Dear Shareholder:
Enclosed is a Notice of Meeting for a Special Shareholders' Meeting of the
Franklin Indiana Tax-Free Income Fund (the "Indiana Fund"). The Meeting has been
called for June 23, 1999 at 1:30 p.m. Pacific time at the offices of Franklin
Tax-Free Trust (the "Trust") at 777 Mariners Island Boulevard, San Mateo, CA
94404. The accompanying Prospectus/Proxy Statement describes a proposal being
presented for your consideration and requests your prompt attention and vote via
the enclosed proxy card.
PLEASE TAKE A MOMENT TO FILL OUT, SIGN AND
RETURN THE ENCLOSED PROXY CARD
This meeting is critically important. The Trustees of your fund unanimously
recommend that you consider and approve an Agreement and Plan of Reorganization
that would result in your shares of the Indiana Fund being exchanged for those
of a fund called Franklin Federal Tax-Free Income Fund (the "Federal Fund"). If
the shareholders of the Indiana Fund approve the proposal, you will receive
Class A shares of the Federal Fund equal in value to your investment in shares
of the Indiana Fund. You will no longer be a shareholder of Indiana Fund, and
you will instead be a shareholder of the Federal Fund.
The proposed transaction is intended to be a tax-free reorganization under
the Internal Revenue Code of 1986, as amended, as further described in the
accompanying Prospectus/Proxy Statement.
The transaction is being proposed because the projected growth in assets of
the Indiana Fund was not sufficient to continue to offer a fund with competitive
performance and high quality service to shareholders over the long term. The
Federal Fund has an investment goal and investment policies that are similar to
those of the Indiana Fund, as outlined in the Prospectus/Proxy Statement. The
Federal Fund is managed by Franklin Advisers, Inc., the current investment
manager of the Indiana Fund. Federal Fund is a larger fund that should be better
able to diversify its investments and to obtain certain savings in costs for
shareholders.
Please take the time to review this document and vote now. The Trustees of
your fund unanimously recommend that you vote in favor of this proposal.
- To ensure that your vote is counted, indicate your position on the
enclosed proxy card.
- Sign and return your card promptly.
- If you determine at a later date that you wish to attend this meeting,
you may revoke your proxy and vote in person.
Thank you for your attention to this matter.
Sincerely,
Deborah R. Gatzek
Secretary
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FRANKLIN TAX-FREE TRUST
ON BEHALF OF
FRANKLIN INDIANA TAX-FREE INCOME FUND
777 MARINERS ISLAND BOULEVARD
SAN MATEO, CA 94404
NOTICE OF SPECIAL SHAREHOLDERS' MEETING
TO BE HELD ON JUNE 23, 1999
To the Shareholders:
NOTICE IS HEREBY GIVEN that a Special Shareholders' Meeting of the Franklin
Indiana Tax-Free Income Fund (the "Indiana Fund") will be held at the offices of
Franklin Tax-Free Trust (the "Trust"), 777 Mariners Island Boulevard, San Mateo,
CA 94404, on June 23, 1999 at 1:30 p.m. Pacific time. The Meeting is being
called for the following reasons:
1. For shareholders of the Indiana Fund to approve or disapprove an
Agreement and Plan of Reorganization between the Trust, on behalf of the Indiana
Fund, and Franklin Federal Tax-Free Income Fund (the "Federal Fund") that
provides for: (i) the acquisition of substantially all of the assets of the
Indiana Fund in exchange for Class A shares of the Federal Fund; (ii) the
distribution of Class A shares of the Federal Fund to the shareholders of the
Indiana Fund; and (iii) the liquidation and dissolution of the Indiana Fund.
2. To grant the proxyholders the authority to vote upon any other business
as may properly come before the Meeting or any adjournment thereof.
The transaction contemplated by the Agreement and Plan of Reorganization is
described in the attached Prospectus/Proxy Statement. A copy of the Agreement
and Plan of Reorganization is attached as Exhibit A to the Prospectus/Proxy
Statement.
Shareholders of record of the Indiana Fund as of the close of business on
April 19, 1999 are entitled to notice of, and to vote at, the Meeting or any
adjournment thereof.
By Order of the Board of Trustees,
Deborah R. Gatzek
Secretary
May 7, 1999
THE BOARD OF TRUSTEES URGES YOU TO COMPLETE, DATE, SIGN, AND RETURN THE
ENCLOSED PROXY CARD IN THE ENCLOSED POSTAGE-PAID RETURN ENVELOPE. IT IS
IMPORTANT THAT YOU RETURN YOUR SIGNED PROXY CARD PROMPTLY SO THAT A QUORUM MAY
BE ENSURED.
PROSPECTUS AND PROXY STATEMENT
When reading this Prospectus/Proxy Statement, you will see certain terms
beginning with capital letters. This means the term is explained in our glossary
section.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
COVER PAGE Cover
SUMMARY 2
On what proposal am I being asked to vote? 2
How will the shareholder voting be handled? 2
What are the general tax consequences of the
Transaction? 2
COMPARISONS OF SOME IMPORTANT FEATURES 3
How do the investment goals and policies of the funds
compare? 3
What are the risks of an investment in the funds? 3
Who manages the funds? 3
What are the fees and expenses of each fund and what
might they be after the Transaction? 4
Where can I find more financial information about the
funds? 5
What are other key features of the funds? 6
Transfer Agency and Custody Services 6
Distribution Services 6
Rule 12b-1 Plans 6
Purchases and Redemptions 7
Dividends and Distributions 7
REASONS FOR THE TRANSACTION 8
Information about the Transaction 9
How will the Transaction be carried out? 9
Who will pay the expenses of the Transaction? 9
What are the tax consequences of the Transaction? 9
What should I know about Federal Fund -- Class A
Shares? 9
What are the capitalizations of the funds and what
might the capitalization be after the Transaction? 10
COMPARISON OF INVESTMENT GOALS AND POLICIES 10
Are there any significant differences between the
investment goals of the funds? 10
How do the types of securities the funds buy and the
investment policies of the funds compare? 11
How do the fundamental investment restrictions of the
funds differ? 12
What are the risk factors associated with investments
in the funds? 12
</TABLE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
VOTING INFORMATION 14
How many votes are necessary to approve the Agreement
and Plan? 14
How do I ensure my vote is accurately recorded? 14
Can I revoke my proxy? 14
What other matters will be voted upon at the Meeting? 14
Who is entitled to vote? 15
What other solicitations will be made? 15
Are there dissenters' rights? 15
INFORMATION ABOUT THE FEDERAL FUND 15
INFORMATION ABOUT THE INDIANA FUND 15
PRINCIPAL HOLDERS OF SHARES 16
GLOSSARY OF USEFUL TERMS AND DEFINITIONS 17
EXHIBITS TO COMBINED PROSPECTUS/PROXY STATEMENT 18
Exhibit A - Agreement and Plan of Reorganization A-1
Exhibit B - Prospectus of Franklin Federal Tax-Free
Income Fund dated September 1, 1998, as amended
January 1, 1999
Exhibit C - Annual Report to Shareholders of Franklin
Federal Tax-Free Income Fund dated April 30, 1998
</TABLE>
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PROSPECTUS AND PROXY STATEMENT
DATED APRIL 22, 1999
ACQUISITION OF THE ASSETS OF
FRANKLIN INDIANA TAX-FREE INCOME FUND
(A SERIES OF FRANKLIN TAX-FREE TRUST)
BY AND IN EXCHANGE FOR SHARES OF
FRANKLIN FEDERAL TAX-FREE INCOME FUND
This Prospectus/Proxy Statement solicits proxies to be voted at a Special
Shareholders' Meeting (the "Meeting") of the Franklin Indiana Tax-Free Income
Fund (the "Indiana Fund"), which is a series of Franklin Tax-Free Trust (the
"Trust"), to approve or disapprove an Agreement and Plan of Reorganization
("Agreement and Plan") for the Indiana Fund. If shareholders of the Indiana Fund
vote to approve the Agreement and Plan, the net assets of the Indiana Fund will
be acquired by Franklin Federal Tax-Free Income Fund (the "Federal Fund") in
exchange for shares of Franklin Federal Tax-Free Income Fund -- Class A
("Federal Fund -- Class A Shares"). The Meeting will be held at the principal
offices of the Trust, which are located at 777 Mariners Island Boulevard, San
Mateo, CA 94404, on June 23, 1999 at 1:30 p.m. Pacific time. The Board of
Trustees of the Trust, on behalf of the Indiana Fund, is soliciting these
proxies. This Prospectus/Proxy Statement will first be sent to shareholders on
or about May 7, 1999.
If the shareholders of the Indiana Fund vote to approve the Agreement and
Plan, you will receive Federal Fund -- Class A Shares equal in value to your
investment in the Indiana Fund. The Indiana Fund will then be liquidated.
The Federal Fund's investment goal is to provide investors with as high a
level of interest income exempt from federal income taxes as is consistent with
prudent investing, while seeking preservation of shareholders' capital. The
investment goal of the Indiana Fund is substantially similar to the Federal
Fund's goal, except that the Indiana Fund seeks to maximize income that is also
exempt from personal income taxes for resident shareholders of Indiana.
This Prospectus/Proxy Statement gives the information about the proposed
reorganization and Federal Fund -- Class A Shares that you should know before
investing. You should retain it for future reference. Additional information
about the Federal Fund and the proposed reorganization can be found in the
following documents.
- The Prospectus of the Federal Fund dated September 1, 1998, as amended
January 1, 1999 (the "Federal Fund Prospectus") is attached to and
considered a part of this Prospectus/Proxy Statement.
- The Annual Report to Shareholders of the Federal Fund dated April 30,
1998 contains financial and performance information for the Federal Fund
and is attached to and considered a part of this Prospectus/Proxy
Statement.
- A Statement of Additional Information dated April 22, 1999 relating to
this Prospectus/Proxy Statement, has been filed with the SEC and is
incorporated by reference into this Prospectus/ Proxy Statement.
The Prospectus of the Indiana Fund dated July 1, 1998, as amended January
1, 1999 and supplemented January 12, 1999 (the "Indiana Fund Prospectus") and
the Indiana Fund's Annual Report to Shareholders dated February 28, 1999 are on
file with the SEC (File nos. 02-94222 and 811-4149) and are incorporated by
reference herein. You may request a free copy of the SAI relating to this
Prospectus/ Proxy Statement or any of the documents referred to above without
charge by calling 1-800/DIAL BEN(R), or by writing to Federal Fund or the Trust
at 777 Mariners Island Boulevard, P.O. Box 7777, San Mateo, CA 94403-7777.
THE SEC HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE
ADEQUACY OF THIS PROSPECTUS/PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER U.S. GOVERNMENT
AGENCY. MUTUAL FUND SHARES INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS
OF PRINCIPAL.
SUMMARY
This is only a summary of certain information contained in this
Prospectus/Proxy Statement. You should read the more complete information in the
rest of this Prospectus/Proxy Statement, including the Agreement and Plan
(attached as Exhibit A), the Federal Fund Prospectus (attached as Exhibit B),
and the Federal Fund Annual Report (attached as Exhibit C).
ON WHAT PROPOSAL AM I BEING ASKED TO VOTE?
The Board of Trustees of the Trust has approved an Agreement and Plan for
the Indiana Fund and recommends that shareholders vote to approve the Agreement
and Plan. If shareholders of the Indiana Fund vote to approve the Agreement and
Plan, that fund's net assets will be transferred to the Federal Fund in exchange
for an equal value of Federal Fund -- Class A Shares. These Federal
Fund -- Class A Shares will then be distributed to the Indiana Fund's
shareholders and the Indiana Fund will be liquidated. (This proposed transaction
for the Indiana Fund is referred to in this Prospectus/Proxy Statement as the
"Transaction.")
This means that your shares of the Indiana Fund will be exchanged for an
equal value of Federal Fund -- Class A Shares. As a result, you will cease to be
a shareholder of the Indiana Fund and will become a shareholder of the Federal
Fund. This exchange will occur on the closing date of the Transaction, which is
the specific date on which the Transaction takes place.
Like the Indiana Fund, the Federal Fund is a mutual fund in the Franklin
Templeton Group of Funds that is managed by Advisers. It has investment goals
and policies that are similar, but not identical, to those of the Indiana Fund.
For the reasons set forth below under "Reasons for the Transaction," the
Board of Trustees of the Trust has concluded that the Transaction is in the best
interests of the shareholders of the Indiana Fund. The Board of Trustees of the
Trust and the Board of Directors of Federal Fund also concluded that no dilution
in value would result to the shareholders of the Indiana Fund or to the
shareholders of the Federal Fund, respectively, as a result of the Transaction.
THE BOARD OF TRUSTEES RECOMMENDS THAT YOU VOTE
TO APPROVE THE AGREEMENT AND PLAN.
HOW WILL THE SHAREHOLDER VOTING BE HANDLED?
Shareholders who own shares of the Indiana Fund at the close of business on
April 19, 1999 will be entitled to vote at the Meeting, and will be entitled to
one vote for each full share and a fractional vote for each fractional share
that they hold. To approve the Transaction, a majority of the outstanding shares
of the Indiana Fund must be voted in favor of the Agreement and Plan.
Please vote by proxy as soon as you receive this Prospectus/Proxy
Statement. You may place your vote by completing and signing the enclosed proxy
card. If you return your signed proxy card, your votes will be officially cast
at the Meeting by the persons appointed as proxies.
You can revoke your proxy or change your voting instructions at any time
until the vote is taken at the Meeting. For more details about shareholder
voting, see the "Voting Information" section of this Prospectus/Proxy Statement.
WHAT ARE THE GENERAL TAX CONSEQUENCES OF THE TRANSACTION?
It is expected that shareholders of the Indiana Fund will not recognize any
gain or loss for federal income tax purposes as a result of the exchange of
their shares for Federal Fund -- Class A Shares. You should, however, consult
your tax advisor regarding the effect, if any, of the Transaction in light of
your individual circumstances. You also should consult your tax advisor about
state and local tax consequences of the Transaction, if any, because this
discussion only relates to the federal income tax consequences. For
2
more information about the tax consequences of the Transaction, see "Information
About the Transaction -- What are the tax consequences of the Transaction?"
COMPARISONS OF SOME IMPORTANT FEATURES
HOW DO THE INVESTMENT GOALS AND POLICIES OF THE FUNDS COMPARE?
The Indiana Fund and the Federal Fund share similar investment goals. Each
fund seeks to provide its investors with as high a level of income exempt from
federal income taxes as is consistent with prudent investing, while seeking
preservation of shareholders' capital. The Indiana Fund, however, also seeks to
have that income be exempt from personal income taxes for resident shareholders
of Indiana. Both of the funds seek to achieve their goals by trying to invest
all of their assets in tax-free municipal securities. Therefore, both funds
normally invest at least 80% of their assets in municipal securities that pay
interest free from federal income taxes, including the federal alternative
minimum tax.
In addition, consistent with its goal, the Indiana Fund normally invests at
least 65% of its total assets in municipal securities of Indiana and at least
80% of its net assets in securities that pay interest free from the personal
income taxes of Indiana. The Federal Fund does not limit its investments to the
municipal securities of any state. This is a primary difference in the
investment policies of the funds that may result in different tax treatment for
the distributions from the Indiana Fund and the Federal Fund.
For more information about the investment goals and policies of the funds,
see "Comparison of Investment Goals and Policies."
WHAT ARE THE RISKS OF AN INVESTMENT IN THE FUNDS?
As with most investments, investments in the Federal Fund and the Indiana
Fund involve risks. There can be no guarantee against losses resulting from an
investment in either fund, nor can there be any assurance that either fund will
achieve its investment goal. The risks associated with an investment in each
fund are substantially similar and include interest rate, income, credit, market
and call risks. In general, however, an investment in the Federal Fund may
involve relatively less risk than a similar investment in the Indiana Fund
because the Federal Fund does not concentrate its investments in the municipal
securities of any state.
For more information about the risks of the funds, see "What are the risk
factors associated with investments in the funds?" under the heading "Comparison
of Investment Goals and Policies."
WHO MANAGES THE FUNDS?
The management of the business and affairs of the funds is the
responsibility of the Board of Directors (in the case of the Federal Fund) or
Board of Trustees (in the case of the Indiana Fund). Each Board elects officers
who are responsible for the day-to-day operations of the funds.
Advisers manages the assets of each of the funds and makes each fund's
investment decisions. Advisers is a wholly owned subsidiary of Resources.
Resources is a publicly owned company engaged in various aspects of the
financial services industry through its subsidiaries. Together, Advisers and its
affiliates serve as investment manager or administrator to 54 registered
investment companies, with approximately 163 U.S.-based funds or series. They
have over $216 billion in combined assets, including $51 billion in the
municipal securities market, under management for approximately 7 million
U.S.-based mutual fund shareholder and other accounts. The principal
shareholders of Resources are Charles B. Johnson and Rupert H. Johnson, Jr.
The team responsible for the day-to-day management of the Federal Fund's
portfolio is:
Thomas Kenny, Executive Vice President of Advisers. Mr. Kenny has been an
analyst or portfolio manager of the Federal Fund since 1987, and of the Indiana
Fund since its inception. He is the Director
3
of Franklin's Municipal Bond Department. He holds a Master of Science degree in
Finance from Golden Gate University and a Bachelor of Arts degree in Business
and Economics from the University of California at Santa Barbara. Mr. Kenny
joined the Franklin Templeton Group in 1986.
Sheila Amoroso, Senior Vice President of Advisers. Ms. Amoroso has been an
analyst or portfolio manager of the Federal Fund since 1987. She holds a
Bachelor of Science degree from San Francisco State University. She joined the
Franklin Templeton Group in 1986.
Ben Barber, Vice President of Advisers. Mr. Barber has been an analyst or
portfolio manager of the Federal Fund since 1993. He holds a Bachelor of Arts
degree in International Relations and Political Science from the University of
California at Santa Barbara. Mr. Barber joined the Franklin Templeton Group in
1991.
Stella Wong, Vice President of Advisers and John Wiley, Vice President of
Advisers are currently members of the management team for the Indiana Fund, but
are not members of the management team for the Federal Fund.
Each fund has a management agreement with Advisers under which Advisers
receives a management fee equal to a monthly rate of 5/96 of 1% of the value of
its net assets up to and including $100 million; 1/24 of 1% of the value of its
net assets over $100 million up to and including $250 million; and 9/240 of 1%
of the value of its net assets in excess of $250 million. The management fee
structure for the Federal Fund has additional reductions for larger amounts of
net assets, the least of which is 3/100 of 1% of the value of net assets in
excess of $20 billion. The fee is computed at the close of business on the last
business day of each month. Because the Federal Fund has three classes of
shares, holders of Federal Fund -- Class A Shares pay a proportionate share of
these fees.
WHAT ARE THE FEES AND EXPENSES OF EACH FUND AND WHAT MIGHT THEY BE AFTER THE
TRANSACTION?
FEE TABLE FOR FEDERAL FUND -- CLASS A SHARES
AND THE INDIANA FUND
<TABLE>
<CAPTION>
ACTUAL+ FEDERAL FUND
---------------------------- AFTER TRANSACTION
FEDERAL FUND INDIANA FUND (PROJECTED)
------------ ------------ -----------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES*
Maximum Sales Charge (as a percentage of
Offering Price)............................. 4.25% 4.25% 4.25%
Paid at time of purchase(1)................. 4.25% 4.25% 4.25%
Paid at time of redemption(2)............... None None None
Exchange Fee (per transaction)(3)............. $5.00 None $5.00
ANNUAL FUND OPERATING EXPENSES (as a percentage of
average net assets)
Management Fees............................... 0.45% 0.63% 0.45%
Rule 12b-1 Fees(4)............................ 0.07% 0.09% 0.08%
Other Expenses................................ 0.07% 0.10% 0.07%
----- ----- -----
Total Fund Operating Expenses................. 0.59% 0.82% 0.60%
===== ===== =====
</TABLE>
- ---------------
+ Information provided is for Federal Fund -- Class A Shares for the fiscal year
ended April 30, 1998. Information for the Indiana Fund is provided for the
fiscal year ended February 28, 1999.
* If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
1. There is no front-end sales charge if you invest $1 million or more.
2. A Contingent Deferred Sales Charge may apply to any purchase of $1 million or
more if you sell the shares within one year. The charge is 1% of the value of
the shares sold or the Net Asset Value at the time of purchase, whichever is
less. The number in the
4
table shows the charge as a percentage of Offering Price. While the
percentage is different depending on whether the charge is shown based on the
Net Asset Value or the Offering Price, the dollar amount you would pay is the
same. See "How Do I Sell Shares? -- Contingent Deferred Sales Charge" in the
prospectuses of either fund for details.
3. $5.00 fee is only for Market Timers. We process all other exchanges without a
fee.
4. For both the Federal and Indiana Funds, these fees may not exceed 0.10%. The
combination of front-end sales charges and Rule 12b-1 fees could cause
long-term shareholders to pay more than the economic equivalent of the
maximum front-end sales charges permitted under the NASD's rules.
EXAMPLE
Assume the annual return for each fund is 5%, operating expenses are as
described above, and you sell your shares after the number of years shown. These
are the projected expenses for each $10,000 that you invest in the fund.
<TABLE>
<CAPTION>
1 YEAR* 3 YEARS 5 YEARS 10 YEARS
------- ------- ------- --------
<S> <C> <C> <C> <C>
Federal Fund............................................ $483 $606 $740 $1,132
Indiana Fund............................................ $505 $676 $861 $1,395
Projected Federal Fund (after proposed Transaction)..... $484 $609 $746 $1,143
</TABLE>
* Assumes a Contingent Deferred Sales Charge will not apply.
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. Each
fund pays its operating expenses. The effects of these expenses are reflected in
the Net Asset Value or dividends and are not directly charged to your account.
WHERE CAN I FIND MORE FINANCIAL INFORMATION ABOUT THE FUNDS?
For the Federal Fund, per share income information for the past five fiscal
years (and the most recent six month semiannual period) is shown immediately
below under the heading "Financial Highlights." Also, the current Annual Report
to Shareholders of Federal Fund for the fiscal year ended April 30, 1998, which
is attached, includes a discussion of that fund's performance during the fiscal
year ended April 30, 1998.
The Indiana Fund Prospectus, as well as the Annual Report for the Indiana
Fund, contain more financial information about the Indiana Fund. These documents
are available free of charge upon request (See "Information About the Indiana
Fund").
5
FINANCIAL HIGHLIGHTS
FRANKLIN FEDERAL TAX-FREE INCOME FUND -- CLASS A
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED APRIL 30,
OCTOBER 31, 1998 ------------------------------------------
(UNAUDITED) 1998 1997 1996 1995 1994
---------------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance (for a
share outstanding throughout the
period)
Net asset value, beginning of period... $12.25 $11.90 $11.83 $11.73 $11.81 $12.24
---------------------------------------------------------
Income from investment operations:
Net investment income............. .34 .69 .71 .74 .75 .77
Net realized and unrealized gains
(losses)........................ .17 .35 .07 .10 (.05) (.41)
---------------------------------------------------------
Total from investment operations....... .51 1.04 .78 .84 .70 .36
Less distributions from net investment
income............................... (.34) (.69) (.71) (.74) (.78) (.79)
---------------------------------------------------------
Net asset value, end of period......... $12.42 $12.25 $11.90 $11.83 $11.73 $11.81
---------------------------------------------------------
---------------------------------------------------------
Total return*.......................... 4.19% 8.92% 6.81% 7.33% 6.21% 2.58%
Ratios/supplemental data
Net assets, end of period (millions)... $7,134 $7,023 $6,905 $7,013 $6,887 $6,804
Ratios to average net assets:
Expenses.......................... .58%** .59% .58% .57% .59% .52%
Net investment income............. 5.46%** 5.70% 6.00% 6.20% 6.47% 6.27%
Portfolio turnover rate................ 6.54% 14.54% 16.43% 25.10% 19.88% 24.59%
</TABLE>
* Total return does not reflect sales commissions or the Contingent Deferred
Sales Charge, and is not annualized. Before May 1, 1994, dividends from net
investment income were reinvested at the Offering Price.
** Annualized.
WHAT ARE OTHER KEY FEATURES OF THE FUNDS?
Transfer Agency and Custody Services. Investor Services, a wholly owned
subsidiary of Resources, is the shareholder servicing agent and acts as the
transfer agent and dividend-paying agent for the funds.
Bank of New York acts as the custodian of the securities and other assets
of the funds. The main office of the Bank of New York is 90 Washington Street,
New York, NY 10286.
Distribution Services. Pursuant to underwriting agreements with each of
the funds, Distributors acts as principal underwriter in a continuous public
offering of the funds' shares. Distributors pays the expenses of the
distribution of fund shares, including advertising expenses and the costs of
printing sales materials and prospectuses used to offer shares to the public.
Rule 12b-1 Plans. Each fund (and class in the case of the Federal Fund)
has a separate distribution or "Rule 12b-1" plan under which it shall pay or may
reimburse Distributors or others for the expenses of activities that are
primarily intended to sell shares of the fund. These expenses may include, among
others, distribution or service fees paid to Securities Dealers or others who
have executed a servicing agreement with the fund, Distributors or its
affiliates; a prorated portion of Distributors' overhead expenses; and the
expenses of printing prospectuses and reports used for sales purposes, and
preparing and distributing sales literature and advertisements.
Payments by the Federal Fund under its Class A plan may not exceed 0.10%
per year of Class A's average daily net assets, and payments by the Indiana Fund
under its plan similarly may not exceed 0.10% per year of that fund's average
daily net assets. All distribution expenses over these amounts will be borne
6
by those who have incurred them. During the first year after certain Class A
purchases made without a sales charge, Securities Dealers may not be eligible to
receive the Rule 12b-1 fees associated with the purchase.
In the case of Federal Fund, which has three classes of shares, the Rule
12b-1 fees charged to Class A are based only on the fees attributable to that
class. For more information, please see "The Fund's Underwriter" in the SAI for
Federal Fund.
Purchases and Redemptions. Each fund has a maximum front-end sales charge
of 4.25% with reduced charges for purchases of $100,000 or more and no front-end
sales charges for purchases of $1,000,000 or more. Each fund generally requires
a minimum initial investment of $1,000 and subsequent investments of at least
$50.
You may sell (redeem) your shares at any time. Shares of each fund also may
be exchanged for shares of other Franklin Templeton Funds, subject to certain
limitations, as provided in the prospectuses of the respective Franklin
Templeton Fund. Because it is technically a sale and a purchase of shares, an
exchange is a taxable transaction.
Shares of both funds may be redeemed at their respective Net Asset Value
per share. However, redemptions of Class A shares of both funds which were
purchased in amounts of $1,000,000 or more generally are subject to a Contingent
Deferred Sales Charge. Federal Fund shares acquired by Indiana Fund shareholders
as a result of this Transaction are subject to a Contingent Deferred Sales
Charge to the same extent that the Indiana Fund shares were subject to a
Contingent Deferred Sales Charge.
Additional information and specific instructions explaining how to buy,
sell, and exchange shares of the funds are outlined in the current prospectus of
each fund under the heading "About Your Account." The accompanying prospectus of
the Federal Fund also lists phone numbers for you to call if you have any
questions about your account under the heading "What If I Have Questions About
My Account?" These phone numbers are the same for both funds.
Dividends and Distributions. The Federal Fund intends to pay a dividend
from its net investment income at least monthly, on or about the 15th day of the
month. The Indiana Fund declares dividends daily from its net investment income
and pays them monthly on or about the 20th day of the month. The amount of these
dividends will vary depending on changes in the funds' net investment income. No
fund pays "interest" nor guarantees any amount of dividends or return on an
investment in its shares.
Capital gains for the Federal Fund, if any, may be distributed annually.
Capital gains for the Indiana Fund, if any, may be distributed twice a year.
Each fund automatically reinvests distributions in additional shares of
that fund unless you select a different option. Specific instructions explaining
how to select a different option are outlined in the current prospectus of each
fund under the heading "What Distributions Might I Receive From the Funds?"
Distributions made by the funds to you from interest income on municipal
securities will be exempt from the regular federal income tax. Distributions
made to you from other income on temporary investments, short-term capital
gains, or ordinary income from the sale of market discount bonds will be taxable
to you as ordinary dividends, whether you receive them in cash or in additional
shares. Distributions made to you from interest on certain private activity
bonds, while still exempt from regular federal income tax, are a preference item
when determining your alternative minimum tax. Distributions designated by the
funds as long-term capital gains are taxable to you as such.
Ordinary dividends and capital gain distributions that you receive from the
funds, and gains arising from redemptions or exchanges of your fund shares, will
generally be subject to state and local income tax. Distributions paid by the
funds from the interest earned on municipal securities of a state, or its
political subdivisions, will generally be exempt from that state's personal
income taxes. Because Federal Fund does not, like Indiana Fund, focus its
investments on the municipal securities of Indiana, a greater portion of the
distributions paid by Federal Fund will be subject to Indiana personal income
taxes.
7
Each fund notifies its shareholders annually of the amount of
exempt-interest dividends, ordinary dividends, capital gain distributions,
interest income that is a tax preference item under the alternative minimum tax
and non-taxable distributions received from the fund in the prior year.
For more information about the tax implications of investments in either
fund, see the current prospectus of each fund under the heading "How Taxation
Affects the Funds and Their Shareholders."
REASONS FOR THE TRANSACTION
The Board of Trustees of the Trust, on behalf of the Indiana Fund, has
recommended the Transaction for purposes of combining the Indiana Fund with a
larger fund. Because of the relatively low demand for the Indiana Fund, Advisers
recommended to the Board of Trustees of the Trust that the assets of the Indiana
Fund be combined with a larger fund that has similar investment goals and
policies. A larger fund should be better able to diversify its investments and
to obtain certain savings in costs for the Indiana Fund and its shareholders.
The Transaction was also recommended to combine similar funds within the
Franklin Templeton Group to eliminate duplication of expenses and internal
competition.
The Agreement and Plan was presented to the Trust's Board of Trustees at a
meeting of the Board. At the meeting, the Board questioned management about the
potential benefits and costs to shareholders of the Indiana Fund. In deciding
whether to recommend approval of the Transaction to shareholders, the Board of
Trustees considered, among other things: the expense ratios of the Federal Fund
and the Indiana Fund; the comparative investment performance of the Federal Fund
and the Indiana Fund; the compatibility of the investment goals, policies,
restrictions and investments of the Indiana Fund with those of the Federal Fund;
the tax consequences of the Transaction; and the significant experience of
Advisers. During the course of its deliberations, the Board of Trustees also
considered that the expenses of each Transaction will be shared one-quarter by
the Federal Fund, one-quarter by the Indiana Fund, and one-half by Advisers.
The Board of Trustees concluded that the Transaction is in the best
interests of the shareholders of the Indiana Fund and that no dilution of value
would result to the shareholders of the Indiana Fund from the Transaction. It
then decided to approve the Agreement and Plan and to recommend that
shareholders of the Indiana Fund vote to approve the Transaction. As required by
law, the Board members approving the Agreement and Plan included a majority of
the trustees who are not interested persons of the Indiana Fund.
The Board of Trustees' conclusion was based on a number of factors,
including that the Transaction would permit shareholders to pursue their
investment goals in a larger fund. A larger fund should have an enhanced ability
to effect portfolio transactions on more favorable terms and should have greater
investment flexibility. A fund with higher aggregate net assets may also be able
to reduce or eliminate certain duplicative costs and expenses. This may result
in lower overall expense ratios through the spreading of fixed costs of fund
operations over a larger asset base. However, variable expenses that are based
on the value of assets or the number of shareholder accounts, such as custody
and transfer agent fees, would be largely unaffected by the Transaction.
The Board of Directors of the Federal Fund also determined that the
Transaction was in the best interests of the Federal Fund and its shareholders
and that no dilution would result to those shareholders.
FOR THE REASONS DISCUSSED ABOVE, THE BOARD OF TRUSTEES OF THE TRUST, ON
BEHALF OF THE INDIANA FUND, RECOMMENDS THAT YOU VOTE FOR THE AGREEMENT AND PLAN.
If shareholders of the Indiana Fund do not approve the Agreement and Plan, the
Board of Trustees will consider other possible courses of action for the Indiana
Fund, including dissolution and liquidation.
8
INFORMATION ABOUT THE TRANSACTION
This is only a summary of the Agreement and Plan. You should read the
actual Agreement and Plan. It is attached as Exhibit A.
HOW WILL THE TRANSACTION BE CARRIED OUT?
If the shareholders of the Indiana Fund approve the Agreement and Plan, the
Transaction will take place after various conditions are satisfied by the Trust
on behalf of the Indiana Fund, and by the Federal Fund, including the delivery
of certain documents. The Trust and the Federal Fund will agree on the closing
date. If the shareholders of the Indiana Fund do not approve the Agreement and
Plan, the Transaction will not take place.
If shareholders of the Indiana Fund do approve the Agreement and Plan on
June 23, 1999, shares of the Indiana Fund will no longer be offered for sale,
except for the reinvestment of dividend and capital gain distributions. Until
the close of business on June 23, 1999, you may continue to add to your existing
account subject to your applicable minimum additional investment amount or buy
additional shares through the reinvestment of dividend and capital gain
distributions.
If the shareholders of the Indiana Fund approve the Agreement and Plan,
that fund will deliver to the Federal Fund substantially all of its assets on
the closing date. In exchange, the Trust, on behalf of the Indiana Fund, will
receive Federal Fund -- Class A Shares that have a value equal to the dollar
value of the assets initially delivered to the Federal Fund. Those shares will
be distributed pro rata to the Indiana Fund's shareholders of record as of the
close of business on the closing date. The stock transfer books of the Indiana
Fund will be permanently closed as of 1:00 p.m. Pacific time on the closing
date. The Indiana Fund will only accept requests for redemption received in
proper form before 1:00 p.m. on the closing date. Requests received after that
time will be considered requests to redeem shares of the Federal Fund.
To the extent permitted by law, the Trust and the Federal Fund may agree to
amend the Agreement and Plan without shareholder approval. They may also agree
to terminate and abandon the Transaction at any time before or, to the extent
permitted by law, after the approval of shareholders of the Indiana Fund.
WHO WILL PAY THE EXPENSES OF THE TRANSACTION?
The expenses resulting from the Transaction will be shared by the following
parties in the percentages indicated: 25% by the Indiana Fund, 25% by the
Federal Fund, and 50% by Advisers. As described above, Advisers is the
investment manager for the funds involved in the Transaction.
WHAT ARE THE TAX CONSEQUENCES OF THE TRANSACTION?
The Transaction is intended to qualify as a tax-free reorganization for
federal income tax purposes under Section 368(a)(1) of the Internal Revenue Code
of 1986, as amended. Based on certain assumptions and representations received
from the Trust, on behalf of the Indiana Fund, and the Federal Fund, it is the
opinion of Stradley, Ronon, Stevens & Young, LLP, counsel to the funds, that
shareholders of the Indiana Fund will not recognize any gain or loss for federal
income tax purposes as a result of the exchange of their shares of the Indiana
Fund for shares of the Federal Fund and that the Federal Fund will not recognize
any gain or loss upon receipt of the Indiana Fund's assets.
You will continue to be responsible for tracking the purchase cost and
holding period of your shares and should consult your tax advisor regarding the
effect, if any, of the Transaction in light of your individual circumstances.
You should also consult your tax advisor as to state and local tax consequences,
if any, of the Transaction because this discussion only relates to the federal
income tax consequences.
WHAT SHOULD I KNOW ABOUT FEDERAL FUND -- CLASS A SHARES?
Federal Fund -- Class A Shares will be distributed to shareholders of the
Indiana Fund in connection with the Transaction. Each share will be fully paid
and nonassessable when issued with no personal
9
liability attaching to the ownership thereof. Each Federal Fund -- Class A Share
will have no preemptive or conversion rights, and will be transferable upon the
books of the Federal Fund. The shares of the Federal Fund will be recorded
electronically in each shareholder's account. The Federal Fund will then send a
confirmation to each shareholder. As described in its prospectus, the Federal
Fund does not issue share certificates unless requested. Former shareholders of
the Indiana Fund whose shares are represented by outstanding share certificates
will not be allowed to redeem shares of the Federal Fund until the certificates
have been returned.
The Federal Fund -- Class A Shares have cumulative voting rights. This
gives each shareholder a number of votes equal to the number of shares owned
times the number of members of the Board of Directors to be elected.
Shareholders may cast all of their votes for one candidate or distribute their
votes between two or more candidates.
The Indiana Fund is a series of the Trust, a Massachusetts business trust.
The Federal Fund is a California corporation. Like the Indiana Fund, the Federal
Fund does not routinely hold annual shareholders' meetings. The Federal Fund may
hold special meetings for matters requiring shareholder approval. A meeting of
the Federal Fund's shareholders may also be called by the Board of Directors in
its discretion or by shareholders who hold at least 10% of the fund's
outstanding shares.
WHAT ARE THE CAPITALIZATIONS OF THE FUNDS AND WHAT MIGHT THE CAPITALIZATION BE
AFTER THE TRANSACTION?
The following table sets forth, as of February 28, 1999, (i) the
capitalization of Federal Fund; (ii) the capitalization of Indiana Fund; and
(iii) the projected capitalization of Federal Fund as adjusted to give effect to
the proposed Transaction. The capitalization of Federal Fund is likely to be
different when the Transaction is consummated.
<TABLE>
<CAPTION>
FEDERAL FUND
FEDERAL FUND INDIANA FUND AFTER TRANSACTION
(UNAUDITED) (UNAUDITED) (PROJECTED)
------------ ------------ -----------------
<S> <C> <C> <C>
Net assets (millions)............................. $7,382 $59 $7,441
Total shares outstanding.......................... 597,482,020 4,905,278 602,256,601
Net Asset Value per share......................... $12.36 $12.03 $12.36
</TABLE>
COMPARISON OF INVESTMENT GOALS AND POLICIES
This section describes key investment policies of the Indiana Fund and the
Federal Fund and certain noteworthy differences between the investment goals and
policies of the funds. For a complete description of Federal Fund's investment
policies and risks, you should read the Federal Fund Prospectus, which is
attached to this Prospectus/Proxy Statement as Exhibit B.
ARE THERE ANY SIGNIFICANT DIFFERENCES BETWEEN THE INVESTMENT GOALS OF THE FUNDS?
The Indiana Fund and the Federal Fund both have the investment goal of
providing investors with as high a level of income exempt from federal income
taxes as is consistent with prudent investing, while seeking preservation of
shareholders' capital. The Indiana Fund additionally seeks to have that income
be exempt from personal income taxes for resident shareholders of Indiana. These
investment goals are fundamental. Each fund seeks to achieve its goal by trying
to invest all of its assets in tax-free municipal securities, including bonds,
notes and commercial paper.
Policies or restrictions that are deemed fundamental may not be changed
without the approval of the lesser of (i) a majority of the outstanding shares
of the fund, or (ii) 67% or more of the shares represented at a shareholders'
meeting at which the holders of more than 50% of the outstanding shares are
represented ("Majority Vote").
One significant difference between the funds is that the Indiana Fund
normally invests at least 80% of its net assets in securities that pay interest
free from any Indiana personal income taxes, as well as federal income taxes.
Distributions from the Federal Fund may therefore be subject to higher state
personal
10
income taxes than distributions from the Indiana Fund. And, the Indiana Fund
normally invests at least 65% of its total assets in municipal securities of
Indiana. The Federal Fund does not limit its investments to the municipal
securities of any state.
HOW DO THE TYPES OF SECURITIES THE FUNDS BUY AND INVESTMENT POLICIES OF THE
FUNDS COMPARE?
Municipal Securities.
Both funds generally seek to invest their assets in securities that pay
interest free from income taxes. As fundamental policies, they normally invest
at least 80% of their assets in securities that pay interest free from federal
income taxes, including the federal alternative minimum tax. In addition, in the
case of the Indiana Fund, the Indiana Fund normally invests at least 80% of its
net assets in securities that pay interest free from Indiana personal income
taxes. Thus, it is possible, although not anticipated, that each fund may have
up to 20% of its assets in securities that pay taxable interest. And, each fund
also may have assets invested in municipal securities that pay interest subject
to the federal alternative minimum income tax. In addition, at least 65% of the
Indiana Fund's total assets are normally invested in municipal securities of
Indiana.
Municipal securities are issued by state and local governments, their
agencies and authorities, as well as by the District of Columbia and U.S.
territories and possessions, to borrow money for various public or private
projects. The issuer pays a fixed or variable rate of interest, and must repay
the amount borrowed (the "principal") at maturity. These types of securities
generally pay interest free from federal income tax and, if issued by the fund's
state or that state's counties, municipalities, authorities, agencies, or other
subdivisions, or by U.S. territories, state personal income taxes for residents
of the fund's state.
Quality. Both funds only invest in investment grade municipal securities,
which include those in one of the four highest rating levels as rated by an
independent rating agency, or unrated securities that Advisers believes are
comparable.
Maturity. Neither fund has a restriction on the maturity -- the time when
the issuer must repay the amount borrowed -- of the securities it may buy. The
funds also do not have restrictions on their average portfolio maturity.
Variable and floating rate securities. Each fund may invest in investment
grade variable and floating rate securities. These are securities that have
interest rates that change either at specific intervals or whenever a benchmark
rate changes. This helps to protect against a decline in the security's market
price, but also lowers a fund's income when interest rates fall. If, however,
interest rates increase, a fund's income from its variable rate investments will
also increase.
Municipal lease obligations. Both funds may invest in municipal lease
obligations without limit if the obligations meet the fund's quality and
maturity standards. Municipal lease obligations generally finance the purchase
of public property. The property is leased to the state or a local government,
and the lease payments are used to pay the interest on the obligations.
Municipal lease obligations differ from other municipal securities because the
lessee's governing body must set aside the money to make the lease payments each
year. If the money is not set aside, the issuer or the lessee can end the lease
without penalty. If the lease is cancelled, investors who own the municipal
lease obligations may not be paid.
Temporary Investments.
When Advisers believes unusual or adverse economic, market or other
conditions exist, it may invest either fund's portfolio assets in a temporary
defensive manner. Under these circumstances, each fund may invest all of its
assets in securities that pay taxable interest, including (i) high quality
commercial paper; or (ii) securities issued or guaranteed by the full faith and
credit of the U.S. government. In addition, the Indiana Fund may invest in
municipal securities issued by a state or local government other than Indiana,
or by a U.S. territory such as Guam, Puerto Rico or the Mariana Islands.
11
When-Issued and Delayed Delivery Transactions.
Both funds may engage in when-issued and delayed delivery
transactions -- those where payment and delivery for the security take place at
a future date. Since the market price of the security may fluctuate during the
time before payment and delivery, the funds assume the risk that the value of
the security at delivery may be more or less than the purchase price. When a
fund is the buyer in the transaction, it will maintain cash or liquid
securities, with an aggregate value equal to the amount of its purchase
commitments, in a segregated account with its custodian bank until payment is
made.
Diversification.
Both funds are diversified funds under the 1940 Act. As diversified funds,
they will not buy a security if, with respect to 75% of their total assets, more
than 5% would be in the securities of any single issuer (this limitation does
not apply to investments issued or guaranteed by the U.S. government or its
instrumentalities) or if it would result in a fund owning more than 10% of the
voting securities of a single issuer. The remaining 25% of total assets may be
invested in the securities of a single issuer.
HOW DO THE FUNDAMENTAL INVESTMENT RESTRICTIONS OF THE FUNDS DIFFER?
Except as described below, the funds have adopted the same restrictions as
fundamental policies, which may not be changed without the approval of a
Majority Vote.
Although both funds are prohibited from buying securities on "margin" or
selling securities "short," the Indiana Fund may use such short-term credits as
are necessary for the clearance of transactions.
Both funds also are generally prohibited from making loans. This
prohibition does not prohibit either fund from purchasing debt securities that,
in the case of both funds, are publicly distributed or, in the case of the
Indiana Fund, if such debt securities are customarily purchased by institutional
investors. Furthermore, this restriction does not prohibit the Federal Fund from
entering into repurchase agreements to the extent that they are deemed to be
loans.
The funds also are prohibited from purchasing securities from or selling
securities to officers or directors/trustees, including any firm of which any
officer or director/trustee is a member, as principal. Federal Fund may,
however, deal with those persons or firms as brokers and pay a customary
brokerage commission.
Neither fund may acquire, lease or hold real estate, except such as may be
necessary or advisable for the maintenance of its offices. This limitation does
not, however, prohibit the Indiana Fund from purchases of municipal and other
debt securities secured by real estate or interests therein.
Both funds may not invest in commodities and commodity contracts, puts,
calls, straddles, spreads or any combination thereof, or interests in oil, gas,
or other mineral exploration or development programs. This restriction does not,
however, prohibit the Indiana Fund from purchasing, holding and disposing of
"obligations with puts attached" in accordance with its investment policies. The
Federal Fund may write covered call options listed for trading on a national
securities exchange and purchase call options to the extent necessary to cancel
call options previously written. It should be noted, however, that there are no
option transactions currently available to the Federal Fund because there are
presently no options listed for trading on a national securities exchange
covering the types of securities that are appropriate for investment by Federal
Fund. In addition, the Federal Fund's ability to write call options would be
further limited under California law to 25% of its net assets.
WHAT ARE THE RISK FACTORS ASSOCIATED WITH INVESTMENTS IN THE FUNDS?
Like all investments, an investment in both of the funds involves risk.
There is no assurance that the funds will meet their investment goals. The
achievement of the funds' goals depends upon market conditions, generally, and
on Advisers' analytical and portfolio management skills. The risks of the funds
are basically the same as those of other investments in municipal securities of
similar quality, although an
12
investment in the Indiana Fund may involve more risk than an investment in a
fund that does not focus on securities of a single state.
Interest Rate, Income, Credit, Market and Call Risk.
Investments in both funds are subject to interest rate, income, credit,
market, and call risks.
Interest rate risk is the risk that changes in interest rates can reduce
the value of a security. When interest rates rise, municipal security prices
fall. The opposite is also true: municipal security prices go up when interest
rates fall. Interest rates have increased and decreased in the past. These
changes are unpredictable.
Income risk is the risk that a fund's income will decrease due to falling
interest rates. Since a fund can only distribute what it earns, a fund's
distributions to its shareholders may decline when interest rates fall.
Credit risk is the possibility that an issuer of a security will be unable
to make interest payments and to pay the principal of a security upon maturity.
Changes in an issuer's financial strength or in a security's credit rating may
affect its value. Even securities supported by credit enhancements have the
credit risk of the entity providing the credit support. Credit support provided
by a foreign entity may be less certain because of the possibility of adverse
foreign economic, political or legal developments that may affect the ability of
that foreign entity to meet its obligations. A change in the credit risk
associated with a security may cause a corresponding change in the security's
price, and, therefore, the fund's share price.
Market risk is the risk that a security's value will be reduced by market
activity or the results of supply and demand. This is a basic risk associated
with all securities. When there are more sellers than buyers, prices tend to
fall. Likewise, when there are more buyers than sellers, prices tend to
increase. A security's maturity length also affects its price. In general,
securities with longer maturities are more sensitive to price changes.
Call risk is the likelihood that a security will be prepaid (or "called")
before maturity. An issuer is more likely to call its bonds when interest rates
are falling because the issuer can issue new bonds with lower interest payments.
If a bond is called, a fund may have to replace it with a lower-yielding
security. At any time, a fund may have a large amount of its assets invested in
municipal securities subject to call risk, including escrow-secured or defeased
bonds. A call of some or all of these securities may lower the fund's income and
its distributions to shareholders.
State Risks.
Since the Indiana Fund invests heavily in municipal securities of Indiana,
events in that state are likely to affect the fund's investments and its
performance. These events may include economic or political policy changes, tax
base erosion, state constitutional limits on tax increases, budget deficits and
other financial difficulties, and changes in the ratings assigned to municipal
issuers. A negative change in any one of these or other areas could affect the
ability of Indiana's municipal issuers to meet their obligations. It is
important to remember that economic, budget and other conditions within a state
are unpredictable and can change at any time. And, while Indiana's economy has
been relatively strong since the mid-1990's, it has, historically, been
relatively volatile, with cyclical tax and employment bases.
For more specific information on the economy and financial strength of
Indiana, please see "What Are the Risks of Investing in the Funds?" in the
current SAI for the Indiana Fund.
To the extent the Federal Fund is invested in a state, events in that state
may affect its investments and its performance.
13
U.S. Territories Risks.
Each fund may invest a portion of its assets in municipal securities issued
by U.S. territories such as Guam, Puerto Rico or the Mariana Islands. As with
state municipal securities, events in any of these territories where a fund
invests may affect the fund's investments and its performance.
Concentration.
Although neither fund can invest more than 25% of its assets in securities
of any industry, both funds may invest more than 25% of their assets in
municipal securities that finance similar types of projects, such as hospitals,
housing, industrial development, transportation or pollution control. A change
that affects one project would likely affect all similar projects.
VOTING INFORMATION
HOW MANY VOTES ARE NECESSARY TO APPROVE THE AGREEMENT AND PLAN?
The affirmative vote of a majority of the holders of all of the outstanding
shares of the Indiana Fund is necessary to approve the Agreement and Plan. Each
shareholder will be entitled to one vote for each full share, and a fractional
vote for each fractional share, of the Indiana Fund held at the close of
business on April 19, 1999 (the "Record Date"). If sufficient votes to approve
the Agreement and Plan for the Indiana Fund are not received by the date of the
Meeting, the Meeting may be adjourned to permit further solicitations of
proxies. The holders of a majority of shares of the Indiana Fund entitled to
vote at the Meeting and present in person or by proxy (whether or not sufficient
to constitute quorum) may adjourn the Meeting with respect to the fund.
Abstentions and broker non-votes will be included for purposes of
determining whether a quorum is present at the Meeting, but will be treated as
votes not cast and, therefore, will not be counted for purposes of determining
whether the matters to be voted upon at the Meeting have been approved, and will
have the same effect as a vote against the Agreement and Plan.
HOW DO I ENSURE MY VOTE IS ACCURATELY RECORDED?
You can vote in any one of three ways:
- By mail, with the enclosed proxy card.
- In person at the Meeting.
- Through Shareholder Communications Corporation ("SCC"), a proxy
solicitor, by calling 1-800/645-3559.
A proxy card is, in essence, a ballot. IF YOU SIMPLY SIGN AND DATE THE
PROXY BUT GIVE NO VOTING INSTRUCTIONS, YOUR SHARES WILL BE VOTED IN FAVOR OF THE
AGREEMENT AND PLAN AND IN ACCORDANCE WITH THE VIEWS OF MANAGEMENT UPON ANY
UNEXPECTED MATTERS THAT COME BEFORE THE MEETING OR ADJOURNMENT OF THE MEETING.
CAN I REVOKE MY PROXY?
You may revoke your proxy at any time before it is voted by sending a
written notice to the Trust expressly revoking your proxy, by signing and
forwarding to the Trust a later-dated proxy, or by attending the Meeting and
voting in person.
WHAT OTHER MATTERS WILL BE VOTED UPON AT THE MEETING?
The Board of Trustees of the Trust does not intend to bring any matters
before the Meeting other than described in this Prospectus/Proxy Statement. It
is not aware of any other matters to be brought
14
before the Meeting by others. If any other matter legally comes before the
Meeting, proxies for which discretion has been granted will be voted in
accordance with the views of management.
WHO IS ENTITLED TO VOTE?
Shareholders of record of the Indiana Fund on the Record Date will be
entitled to vote at the Meeting. On the Record Date, there were 4,941,906.966
outstanding shares of the Indiana Fund.
WHAT OTHER SOLICITATIONS WILL BE MADE?
The Indiana Fund will request broker-dealer firms, custodians, nominees and
fiduciaries to forward proxy material to the beneficial owners of the shares of
record. The Indiana Fund may reimburse broker-dealer firms, custodians, nominees
and fiduciaries for their reasonable expenses incurred in connection with such
proxy solicitation. In addition to solicitations by mail, officers and employees
of the Trust, without extra pay, may conduct additional solicitations by
telephone, personal interviews and other means. The Trust, on behalf of the
Indiana Fund, has engaged SCC to solicit proxies from brokers, banks, other
institutional holders and individual shareholders for an approximate fee,
including out-of-pocket expenses, ranging between $6,824 and $8,827. The costs
of any such additional solicitation and of any adjourned session will be shared
one-quarter by the Indiana Fund, one-quarter by the Federal Fund, and one-half
by Advisers.
ARE THERE DISSENTERS' RIGHTS?
Shareholders of the Indiana Fund will not be entitled to any "dissenters'
rights" since the proposed Transaction involves two open-end investment
companies registered under the 1940 Act (commonly called mutual funds). Although
no dissenters' rights may be available, you have the right to redeem your shares
at Net Asset Value until the closing date. After the closing date, you may
redeem your Federal Fund shares or exchange them for shares of certain other
funds in the Franklin Templeton Funds, subject to the terms in the prospectus of
the respective fund.
INFORMATION ABOUT THE FEDERAL FUND
Information about the Federal Fund is included in the Federal Fund
Prospectus, which is attached to and considered a part of this Prospectus/Proxy
Statement. Additional information about the Federal Fund is included in its SAI
dated September 1, 1998, as supplemented April 1, 1999, which has been filed
with the SEC and is incorporated into the SAI relating to this Prospectus/Proxy
Statement. You may request a free copy of the Federal Fund's SAI and other
information by calling 1-800/DIAL BEN(R) or by writing to the Federal Fund at
777 Mariners Island Blvd., P.O. Box 7777, San Mateo, CA 94403-7777. The Federal
Fund's Annual Report to Shareholders for the fiscal year ended April 30, 1998 is
attached to and considered a part of this Prospectus/Proxy Statement.
The Federal Fund files proxy materials, reports and other information with
the SEC in accordance with the informational requirements of the Securities
Exchange Act of 1934 and the 1940 Act. These materials can be inspected and
copied at: the SEC's Public Reference Room at 450 Fifth Street NW, Washington,
DC 20549, and at the Regional Offices of the SEC located in New York City at 7
World Trade Center, Suite 1300, New York, NY 10048 and in Chicago at 500 West
Madison Street, Suite 1400, Chicago, IL 60661. Also, copies of such material can
be obtained from the SEC's Public Reference Section, Washington, DC 20549-6009,
at prescribed rates, or from the SEC's internet address at http://www.sec.gov.
INFORMATION ABOUT THE INDIANA FUND
Information about the Indiana Fund is included in the Indiana Fund
Prospectus, and the Indiana Fund's SAI dated July 1, 1998, as supplemented April
1, 1999, and in the Indiana Fund's Annual Report to Shareholders dated February
28, 1999. These documents have been filed with the SEC and the Indiana
15
Fund Prospectus and Annual Report are incorporated by reference herein. You may
request free copies of these documents and other information relating to the
Indiana Fund by calling 1-800/DIAL BEN(R) or by writing to 777 Mariners Island
Blvd., P.O. Box 7777, San Mateo, CA 94403-7777. Reports and other information
filed by the Indiana Fund can be inspected and copied at the SEC's Public
Reference Room at 450 Fifth Street NW, Washington, DC 20549, and at the Regional
Offices of the SEC located in New York City at 7 World Trade Center, Suite 1300,
New York, NY 10048 and in Chicago at 500 West Madison Street, Suite 1400,
Chicago, IL 60661. Also, copies of such material can be obtained from the SEC's
Public Reference Section, Washington, DC 20549-6009, at prescribed rates, or
from the SEC's internet address at http://www.sec.gov.
PRINCIPAL HOLDERS OF SHARES
As of the Record Date, the officers and Trustees of the Trust, as a group,
owned less than 1% of the outstanding voting shares of the Indiana Fund. From
time to time, the number of fund shares held in the "street name" accounts of
various securities dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares outstanding. No other
person owned (beneficially or of record) 5% or more of the outstanding shares of
the Federal Fund or the Indiana Fund.
16
GLOSSARY OF USEFUL TERMS AND DEFINITIONS
1940 Act -- Investment Company Act of 1940, as amended
Advisers -- Franklin Advisers, Inc., 777 Mariners Island Boulevard, San Mateo,
CA 94404, the investment manager for the Federal Fund and the Indiana Fund
Contingent Deferred Sales Charge (CDSC) -- A sales charge of 1% that may apply
if you sell your shares within 12 months of purchase.
Distributors -- Franklin/Templeton Distributors, Inc., 777 Mariners Island
Boulevard, San Mateo, CA 94404, the principal underwriter for the funds
Franklin Templeton Funds -- The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds, except Franklin Valuemark
Funds, Templeton Capital Accumulator Fund, Inc., and Templeton Variable Products
Series Fund
Franklin Templeton Group -- Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
Franklin Templeton Group of Funds -- All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
Investor Services -- Franklin/Templeton Investor Services, Inc., 777 Mariners
Island Boulevard, San Mateo, CA 94404, the shareholder servicing and transfer
agent to the funds
Market Timers -- Market Timers generally include market timing or asset
allocation services, accounts administered so as to buy, sell or exchange shares
based on predetermined market indicators, or any person or group whose
transactions seem to follow a timing pattern or whose transactions include
frequent or large exchanges.
NASD -- National Association of Securities Dealers, Inc.
Net Asset Value (NAV) -- The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
Offering Price -- The public offering price is based on the Net Asset Value per
share and includes the front-end sales charge. The maximum front-end sales
charge for each fund is 4.25%.
Resources -- Franklin Resources, Inc.
SAI -- Statement of Additional Information
SEC -- U.S. Securities and Exchange Commission
Securities Dealer -- A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the funds. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
U.S. -- United States
We/Our/Us -- Unless the context indicates a different meaning, these terms refer
to the funds and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
17
EXHIBITS TO COMBINED PROSPECTUS AND
PROXY STATEMENT
<TABLE>
<CAPTION>
EXHIBIT
- -------
<C> <S>
A Agreement and Plan of Reorganization between Franklin
Tax-Free Trust (on behalf of the Franklin Indiana Tax-Free
Income Fund) and Franklin Federal Tax-Free Income Fund
B Prospectus of Franklin Federal Tax-Free Income Fund, dated
September 1, 1998, as amended January 1, 1999
C Annual Report to Shareholders of Franklin Federal Tax-Free
Income Fund, dated April 30, 1998
</TABLE>
18
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement and Plan"), made as of
this 28th day of April, 1999, by and between FRANKLIN FEDERAL TAX-FREE INCOME
FUND ("Federal Fund"), a corporation incorporated under the laws of the State of
California in 1982, with its principal place of business at 777 Mariners Island
Boulevard, San Mateo, California 94404, and FRANKLIN TAX-FREE TRUST (the
"Trust"), a business trust created under the laws of the Commonwealth of
Massachusetts in 1984, with its principal place of business at 777 Mariners
Island Boulevard, San Mateo, California 94404, on behalf of its series Franklin
Indiana Tax-Free Income Fund, a series of shares of the Trust ("Indiana Fund").
PLAN OF REORGANIZATION
The reorganization (hereinafter referred to as the "Plan of
Reorganization") will consist of (i) the acquisition by Federal Fund of
substantially all of the property, assets and goodwill of Indiana Fund in
exchange solely for shares of common stock, no par value, of Federal Fund -
Class A ("Federal Fund Shares"); (ii) the distribution of Federal Fund Shares to
the shareholders of Indiana Fund according to their respective interests; and
(iii) the subsequent dissolution of Indiana Fund as soon as practicable after
the closing (as defined in Section 3, hereinafter called the "Closing"), all
upon and subject to the terms and conditions of this Agreement and Plan
hereinafter set forth.
AGREEMENT
In order to consummate the Plan of Reorganization and in consideration of
the promises and of the covenants and agreements hereinafter set forth, and
intending to be legally bound, the parties hereto covenant and agree as follows:
1. SALE AND TRANSFER OF ASSETS, LIQUIDATION AND DISSOLUTION OF INDIANA FUND.
(a) Subject to the terms and conditions of this Agreement and Plan, and in
reliance on the representations and warranties of Federal Fund herein contained,
and in consideration of the delivery by Federal Fund of the number of its
Federal Fund Shares hereinafter provided, the Trust, on behalf of Indiana Fund,
agrees that it will convey, transfer and deliver to Federal Fund at the Closing
all of Indiana Fund's then existing assets, free and clear of all liens,
encumbrances, and claims whatsoever (other than shareholders' rights of
redemption), except for cash, bank deposits, or cash equivalent securities in an
estimated amount necessary to (i) pay the costs and expenses of carrying out
this Agreement and Plan (including, but not limited to, fees of counsel and
accountants, and expenses of its liquidation and dissolution contemplated
hereunder), which costs and expenses shall be established on Indiana Fund's
books as liability reserves; (ii) discharge its unpaid liabilities on its books
at the closing date (as defined in Section 3, hereinafter called the "Closing
Date"), including, but not limited to, its income dividends and capital gains
distributions, if any, payable for the period prior to, and through, the Closing
Date; and (iii) pay such contingent liabilities as the Board of Trustees shall
reasonably deem to exist against Indiana Fund, if any, at the Closing Date, for
which contingent and other appropriate liabilities reserves shall be established
on Indiana Fund's books (hereinafter "Net Assets"). Indiana Fund shall also
retain any and all rights that it may have over and against any person that may
have accrued up to and including the close of business on the Closing Date.
(b) Subject to the terms and conditions of this Agreement and Plan, and in
reliance on the representations and warranties of the Trust herein contained,
and in consideration of such sale, conveyance, transfer, and delivery, Federal
Fund agrees at the Closing to deliver to the Trust the number of Federal Fund
Shares, determined by dividing the aggregate Net Assets of Indiana Fund on the
Closing Date by
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the net asset value per share of Federal Fund Shares, as of 1:00 p.m. Pacific
time on the Closing Date. All such values shall be determined in the manner and
as of the time set forth in Section 2 hereof.
(c) Immediately following the Closing, Indiana Fund shall dissolve and
distribute pro rata to its shareholders of record as of the close of business on
the Closing Date Federal Fund Shares received by Indiana Fund pursuant to this
Section 1. Such liquidation and distribution shall be accomplished by the
establishment of accounts on the share records of Federal Fund of the type and
in the amounts due such shareholders based on their respective holdings as of
the close of business on the Closing Date. Fractional Federal Fund Shares shall
be carried to the third decimal place. As promptly as practicable after the
Closing, each holder of any outstanding certificate or certificates representing
shares of beneficial interest of Indiana Fund shall be entitled to surrender the
same to the transfer agent for the Federal Fund in exchange for the number of
Federal Fund Shares into which the shares of the Indiana Fund theretofore
represented by the certificate or certificates so surrendered shall have been
converted. Certificates for Federal Fund Shares shall not be issued, unless
specifically requested by the shareholders. Until so surrendered, each
outstanding certificate which, prior to the Closing, represented shares of
beneficial interest of the Indiana Fund shall be deemed for all the Federal
Fund's purposes to evidence ownership of the number of Federal Fund's Shares
into which the shares of beneficial interest of the Indiana Fund (which prior to
the Closing were represented thereby) have been converted.
2. VALUATION.
(a) The value of Indiana Fund's Net Assets to be acquired by Federal Fund
hereunder shall be computed as of 1:00 p.m. Pacific time on the Closing Date
using the valuation procedures set forth in Indiana Fund's currently effective
prospectus.
(b) The net asset value of a share of common stock of Federal Fund shall be
determined to the nearest full cent as of 1:00 p.m. Pacific time on the Closing
Date using the valuation procedures set forth in Federal Fund's currently
effective prospectus.
(c) The net asset value of a share of beneficial interest of Indiana Fund
shall be determined to the fourth decimal place as of 1:00 p.m. Pacific time on
the Closing Date using the valuation procedures set forth in Indiana Fund's
currently effective prospectus.
3. CLOSING AND CLOSING DATE.
The Closing Date shall be June 24, 1999, or such later date as the parties
may mutually agree. The Closing shall take place at the principal office of
Federal Fund at 2:00 p.m. Pacific time on the Closing Date. The Trust shall have
provided for delivery, as of the Closing, of those Net Assets of Indiana Fund to
be transferred to Federal Fund's Custodian, Bank of New York, Mutual Funds
Division, 90 Washington Street, New York, NY 10286. Also, the Trust shall
deliver at the Closing a list of names and addresses of the shareholders of
record of Indiana Fund's shares and the number of shares of beneficial interest
owned by each such shareholder, indicating thereon which such shares are
represented by outstanding certificates and which by book-entry accounts, all as
of 1:00 p.m. Pacific time on the Closing Date, certified by its transfer agent
or by its President to the best of its or his knowledge and belief. Federal Fund
shall issue and deliver a certificate or certificates evidencing the shares of
common stock of Federal Fund to be delivered to said transfer agent registered
in such manner as the Trust may request, or provide evidence satisfactory to the
Trust that such Federal Fund Shares have been registered in an account on the
books of Federal Fund in such manner as the Trust may request.
4. REPRESENTATIONS AND WARRANTIES BY THE TRUST.
The Trust represents and warrants to Federal Fund that:
(a) The Trust is a business trust created under the laws of the
Commonwealth of Massachusetts on September 18, 1984, and is validly existing and
in good standing under the laws of that commonwealth. The Trust is duly
registered under the Investment Company Act of 1940, as amended (the "1940
Act"),
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as an open-end, management investment company and all of Indiana Fund's shares
sold were sold pursuant to an effective registration statement filed under the
Securities Act of 1933, as amended (the "1933 Act"), except for those shares
sold pursuant to the private offering exemption for the purpose of raising the
required initial capital.
(b) The Trust is authorized to issue an unlimited number of shares of
beneficial interest, no par value, each outstanding share of which is fully
paid, non-assessable, fully transferable and has full voting rights and
currently issues shares of twenty-eight (28) series including Indiana Fund. The
Trust is authorized to issue an unlimited number of shares of beneficial
interest of each series.
(c) The financial statements appearing in the Trust's Annual Report to
Shareholders for the fiscal year ended February 28, 1998, audited by Coopers &
Lybrand L.L.P., copies of which have been delivered to Federal Fund, fairly
present the financial position of Indiana Fund as of such date and the results
of its operations for the periods indicated in conformity with generally
accepted accounting principles applied on a consistent basis.
(d) The books and records of Indiana Fund made available to Federal Fund
and/or its counsel accurately summarize the accounting data represented and
contain no material omissions with respect to the business and operations of
Indiana Fund.
(e) The Trust has the necessary power and authority to conduct Indiana
Fund's business as such business is now being conducted.
(f) The Trust is not a party to or obligated under any provision of the
Trust's Amended and Restated Agreement and Declaration of Trust or By-laws, or
any contract or any other commitment or obligation, and is not subject to any
order or decree that would be violated by the Trust's execution of or
performance under this Agreement and Plan.
(g) The Trust has elected to treat the Indiana Fund as a regulated
investment company ("RIC") for federal income tax purposes under Part I of
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), and
Indiana Fund has qualified as a RIC for each taxable year since its inception
and will qualify as a RIC as of the Closing Date.
5. REPRESENTATIONS AND WARRANTIES BY FEDERAL FUND.
Federal Fund represents and warrants to the Trust, on behalf of Indiana
Fund, that:
(a) Federal Fund is a corporation incorporated under the laws of the State
of California on January 7, 1982, and is validly existing and in good standing
under the laws of that state. Federal Fund is duly registered under the 1940 Act
as a diversified, open-end, management investment company and all its shares
sold have been sold pursuant to an effective registration statement filed under
the 1933 Act, except for those shares sold pursuant to the private offering
exemption for the purpose of raising the required initial capital.
(b) Federal Fund is authorized to issue ten billion (10,000,000,000) shares
of common stock, no par value, all of which is allocated to the Franklin Federal
Tax-Free Income Fund Series of which three billion (3,000,000,000) shares are
further allocated to Class A of that series, and each outstanding share of which
is fully paid, non-assessable, fully transferable, and has full voting rights.
Federal Fund Shares to be issued pursuant to this Agreement and Plan will be
fully paid, non-assessable, freely transferable and have full voting rights.
(c) At the Closing, Federal Fund Shares will be eligible for offering to
the public in those states of the United States and jurisdictions in which the
shares of Indiana Fund are presently eligible for offering to the public, and
there are a sufficient number of Federal Fund Shares registered under the 1933
Act to permit the transfers contemplated by this Agreement and Plan to be
consummated.
(d) The financial statements appearing in Federal Fund's Annual Report to
Shareholders for the fiscal year ended April 30, 1998, audited by Coopers &
Lybrand L.L.P., copies of which have been
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delivered to Indiana Fund, fairly present the financial position of Federal Fund
as of such date and the results of its operations for the periods indicated in
conformity with generally accepted accounting principles applied on a consistent
basis.
(e) Federal Fund has the necessary power and authority to conduct its
business as such business is now being conducted.
(f) Federal Fund is not a party to or obligated under any provision of its
Articles of Incorporation or By-laws, or any contract or any other commitment or
obligation, and is not subject to any order or decree, that would be violated by
its execution of or performance under this Agreement and Plan.
(g) Federal Fund has elected to be treated as a RIC for federal income tax
purposes under Part I of Subchapter M of the Code, has qualified as a RIC for
each taxable year since its inception, and will qualify as a RIC as of the
Closing Date.
6. REPRESENTATIONS AND WARRANTIES BY THE TRUST AND FEDERAL FUND.
The Trust and Federal Fund each represents and warrants to the other that:
(a) The statement of assets and liabilities to be furnished by it as of
1:00 p.m. Pacific time on the Closing Date for the purpose of determining the
number of Federal Fund Shares to be issued pursuant to Section 1 of this
Agreement and Plan will accurately reflect its Net Assets in the case of Indiana
Fund and its net assets in the case of Federal Fund, and outstanding shares of
common stock, as of such date, in conformity with generally accepted accounting
principles applied on a consistent basis.
(b) At the Closing, it will have good and marketable title to all of the
securities and other assets shown on the statement of assets and liabilities
referred to in "(a)" above, free and clear of all liens or encumbrances of any
nature whatsoever, except such imperfections of title or encumbrances as do not
materially detract from the value or use of the assets subject thereto, or
materially affect title thereto.
(c) Except as disclosed in its currently effective prospectus, there is no
material suit, judicial action, or legal or administrative proceeding pending or
threatened against it.
(d) There are no known actual or proposed deficiency assessments with
respect to any taxes payable by it.
(e) The execution, delivery, and performance of this Agreement and Plan
have been duly authorized by all necessary action of its Board of Trustees or
Board of Directors, as applicable, and this Agreement and Plan constitutes a
valid and binding obligation enforceable in accordance with its terms.
(f) It anticipates that consummation of this Agreement and Plan will not
cause it, in the case of Federal Fund, and Indiana Fund, in the case of the
Trust, to fail to conform to the requirements of Subchapter M of the Code for
federal income taxation as a RIC at the end of its fiscal year.
(g) It has the necessary power and authority to conduct its business, in
the case of Federal Fund, and Indiana Fund's business, in the case of Indiana
Fund, as such business is now being conducted.
7. COVENANTS OF THE TRUST AND FEDERAL FUND.
(a) The Trust, on behalf of Indiana Fund, and Federal Fund each covenant to
operate their respective businesses as presently conducted between the date
hereof and the Closing.
(b) The Trust undertakes that it will not acquire the Federal Fund Shares
for the purpose of making distributions thereof to anyone other than Indiana
Fund's shareholders.
(c) The Trust undertakes that, if this Agreement and Plan is consummated,
it will dissolve Indiana Fund and rescind the establishment of Indiana Fund as a
series of the Trust.
(d) The Trust and Federal Fund each agree that, by the Closing, all of
their federal and other tax returns and reports required by law to be filed by
the Trust, on behalf of Indiana Fund, or by Federal
A-4
Fund on or before such date shall have been filed, and all federal and other
taxes shown as due on said returns shall have either been paid or adequate
liability reserves shall have been provided for the payment of such taxes.
(e) At the Closing, the Trust will provide Federal Fund with a copy of the
shareholder ledger accounts of Indiana Fund, certified by its transfer agent or
its President to the best of its or his knowledge and belief, for all the
shareholders of record of Indiana Fund's shares as of 1:00 p.m. Pacific time on
the Closing Date who are to become shareholders of Federal Fund as a result of
the transfer of assets that is the subject of this Agreement and Plan.
(f) The Trust agrees to mail to each shareholder of record entitled to vote
at the meeting of Indiana Fund's shareholders at which action on this Agreement
and Plan is to be considered, in sufficient time to comply with requirements as
to notice thereof, a Combined Prospectus and Proxy Statement that complies in
all material respects with the applicable provisions of Section 14(a) of the
Securities Exchange Act of 1934, as amended, and Section 20(a) of the 1940 Act,
and the rules and regulations, respectively, thereunder.
(g) Federal Fund will file with the U.S. Securities and Exchange Commission
a registration statement on Form N-14 under the 1933 Act relating to the Federal
Fund Shares issuable hereunder ("Registration Statement"), and will use its best
efforts to provide that the Registration Statement becomes effective as promptly
as practicable. At the time it becomes effective, the Registration Statement
will (i) comply in all material respects with the applicable provisions of the
1933 Act, and the rules and regulations promulgated thereunder; and (ii) not
contain any untrue statement of material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading. At the time the Registration Statement becomes effective, at the
time of Indiana Fund's shareholders' meeting, and at the Closing Date, the
prospectus and statement of additional information included in the Registration
Statement will not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading.
8. CONDITIONS PRECEDENT TO BE FULFILLED BY THE TRUST AND FEDERAL FUND.
The obligations of the Trust and Federal Fund to effectuate this Agreement
and Plan shall be subject to the following respective conditions:
(a) That: (i) all the representations and warranties of the other party
contained herein shall be true and correct as of the Closing with the same
effect as though made as of and at such date; (ii) the other party shall have
performed all obligations required by this Agreement and Plan to be performed by
it prior to the Closing; and (iii) the other party shall have delivered to such
party a certificate signed by the President and by the Secretary or equivalent
officer to the foregoing effect.
(b) That each party shall have delivered to the other party a copy of the
resolutions approving this Agreement and Plan adopted by its Board of Trustees
or Board of Directors, as applicable, certified by its Secretary or equivalent
officer.
(c) That the U.S. Securities and Exchange Commission shall not have issued
an unfavorable management report under Section 25(b) of the 1940 Act or
instituted or threatened to institute any proceeding seeking to enjoin
consummation of the Plan of Reorganization under Section 25(c) of the 1940 Act.
And, further, no other legal, administrative or other proceeding shall have been
instituted or threatened that would materially affect the financial condition of
either party or would prohibit the transactions contemplated hereby.
(d) That this Agreement and Plan and the Plan of Reorganization
contemplated hereby shall have been adopted and approved by the appropriate
action of the shareholders of Indiana Fund at an annual or special meeting or
any adjournment thereof.
A-5
(e) That each party shall have declared a distribution or distributions
prior to the Closing Date that, together with all previous distributions, shall
have the effect of distributing to its shareholders (i) all of its net
investment income and all of its net realized capital gains, if any, for the
period from the close of its last fiscal year to 1:00 p.m. Pacific time on the
Closing Date; and (ii) any undistributed net investment income and net realized
capital gains from any period to the extent not otherwise declared for
distribution.
(f) That there shall be delivered to the Trust and Federal Fund an opinion
from Messrs. Stradley, Ronon, Stevens & Young, LLP, counsel to the Trust and
Federal Fund, to the effect that, provided the acquisition contemplated hereby
is carried out in accordance with this Agreement and Plan and based upon
certificates of the officers of the Trust and Federal Fund with regard to
matters of fact:
(1) The acquisition by Federal Fund of substantially all the assets of
Indiana Fund as provided for herein in exchange for Federal Fund Shares
will qualify as a reorganization within the meaning of Section 368(a)(1)(C)
of the Code, and Indiana Fund and Federal Fund will each be a party to the
respective reorganization within the meaning of Section 368(b) of the Code;
(2) No gain or loss will be recognized by Indiana Fund upon the
transfer of substantially all of its assets to Federal Fund in exchange
solely for voting shares of Federal Fund (Sections 361(a) and 357(a)). No
opinion, however, will be expressed as to whether any accrued market
discount will be required to be recognized as ordinary income pursuant to
Section 1276 of the Code;
(3) No gain or loss will be recognized by Federal Fund upon the
receipt of substantially all of the assets of Indiana Fund in exchange
solely for voting shares of Federal Fund (Section 1032(a));
(4) The basis of the assets of Indiana Fund received by Federal Fund
will be the same as the basis of such assets to Indiana Fund immediately
prior to the exchange (Section 362(b));
(5) The holding period of the assets of Indiana Fund received by
Federal Fund will include the period during which such assets were held by
Indiana Fund (Section 1223(2));
(6) No gain or loss will be recognized to the shareholders of Indiana
Fund upon the exchange of their shares in Indiana Fund for voting shares of
Federal Fund (Section 354(a));
(7) The basis of the Federal Fund Shares received by Indiana Fund's
shareholders shall be the same as the basis of the shares of Indiana Fund
exchanged therefor (Section 358(a)(1));
(8) The holding period of Federal Fund Shares received by Indiana
Fund's shareholders (including fractional shares to which they may be
entitled) will include the holding period of Indiana Fund's shares
surrendered in exchange therefor, provided that Indiana Fund's shares were
held as a capital asset on the date of the exchange (Section 1223(1)); and
(9) Federal Fund will succeed to and take into account as of the date
of the proposed transfer (as defined in Section 1.381(b)-1(b) of the Income
Tax Regulations) the items of Indiana Fund described in Section 381(c) of
the Code (as defined in Section 1.381(b)-1(b) of the Income Tax
Regulations), subject to the conditions and limitations specified in
Sections 381(b) and (c), 382, 383 and 384 of the Code and the Income Tax
Regulations thereunder.
(g) That Federal Fund shall have received an opinion in form and substance
satisfactory to it from Messrs. Stradley, Ronon, Stevens & Young, LLP, counsel
to the Trust, to the effect that, subject in all respects to the effects of
bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, and
other laws now or hereafter affecting generally the enforcement of creditors'
rights:
(1) The Trust was created as a business trust under the laws of the
Commonwealth of Massachusetts on September 18, 1984, and is validly
existing and in good standing under the laws of that commonwealth;
(2) The Trust is authorized to issue an unlimited number of shares of
beneficial interest of Indiana Fund, no par value. Assuming that the
initial shares of beneficial interest were issued in accordance with the
1940 Act and the Amended and Restated Agreement and Declaration of Trust
A-6
and By-laws of the Trust, and that all other outstanding shares of Indiana
Fund were sold, issued and paid for in accordance with the terms of Indiana
Fund's prospectus in effect at the time of such sales, each such
outstanding share is fully paid, non-assessable, fully transferable and has
full voting rights;
(3) The Trust is an open-end investment company of the management type
registered as such under the 1940 Act;
(4) Except as disclosed in Indiana Fund's currently effective
prospectus, such counsel does not know of any material suit, action, or
legal or administrative proceeding pending or threatened against the Trust,
the unfavorable outcome of which would materially and adversely affect the
Trust or Indiana Fund;
(5) All actions required to be taken by the Trust to authorize this
Agreement and Plan and to effect the Plan of Reorganization contemplated
hereby have been duly authorized by all necessary action on the part of the
Trust; and
(6) Neither the execution, delivery, nor performance of this Agreement
and Plan by the Trust violates any provision of its Amended and Restated
Agreement and Declaration of Trust or By-laws, or the provisions of any
agreement or other instrument known to such counsel to which the Trust is a
party or by which Indiana Fund is otherwise bound; this Agreement and Plan
is the legal, valid and binding obligation of the Trust and Indiana Fund
and is enforceable against the Trust and/or Indiana Fund in accordance with
its terms.
In giving the opinions set forth above, this counsel may state that it is
relying on certificates of the officers of the Trust with regard to matters of
fact, and certain certifications and written statements of governmental
officials with respect to the good standing of the Trust and Indiana Fund.
(h) That the Trust shall have received an opinion in form and substance
satisfactory to it from Messrs. Stradley, Ronon, Stevens & Young, LLP, counsel
to Federal Fund, to the effect that, subject in all respects to the effects of
bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance and
other laws now or hereafter affecting generally the enforcement of creditors'
rights:
(1) Federal Fund was incorporated under the laws of the State of
California on January 7, 1982, and is validly existing and in good standing
under the laws of that state;
(2) Federal Fund is authorized to issue ten billion (10,000,000,000)
shares of common stock, no par value, all of which is allocated to the
Franklin Federal Tax-Free Income Fund Series of which three billion
(3,000,000,000) shares are further allocated to Class A of that series, and
each outstanding share of which is fully paid, non-assessable, fully
transferable, and has full voting rights. Assuming that the initial capital
shares of Federal Fund were issued in accordance with the 1940 Act, and the
Articles of Incorporation and By-laws of Federal Fund, and that all other
outstanding shares of Federal Fund were sold, issued and paid for in
accordance with the terms of Federal Fund's prospectus in effect at the
time of such sales, each such outstanding share of Federal Fund is fully
paid, non-assessable, freely transferable and has full voting rights;
A-7
(3) Federal Fund is an open-end, diversified investment company of the
management type registered as such under the 1940 Act;
(4) Except as disclosed in Federal Fund's currently effective
prospectus, such counsel does not know of any material suit, action, or
legal or administrative proceeding pending or threatened against Federal
Fund, the unfavorable outcome of which would materially and adversely
affect Federal Fund;
(5) Federal Fund Shares to be issued pursuant to the terms of this
Agreement and Plan have been duly authorized and, when issued and delivered
as provided in this Agreement and Plan, will have been validly issued and
fully paid and will be non-assessable by Federal Fund;
(6) All corporate actions required to be taken by Federal Fund to
authorize this Agreement and Plan and to effect the Plan of Reorganization
contemplated hereby have been duly authorized by all necessary corporate
action on the part of Federal Fund;
(7) Neither the execution, delivery, nor performance of this Agreement
and Plan by Federal Fund violates any provision of its Articles of
Incorporation, its By-laws, or the provisions of any agreement or other
instrument known to such counsel to which Federal Fund is a party or by
which Federal Fund is otherwise bound; this Agreement and Plan is the
legal, valid and binding obligation of Federal Fund and is enforceable
against Federal Fund in accordance with its terms; and
(8) The registration statement of which the prospectus, dated
September 1, 1998, as amended January 1, 1999, of Federal Fund is a part
(the "Prospectus") is, at the time of the signing of this Agreement and
Plan, effective under the 1933 Act, and, to the best knowledge of such
counsel, no stop order suspending the effectiveness of such registration
statement has been issued, and no proceedings for such purpose have been
instituted or are pending before or threatened by the U.S. Securities and
Exchange Commission under the 1933 Act, and nothing has come to such
counsel's attention that causes it to believe that, at the time the
Prospectus became effective, or at the time of the signing of this
Agreement and Plan, or at the Closing, such Prospectus (except for the
financial statements and other financial and statistical data included
therein, as to which counsel need not express an opinion), contained any
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading; and such counsel knows of no legal or government
proceedings required to be described in the Prospectus, or of any contract
or document of a character required to be described in the Prospectus that
is not described as required.
In giving the opinions set forth above, this counsel may state that it is
relying on certificates of the officers of Federal Fund with regard to matters
of fact, and certain certifications and written statements of governmental
officials with respect to the good standing of Federal Fund.
(i) That the Trust shall have received a certificate from the President and
Secretary of Federal Fund to the effect that the statements contained in Federal
Fund's Prospectus, at the time the Prospectus became effective, at the date of
the signing of this Agreement and Plan, and at the Closing, did not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading.
(j) That Federal Fund's Registration Statement with respect to the Federal
Fund Shares to be delivered to the Indiana Fund's shareholders in accordance
with this Agreement and Plan shall have become effective, and no stop order
suspending the effectiveness of the Registration Statement or any amendment or
supplement thereto, shall have been issued prior to the Closing Date or shall be
in effect at Closing, and no proceedings for the issuance of such an order shall
be pending or threatened on that date.
A-8
(k) That the Federal Fund Shares to be delivered hereunder shall be
eligible for sale by Federal Fund with each state commission or agency with
which such eligibility is required in order to permit the Federal Fund Shares
lawfully to be delivered to each Indiana Fund shareholder.
(l) That, at the Closing, the Trust, on behalf of Indiana Fund, transfers
to Federal Fund aggregate Net Assets of Indiana Fund comprising at least 90% in
fair market value of the total net assets and 70% of the fair market value of
the total gross assets recorded on the books of Indiana Fund on the Closing
Date.
9. BROKERAGE FEES AND EXPENSES.
(a) The Trust and Federal Fund each represents and warrants to the other
that there are no broker or finders' fees payable by it in connection with the
transactions provided for herein.
(b) The expenses of entering into and carrying out the provisions of this
Agreement and Plan shall be borne one-quarter by Indiana Fund, one-quarter by
Federal Fund, and one-half by Franklin Advisers, Inc.
10. TERMINATION; POSTPONEMENT; WAIVER; ORDER.
(a) Anything contained in this Agreement and Plan to the contrary
notwithstanding, this Agreement and Plan may be terminated and the Plan of
Reorganization abandoned at any time (whether before or after approval thereof
by the shareholders of Indiana Fund) prior to the Closing or the Closing may be
postponed as follows:
(1) by mutual consent of the Trust and Federal Fund;
(2) by Federal Fund if any condition of its obligations set forth in
Section 8 has not been fulfilled or waived; or
(3) by the Trust if any condition of its obligations set forth in
Section 8 has not been fulfilled or waived.
An election by the Trust, on behalf of Indiana Fund, or Federal Fund to
terminate this Agreement and Plan and to abandon the Plan of Reorganization
shall be exercised, respectively, by the Board of Trustees of the Trust or Board
of Directors of Federal Fund.
(b) If the transactions contemplated by this Agreement and Plan have not
been consummated by December 31, 1999, the Agreement and Plan shall
automatically terminate on that date, unless a later date is agreed to by both
Federal Fund and the Trust.
(c) In the event of termination of this Agreement and Plan pursuant to the
provisions hereof, the same shall become void and have no further effect, and
neither the Trust nor Federal Fund, nor their directors or trustees, officers,
agents or shareholders shall have any liability in respect of this Agreement and
Plan.
(d) At any time prior to the Closing, any of the terms or conditions of
this Agreement and Plan may be waived by the party who is entitled to the
benefit thereof by action taken by that party's Board of Trustees or Board of
Directors, as applicable, if, in the judgment of such Board, such action or
waiver will not have a material adverse effect on the benefits intended under
this Agreement and Plan to its shareholders, on behalf of whom such action is
taken.
(e) The respective representations and warranties contained in Sections 4
to 6 hereof shall expire with and be terminated by the Plan of Reorganization,
and neither the Trust nor Federal Fund, nor any of their officers, trustees or
directors, agents or shareholders shall have any liability with respect to such
representations or warranties after the Closing. This provision shall not
protect any officer, trustee or director, agent or shareholder of the Trust or
Federal Fund against any liability to the entity for which that officer, trustee
or director, agent or shareholder so acts or to its shareholders to which that
officer, trustee
A-9
or director, agent or shareholder would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties in the conduct of such office.
(f) If any order or orders of the U.S. Securities and Exchange Commission
with respect to this Agreement and Plan shall be issued prior to the Closing and
shall impose any terms or conditions that are determined by action of the Board
of Trustees of the Trust or the Board of Directors of the Federal Fund to be
acceptable, such terms and conditions shall be binding as if a part of this
Agreement and Plan without further vote or approval of the shareholders of
Indiana Fund, unless such terms and conditions shall result in a change in the
method of computing the number of Federal Fund Shares to be issued to Indiana
Fund in which event, unless such terms and conditions shall have been included
in the proxy solicitation material furnished to the shareholders of Indiana Fund
prior to the meeting at which the transactions contemplated by this Agreement
and Plan shall have been approved, this Agreement and Plan shall not be
consummated and shall terminate unless Indiana Fund shall promptly call a
special meeting of shareholders at which such conditions so imposed shall be
submitted for approval.
11. ENTIRE AGREEMENT AND AMENDMENTS.
This Agreement and Plan embodies the entire agreement between the parties
and there are no agreements, understandings, restrictions, or warranties between
the parties other than those set forth herein or herein provided for. This
Agreement and Plan may be amended only by mutual consent of the parties in
writing. Neither this Agreement and Plan nor any interest herein may be assigned
without the prior written consent of the other party.
12. COUNTERPARTS.
This Agreement and Plan may be executed in any number of counterparts, each
of which shall be deemed to be an original, but all such counterparts together
shall constitute but one instrument.
13. NOTICES.
Any notice, report, or demand required or permitted by any provision of
this Agreement and Plan shall be in writing and shall be deemed to have been
given if delivered or mailed, first class postage prepaid, addressed to Franklin
Federal Tax-Free Income Fund at 777 Mariners Island Boulevard, P. O. Box 7777,
San Mateo, CA 94403-7777, Attention: Secretary, or Franklin Tax-Free Trust, at
777 Mariners Island Boulevard, P.O. Box 7777, San Mateo CA 94403-7777,
Attention: Secretary, as the case may be.
14. GOVERNING LAW.
This Agreement shall be governed by and carried out in accordance with the
laws of the Commonwealth of Massachusetts.
IN WITNESS WHEREOF, Franklin Federal Tax-Free Income Fund and Franklin
Tax-Free Trust, on behalf of Franklin Indiana Tax-Free Income Fund, have each
caused this Agreement and Plan to be executed on its behalf by its duly
authorized officers, all as of the date and year first-above written.
A-10
<TABLE>
<S> <C>
FRANKLIN FEDERAL TAX-FREE
INCOME FUND
Attest:
/s/ LEIANN NUZUM By: /s/ DEBORAH R. GATZEK
- ----------------------------------------------------- -----------------------------------------------------
Assistant Secretary Deborah R. Gatzek
Vice President and Secretary
FRANKLIN TAX-FREE TRUST, ON BEHALF OF FRANKLIN
INDIANA TAX-FREE INCOME FUND
Attest:
/s/ LEIANN NUZUM By: /s/ DEBORAH R. GATZEK
- ----------------------------------------------------- -----------------------------------------------------
Assistant Secretary Deborah R. Gatzek
Vice President and Secretary
</TABLE>
A-11
167 PROXY
PROSPECTUS
FRANKLIN
FEDERAL TAX-FREE
INCOME FUND
INVESTMENT STRATEGY
TAX-FREE INCOME
SEPTEMBER 1, 1998 AS AMENDED JANUARY 1, 1999
Class A, B & C
Please read this prospectus before investing, and keep it for future
reference. It contains important information, including how the fund invests
and the services available to shareholders.
To learn more about the fund and its policies, you may request a copy of the
fund's Statement of Additional Information ("SAI"), dated September 1, 1998,
which we may amend from time to time. We have filed the SAI with the SEC and
have incorporated it by reference into this prospectus.
For a free copy of the SAI or a larger print version of this prospectus,
contact your investment representative or call 1-800/DIAL BEN.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE
U.S. GOVERNMENT. MUTUAL FUND SHARES INVOLVE INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUND SHARES, THE SEC HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
FRANKLIN FEDERAL
TAX-FREE INCOME FUND
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED IN ANY
STATE, JURISDICTION OR COUNTRY IN WHICH THE OFFERING IS NOT AUTHORIZED. NO
SALES REPRESENTATIVE, DEALER, OR OTHER PERSON IS AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS. FURTHER INFORMATION MAY BE OBTAINED FROM DISTRIBUTORS.
TABLE OF CONTENTS
ABOUT THE FUND
Expense Summary ........................................... 2
Financial Highlights ....................................... 3
How Does the Fund Invest Its Assets?........................ 5
What Are the Risks of Investing in the Fund? ............... 8
Who Manages the Fund? ...................................... 10
How Taxation Affects the Fund and Its Shareholders ......... 13
How Is the Fund Organized? ................................. 16
ABOUT YOUR ACCOUNT
How Do I Buy Shares? ....................................... 16
May I Exchange Shares for Shares of Another Fund? .......... 24
How Do I Sell Shares? ...................................... 27
What Distributions Might I Receive From the Fund? .......... 29
Transaction Procedures and Special Requirements ............ 31
Services to Help You Manage Your Account ................... 35
What If I Have Questions About My Account? ................. 37
GLOSSARY
Useful Terms and Definitions ............................... 38
FRANKLIN
FEDERAL
TAX-FREE
INCOME FUND
September 1, 1998
as amended January 1, 1999
When reading this prospectus, you will see certain terms beginning with
capital letters. This means the term is explained in our glossary section.
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN
ABOUT THE FUND
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in the
fund. It is based on the historical expenses of the fund for the fiscal year
ended April 30, 1998. The fund's actual expenses may vary.
CLASS A 1 CLASS B 2 CLASS C 1
A. SHAREHOLDER TRANSACTION EXPENSES3
Maximum Sales Charge
(as a percentage of Offering Price) 4.25% 4.00% 1.99%
Paid at time of purchase4 4.25% None 1.00%
Paid at redemption5 None 4.00% 0.99%
Exchange Fee (per transaction)6 None None None
B. ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees 0.45% 0.45% 0.45%
Rule 12b-1 Fees7 0.07% 0.65% 0.65%
Other Expenses 0.07% 0.07% 0.07%
-------------------------
Total Fund Operating Expenses 0.59% 1.17% 1.17%
=========================
C. EXAMPLE
Assume the annual return for each class is 5%, operating expenses are as
described above, and you sell your shares after the number of years shown.
These are the projected expenses for each $10,000 that you invest in the fund.
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------
CLASS A $483 8 $606 $740 $1,132
CLASS B
Assuming you sold your
shares at the end of
the period $519 $672 $844 $1,259 9
Assuming you stayed
in the fund $119 $372 $644 $1,259 9
CLASS C $316 10 $468 $737 $1,506
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN.
The fund pays its operating expenses. The effects of these expenses are
reflected in the Net Asset Value or dividends of each class and are not
directly charged to your account.
1. Before January 1, 1999, Class A shares were designated Class I and Class C
shares were designated Class II.
2. The fund began offering Class B shares on January 1, 1999. Annual fund
operating expenses are based on the expenses for Class A and C for the fiscal
year ended April 30, 1998. The Rule 12b-1 fees are based on the maximum fees
allowed under Class B's Rule 12b-1 plan.
3. If your transaction is processed through your Securities Dealer, you may
be charged a fee by your Securities Dealer for this service.
4. There is no front-end sales charge if you invest $1 million or more in
Class A shares. Although Class B and C have a lower front-end sales charge
than Class A, their Rule 12b-1 fees are higher. Over time you may pay more
for Class B and C shares. Please see "How Do I Buy Shares? - Choosing a Share
Class."
5. A Contingent Deferred Sales Charge of 1% may apply to Class A purchases of
$1 million or more if you sell the shares within one year and to any Class C
purchase if you sell the shares within 18 months. A Contingent Deferred Sales
Charge of up to 4% may apply to any Class B purchase if you sell the shares
within six years. The charge is based on the value of the shares sold or the
Net Asset Value at the time of purchase, whichever is less. The number in the
table shows the charge as a percentage of Offering Price. While the
percentage for Class C is different depending on whether the charge is shown
based on the Net Asset Value or the Offering Price, the dollar amount you
would pay is the same. See "How Do I Sell Shares? - Contingent Deferred Sales
Charge" for details.
6. There is a $5 fee for exchanges by Market Timers.
7. These fees may not exceed 0.10% for Class A and 0.65% for Class B and C.
The combination of front-end sales charges and Rule 12b-1 fees could cause
long-term shareholders to pay more than the economic equivalent of the
maximum front-end sales charge permitted under the rules of the National
Association of Securities Dealers, Inc.
8. Assumes a Contingent Deferred Sales Charge will not apply.
9. Assumes conversion of Class B shares to Class A shares after eight years,
lowering your annual expenses from that time on.
10. For the same Class C investment, you would pay projected expenses of $218
if you did not sell your shares at the end of the first year. Your projected
expenses for the remaining periods would be the same.
FINANCIAL HIGHLIGHTS
This table summarizes the fund's financial history. The information has been
audited by PricewaterhouseCoopers LLP, the fund's independent auditor. The
audit report covering each of the most recent five years appears in the
fund's Annual Report to Shareholders for the fiscal year ended April 30,
1998. The Annual Report to Shareholders also includes more information about
the fund's performance. For a free copy, please call Fund Information.
CLASS A
YEAR ENDED APRIL 30,
<TABLE>
<CAPTION>
--------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
---------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding
throughout the year)
Net asset value,
beginning of year $11.90 $11.83 $11.73 $11.81 $12.24 $11.68 $11.40 $11.08 $11.33 $10.97
----------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income .69 .71 .74 .75 .77 .80 .82 .83 .84 .85
Net realized and unrealized
gains (losses) .35 .07 .10 (.05) (.41) .58 .30 .34 (.24) .42
--------------------------------------------------------------------------------------
Total from investment
operations 1.04 .78 .84 .70 .36 1.38 1.12 1.17 .60 1.27
Less distributions from net
investment income (.69) (.71) (.74) (.78) (.79) (.82) (.84) (.85) (.85) (.91)
---------------------------------------------------------------------------------------
Net asset value,
end of year $12.25 $11.90 $11.83 $11.73 $11.81 $12.24 $11.68 $11.40 $11.08 $11.33
========================================================================================
Total return* 8.92% 6.81% 7.33% 6.21% 2.58% 11.89% 9.90% 10.67% 5.10% 11.71%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
year (millions) $7,023 $6,905 $7,013 $6,887 $6,804 $6,415 $5,184 $4,353 $3,865 $3,649
Ratios to average net assets:
Expenses .59% .58% .57% .59% .52% .51% .51% .50% .50% .51%
Net investment income 5.70% 6.00% 6.20% 6.47% 6.27% 6.68% 7.70% 7.34% 7.39% 7.59%
Portfolio turnover rate 14.54% 16.43% 25.10% 19.88% 24.59% 13.30% 14.94% 28.79% 17.83% 16.43%
</TABLE>
CLASS C
YEAR ENDED APRIL 30,
1998 1997 1996
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year $11.90 $11.82 $11.73**
========================
Income from investment operations:
Net investment income .63 .66 .68
Net realized and unrealized gains .33 .06 .09
------------------------
Total from investment operations .96 .72 .77
Less distributions from net investment income (.62) (.64) (.68)
------------------------
Net asset value, end of year $12.24 $11.90 $11.82
========================
Total return* 8.22% 6.28% 6.68%
Ratios/supplemental data
Net assets, end of year (000's) $135,195 $71,944 $34,110
Ratios to average net assets:
Expenses 1.17% 1.16% 1.15%
Net investment income 5.12% 5.42% 5.68%
Portfolio turnover rate 14.54% 16.43% 25.10%
*TOTAL RETURN DOES NOT REFLECT SALES COMMISSIONS OR THE CONTINGENT DEFERRED
SALES CHARGE, AND IS NOT ANNUALIZED. PRIOR TO MAY 1, 1994, DIVIDENDS FROM NET
INVESTMENT INCOME WERE REINVESTED AT THE OFFERING PRICE.
**THE FUND PAID A DIVIDEND TO SHAREHOLDERS OF RECORD ON THE BEGINNING OF
BUSINESS, MAY 1, 1995, IN THE AMOUNT OF $0.062 PER SHARE. THE NET ASSET VALUE
PER SHARE AT THE BEGINNING OF THE PERIOD INCLUDES THIS DIVIDEND.
HOW DOES THE FUND INVEST ITS ASSETS?
A QUICK LOOK AT THE FUND
GOAL: High current income free from federal income taxes.
STRATEGY: Invests in investment grade municipal securities whose interest is
free from federal income taxes.
WHAT IS THE MANAGER'S APPROACH?
The manager tries to select securities that it believes will provide the best
balance between risk and return within the fund's range of allowable
investments. The manager considers a number of factors, including general
market and economic conditions and the credit quality of the issuer, when
selecting securities for the fund.
To provide tax-free income to shareholders, the manager typically uses a buy
and hold strategy. This means it holds securities in the fund's portfolio for
income purposes, rather than trading securities for capital gains. The
manager may sell a security at any time, however, when the manager believes
doing so could help the fund meet its goal.
While income is the most important part of return over time, the total return
from a municipal security includes both income and price gains or losses. The
fund's focus on income does not mean it invests only in the highest-yielding
securities available, or that it can avoid losses of principal.
WHO MAY WANT TO INVEST?
The fund may be appropriate for investors in higher tax brackets who seek
high current income that is free from federal income taxes.
The value of the fund's investments and the income they generate will vary
from day to day, and generally reflect interest rates, market conditions, and
other federal and state political and economic news. When you sell your
shares, they may be worth more or less than what you paid for them. Please
consider your investment goals and tolerance for price fluctuations and risk
when making your investment decision.
THE FUND IN MORE DETAIL
WHAT IS THE FUND'S GOAL?
The investment goal of the fund is to provide investors with as high a level
of interest income exempt from federal income taxes as is consistent with
prudent investing, while seeking preservation of shareholders' capital. This
goal is fundamental, which means that it may not be changed without
shareholder approval.
WHAT KINDS OF SECURITIES DOES THE FUND BUY?
The fund tries to invest all of its assets in tax-free municipal securities,
including bonds, notes and commercial paper.
MUNICIPAL SECURITIES are issued by state and local governments, their
agencies and authorities, as well as by the District of Columbia and U.S.
territories and possessions, to borrow money for various public or private
projects. The issuer pays a fixed or variable rate of interest, and must
repay the amount borrowed (the "principal") at maturity. Municipal securities
help the fund meet its investment goal because they generally pay interest
free from federal income tax.
- - The fund normally invests at least 80% of its total assets in municipal
securities that pay interest free from federal income taxes, including the
federal alternative minimum tax (this policy is fundamental).
While the fund tries to invest 100% of its assets in tax-free municipal
securities, it is possible, although not anticipated, that the fund may have up
to 20% of its assets in securities that pay taxable interest. If you are subject
to the federal alternative minimum tax, please keep in mind that the fund may
also have a portion of its assets in municipal securities that pay interest
subject to the federal alternative minimum tax.
QUALITY. All things being equal, the lower a security's credit quality, the
higher the risk and the higher the yield the security generally must pay as
compensation to investors for the higher risk.
A security's credit quality depends on the issuer's ability to pay interest
on the security and, ultimately, to repay the principal. Independent rating
agencies, such as Fitch, Moody's and S&P, often rate municipal securities
based on their opinion of the issuer's credit quality. Most rating agencies
use a descending alphabet scale to rate long-term securities, and a
descending numerical scale to rate short-term securities. For example, Fitch
and S&P use AAA, AA, A and BBB for their top four long-term ratings, while
Moody's uses Aaa, Aa, A and Baa. Securities in the top four ratings are
"investment grade," although securities in the fourth highest rating may have
some speculative features. These ratings are described in more detail in the
SAI.
An insurance company, bank or other foreign or domestic entity may provide
credit support for a municipal security and enhance its credit quality. For
example, some municipal securities are insured, which means they are covered
by an insurance policy that insures the timely payment of principal and
interest. Other municipal securities may be backed by letters of credit,
guarantees, or escrow or trust accounts that contain securities backed by the
full faith and credit of the U.S. government to secure the payment of
principal and interest.
The fund only buys investment grade securities or unrated securities that
the manager believes are comparable.
MATURITY. Municipal securities are issued with a specific maturity date - the
date when the issuer must repay the amount borrowed. Maturities typically
range from less than one year (short term) to 30 years (long term). In
general, securities with longer maturities are more sensitive to price
changes, although they may provide higher yields.
- - The fund has no restrictions on the maturity of the securities it may buy
or on its average portfolio maturity.
VARIABLE AND FLOATING RATE SECURITIES have interest rates that change either
at specific intervals or whenever a benchmark rate changes. While this
feature helps to protect against a decline in the security's market price, it
also lowers the fund's income when interest rates fall. Of course, the fund's
income from its variable rate investments may also increase if interest rates
rise.
- - The fund may invest in investment grade variable and floating rate
securities.
MUNICIPAL LEASE OBLIGATIONS finance the purchase of public property. The
property is leased to the state or a local government, and the lease payments
are used to pay the interest on the obligations. Municipal lease obligations
differ from other municipal securities because the lessee's governing body must
set aside the money to make the lease payments each year. If the money is not
set aside, the issuer or the lessee can end the lease without penalty. If the
lease is cancelled, investors who own the municipal lease obligations may not be
paid.
- - The fund may invest in municipal lease obligations without limit, if the
obligations meet the fund's quality and maturity standards.
WHAT ARE SOME OF THE FUND'S OTHER INVESTMENT STRATEGIES AND PRACTICES?
TEMPORARY INVESTMENTS. When the manager believes unusual or adverse economic,
market or other conditions exist, it may invest the fund's portfolio in a
temporary defensive manner. Under these circumstances, the fund may invest
all of its assets in securities that pay taxable interest, including (i) high
quality commercial paper; or (ii) securities issued or guaranteed by the full
faith and credit of the U.S. government.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS are those where payment and
delivery for the security take place at a future date. Since the market price
of the security may fluctuate during the time before payment and delivery,
the fund assumes the risk that the value of the security at delivery may be
more or less than the purchase price.
DIVERSIFICATION. Diversification involves limiting the amount of money
invested in any one issuer or, on a broader scale, in any one state or type
of project to help spread and reduce the risks of investment. A fund can be
either diversified or non-diversified. A non-diversified fund may invest a
greater portion of its assets in the securities of one issuer than a
diversified fund. Economic, business, political or other changes can affect
all securities of a similar type. A non-diversified fund may be more
sensitive to these changes.
- - The fund is a diversified fund. The fund may, however, invest up to 25% of
its assets in the securities of one issuer or in the securities of issuers
located in the same state. The fund may invest more than 25% of its assets in
municipal securities that finance similar types of projects, such as
hospitals, housing, industrial development, transportation or pollution
control.
OTHER POLICIES AND RESTRICTIONS. The fund has a number of additional
investment policies and restrictions that govern its activities. Those that
are identified as "fundamental" may only be changed with shareholder
approval. The others may be changed by the Board alone. For a list of these
restrictions and more information about the fund's investment policies,
including those described above, please see "How Does the Fund Invest Its
Assets?" and "Investment Restrictions" in the SAI.
Generally, the policies and restrictions discussed in this prospectus and in
the SAI apply when the fund makes an investment. In most cases, the fund is
not required to sell a security because circumstances change and the security no
longer meets one or more of the fund's policies or restrictions.
WHAT ARE THE RISKS OF INVESTING IN THE FUND?
Like all investments, an investment in the fund involves risks. The risks of
the fund are basically the same as those of other investments in municipal
securities of similar quality. Because the fund holds many securities,
however, it is likely to be less risky than any one, or few, directly held
municipal investments.
GENERAL RISK. There is no assurance that the fund will meet its investment
goal. The fund's share price, and the value of your investment, may change.
Generally, when the value of the fund's investments go down, so does the
fund's share price. Similarly, when the value of the fund's investments go
up, so does the fund's share price. Since the value of the fund's shares can
go up or down, it is possible to lose money by investing in the fund.
INTEREST RATE RISK is the risk that changes in interest rates can reduce the
value of a security. When interest rates rise, municipal security prices fall.
The opposite is also true: municipal security prices go up when interest rates
fall. To explain why this is so, assume you hold a municipal security offering a
5% yield. A year later, interest rates are on the rise and comparable securities
are offered with a 6% yield. With higher-yielding securities available, you
would have trouble selling your 5% security for the price you paid - causing you
to lower your asking price. On the other hand, if interest rates were falling
and 4% municipal securities were being offered, you would be able to sell your
5% security for more than you paid.
INCOME RISK is the risk that the fund's income will decrease due to falling
interest rates. Since the fund can only distribute what it earns, the fund's
distributions to its shareholders may decline when interest rates fall.
CREDIT RISK is the possibility that an issuer will be unable to make interest
payments or repay principal. Changes in an issuer's financial strength or in
a security's credit rating may affect its value. Even securities supported by
credit enhancements have the credit risk of the entity providing the credit
support. Credit support provided by a foreign entity may be less certain
because of the possibility of adverse foreign economic, political or legal
developments that may affect the ability of that foreign entity to meet its
obligations. Changes in the credit quality of the credit provider could
affect the value of the security and the fund's share price.
MARKET RISK is the risk that a security's value will be reduced by market
activity or the results of supply and demand. This is a basic risk associated
with all securities. When there are more sellers than buyers, prices tend to
fall. Likewise, when there are more buyers than sellers, prices tend to
increase.
CALL RISK is the likelihood that a security will be prepaid (or "called")
before maturity. An issuer is more likely to call its bonds when interest
rates are falling, because the issuer can issue new bonds with lower interest
payments. If a bond is called, the fund may have to replace it with a
lower-yielding security. At any time, the fund may have a large amount of its
assets invested in municipal securities subject to call risk, including
escrow-secured or defeased bonds. A call of some or all of these securities
may lower the fund's income and its distributions to shareholders.
YEAR 2000. When evaluating current and potential portfolio positions, Year
2000 is one of the factors the fund's manager considers.
The manager will rely upon public filings and other statements made by
issuers about their Year 2000 readiness. The manager, of course, cannot audit
each issuer and its major suppliers to verify their Year 2000 readiness.
If an issuer in which the fund is invested is adversely affected by Year 2000
problems, it is likely that the price of its security will also be adversely
affected. A decrease in the value of one or more of the fund's portfolio
holdings will have a similar impact on the price of the fund's shares. Please
see "Year 2000 Problem" under "Who Manages the Fund?" for more information.
WHO MANAGES THE FUND?
THE BOARD. The Board oversees the management of the fund and elects its
officers. The officers are responsible for the fund's day-to-day operations.
The Board also monitors the fund to ensure no material conflicts exist among
the fund's classes of shares. While none is expected, the Board will act
appropriately to resolve any material conflict that may arise.
INVESTMENT MANAGER. Franklin Advisers, Inc. manages the fund's assets and
makes its investment decisions. The manager also performs similar services
for other funds. It is wholly owned by Resources, a publicly owned company
engaged in the financial services industry through its subsidiaries. Charles
B. Johnson and Rupert H. Johnson, Jr. are the principal shareholders of
Resources. Together, the manager and its affiliates manage over $208 billion
in assets, including more than $50 billion in the municipal securities
market. Please see "Investment Management and Other Services" and
"Miscellaneous Information" in the SAI for information on securities
transactions and a summary of the fund's Code
of Ethics.
MANAGEMENT TEAM. The team responsible for the day-to-day management of the
fund's portfolio is Sheila Amoroso since 1987, Ben Barber since 1993 and
Thomas Kenny since 1987:
Sheila Amoroso
Vice President of Franklin Advisers, Inc.
Ms. Amoroso has been an analyst or portfolio manager for the fund since 1987.
She holds a Bachelor of Science degree from San Francisco State University.
She joined the Franklin Templeton Group in 1986. She is a member of several
securities industry-related committees and associations.
Ben Barber
Portfolio Manager of Franklin Advisers, Inc.
Mr. Barber has been an analyst or portfolio manager for the fund since 1993.
He holds a Bachelor of Arts degree in International Relations and Political
Science from the University of California at Santa Barbara. Mr. Barber joined
the Franklin Templeton Group in 1991. He is a member of several securities
industry-related committees and associations.
Thomas Kenny
Executive Vice President of Franklin Advisers, Inc.
Mr. Kenny has been an analyst or portfolio manager for the fund since 1987.
He is the Director of Franklin's Municipal Bond Department. He holds a Master
of Science degree in Finance from Golden Gate University and a Bachelor of
Arts degree in Business and Economics from the University of California at
Santa Barbara. Mr. Kenny joined the Franklin Templeton Group in 1986. He is a
member of several securities industry-related committees and associations.
MANAGEMENT FEES. During the fiscal year ended April 30, 1998, management fees
totaling 0.45% of the average monthly net assets of the fund were paid to the
manager. Total expenses, including fees paid to the manager, were 0.59% for
Class A and 1.17% for Class C.
PORTFOLIO TRANSACTIONS. The manager tries to obtain the best execution on all
transactions. If the manager believes more than one broker or dealer can
provide the best execution, it may consider research and related services and
the sale of fund shares, as well as shares of other funds in the Franklin
Templeton Group of Funds, when selecting a broker or dealer. Please see "How
Does the Fund Buy Securities for Its Portfolio?" in the SAI for more
information.
ADMINISTRATIVE SERVICES. Under an agreement with the manager, FT Services
provides certain administrative services and facilities for the fund. During
the fiscal year ended April 30, 1998, administration fees totaling 0.08% of
the average daily net assets of the fund were paid to FT Services. These fees
are paid by the manager. They are not a separate expense of the fund. Please
see "Investment Management and Other Services" in the SAI for more
information.
YEAR 2000 PROBLEM. The fund's business operations depend on a worldwide
network of computer systems that contain date fields, including securities
trading systems, securities transfer agent operations and stock market links.
Many of the systems currently use a two digit date field to represent the
date, and unless these systems are changed or modified, they may not be able
to distinguish the Year 1900 from the Year 2000 (commonly referred to as the
Year 2000 problem). In addition, the fact that the Year 2000 is a
non-standard leap year may create difficulties for some systems.
When the Year 2000 arrives, the fund's operations could be adversely affected
if the computer systems used by the manager, its service providers and other
third parties it does business with are not Year 2000 ready. For example, the
fund's portfolio and operational areas could be impacted, including
securities trade processing, interest and dividend payments, securities
pricing, shareholder account services, reporting, custody functions and
others.
The fund's manager and its affiliated service providers are making a
concerted effort to take steps they believe are reasonably designed to
address their Year 2000 problems. Of course, the fund's ability to reduce the
effects of the Year 2000 problem is also very much dependent upon the efforts
of third parties over which the fund and its manager may have no control.
THE RULE 12B-1 PLANS
Each class has a separate distribution or "Rule 12b-1" plan under which the
fund shall pay or may reimburse Distributors or others for the expenses of
activities that are primarily intended to sell shares of the class. These
expenses may include, among others, distribution or service fees paid to
Securities Dealers or others who have executed a servicing agreement with the
fund, Distributors or its affiliates; a prorated portion of Distributors'
overhead expenses; and the expenses of printing prospectuses and reports used
for sales purposes, and preparing and distributing sales literature and
advertisements.
Payments by the fund under the Class A plan may not exceed 0.10% per year of
Class A's average daily net assets. All distribution expenses over this
amount will be borne by those who have incurred them. During the first year
after certain Class A purchases made without a sales charge, Securities
Dealers may not be eligible to receive the Rule 12b-1 fees associated with
the purchase.
Under the Class B plan, the fund pays Distributors up to 0.50% per year of
Class B's average daily net assets to pay Distributors for providing
distribution and related services and bearing certain Class B expenses. All
distribution expenses over this amount will be borne by those who have
incurred them. Securities Dealers are not eligible to receive this portion of
the Rule 12b-1 fees associated with the purchase.
The fund may also pay a servicing fee of up to 0.15% per year of Class B's
average daily net assets under the Class B plan. This fee may be used to pay
Securities Dealers or others for, among other things, helping to establish
and maintain customer accounts and records, helping with requests to buy and
sell shares, receiving and answering correspondence, monitoring dividend
payments from the fund on behalf of customers, and similar servicing and
account maintenance activities. Securities Dealers may be eligible to receive
this portion of the Rule 12b-1 fees from the date of purchase. After 8 years,
Class B shares convert to Class A shares and Securities Dealers may then
receive the Rule 12b-1 fees applicable to Class A.
The expenses relating to the Class B plan are also used to pay Distributors
for advancing the commission costs to Securities Dealers with respect to the
initial sale of Class B shares. Further, the expenses relating to the Class B
plan may be used by Distributors to pay third party financing entities that
have provided financing to Distributors in connection with advancing
commission costs to Securities Dealers.
Under the Class C plan, the fund may pay Distributors up to 0.50% per year of
Class C's average daily net assets to pay Distributors or others for
providing distribution and related services and bearing certain Class C
expenses. All distribution expenses over this amount will be borne by those
who have incurred them. During the first year after a purchase of Class C
shares, Securities Dealers may not be eligible to receive this portion of the
Rule 12b-1 fees associated with the purchase.
The fund may also pay a servicing fee of up to 0.15% per year of Class C's
average daily net assets under the Class C plan. This fee may be used to pay
Securities Dealers or others for, among other things, helping to establish
and maintain customer accounts and records, helping with requests to buy and
sell shares, receiving and answering correspondence, monitoring dividend
payments from the fund on behalf of customers, and similar servicing and
account maintenance activities.
The Rule 12b-1 fees charged to each class are based only on the fees
attributable to that particular class. For more information, please see "The
Fund's Underwriter" in the SAI.
<TABLE>
<CAPTION>
HOW TAXATION AFFECTS THE FUND AND ITS SHAREHOLDERS
<S> <C>
-------------------------------------------
TAXATION OF THE FUND'S INVESTMENTS. The
fund invests your money in the municipal HOW DOES THE FUND EARN
and other securities described in the INCOME AND GAINS?
section "How Does the Fund Invest Its
Assets?" Special tax rules may apply when The fund earns interest and other income
determining the income and gains that the (the fund's "income") on its investments.
fund earns on its investments. These rules When the fund sells a security for a
may, in turn, affect the amount of price that is higher than it paid, it has
distributions that the fund pays to you. a gain. When the fund sells a security
These special tax rules are discussed in for a price that is lower than it paid,
the SAI. it has a loss. If the fund has held the
security for more than one year, the gain
TAXATION OF THE FUND. As a regulated or loss will be a long-term capital gain
investment company, the fund generally or loss. If the fund has held the
pays no federal income tax on the income security for one year or less, the gain
and gains that it distributes to you. or loss will be a short-term capital gain
or loss. The fund's gains and losses are
TAXATION OF SHAREHOLDERS netted together, and, if the fund has a
net gain (the fund's "gains"), that gain
DISTRIBUTIONS. Distributions made to you will generally be distributed to you
from interest income on municipal -----------------------------------------
securities will be exempt from the regular WHAT IS A DISTRIBUTION?
federal income tax. Distributions made to
you from other income on temporary As a shareholder, you will receive your
investments, short-term capital gains, or share of the fund's income and gains on
ordinary income from the sale of market its investments. The fund's interest
discount bonds will be taxable to you as income on municipal securities is paid to
ordinary dividends, whether you receive you as exempt-interest dividends. The
them in cash or in additional shares. fund's ordinary income and short-term
Distributions made to you from interest on capital gains are paid to you as ordinary
certain private activity bonds, while dividends. The fund's long-term capital
still exempt from the regular federal gains are paid to you as capital gain
income tax, are a preference item when distributions. If the fund pays you an
determining your alternative minimum tax. amount in excess of its income and gains,
this excess will generally be treated as
a non-taxable distribution. These
amounts, taken together, are what we call
the fund's distributions to you.
-------------------------------------------
The fund will send you a statement in January of the current year that reflects the
amount of exempt-interest dividends, ordinary dividends, capital gain distributions,
interest income that is a tax preference item under the alternative minimum tax and
non-taxable distributions you received from the fund in the prior year. This
statement will include distributions declared in December and paid to you in January
of the current year, but which are taxable as if paid on December 31 of the prior
year. The IRS requires you to report these amounts on your income tax return for the
prior year.
DIVIDENDS-RECEIVED DEDUCTION. It is anticipated that no portion of the fund's
distributions will qualify for the corporate dividends-received deduction.
-------------------------------------------
REDEMPTIONS AND EXCHANGES. If you redeem
your shares or if you exchange your shares WHAT IS A REDEMPTION?
in the fund for shares in another Franklin
Templeton Fund, you will generally have a A redemption is a sale by you to the fund
gain or loss that the IRS requires you to of some or all of your shares in the
report on your income tax return. If you fund. The price per share you receive
exchange fund shares held for 90 days or when you redeem fund shares may be more
less and pay no sales charge, or a reduced or less than the price at which you
sales charge, for the new shares, all or a purchased those shares. An exchange of
portion of the sales charge you paid on shares in the fund for shares of another
the purchase of the shares you exchanged Franklin Templeton Fund is treated as a
is not included in their cost for purposes redemption of fund shares and then a
of computing gain or loss on the exchange. purchase of shares of the other fund.
If you hold your shares for six months or When you redeem or exchange your shares,
less, any loss you have will be disallowed you will generally have a gain or loss,
to the extent of any exempt-interest depending upon whether the amount you
dividends paid on your shares. Any such receive for your shares is more or less
loss not disallowed will be treated as a than your cost or other basis in the
long-term capital loss to the extent of shares.
anylong-term capital gain distributions -------------------------------------------
paid on your shares. All or a portion of any
loss on the redemption or exchange of your
shares will be disallowed by the IR
if you buy other shares in the fund within
30 days before or after your redemption
or exchange.
STATE TAXES. Ordinary dividends and capital gain distributions that you receive from
the fund, and gains arising from redemptions or exchanges of your fund shares, will
generally be subject to state and local income tax. Distributions paid from the
interest earned on the municipal securities of a state, or its political
subdivisions, will generally be exempt from that state's personal income taxes.
Dividends paid from interest earned on qualifying U.S. territorial obligations
(including qualifying obligations of Puerto Rico, the U.S. Virgin Islands and Guam)
will also generally be exempt from state personal income taxes. Investments in
municipal securities of other states generally do not qualify for tax-free treatment
in that state. Corporate taxpayers subject to state taxes are subject to special
rules. The holding of fund shares may also be subject to state and local intangibles
taxes. The fund will provide you with information at the end of each calendar year on
the amounts of such dividends that may qualify for exemption from reporting on your
individual income tax returns. You may wish to contact your tax advisor to determine
the state and local tax consequences of your investment in the fund.
SOCIAL SECURITY AND RAILROAD RETIREMENT BENEFits. Exempt-interest dividends paid to
you, although exempt from the regular federal income tax, are includible in the tax
base for determining the taxable portion of your social security or railroad
retirement benefits. The IRS requires you to disclose these exempt-interest dividends
on your federal income tax return.
NON-U.S. INVESTORS. Ordinary dividends generally will be subject to U.S. income tax
withholding. Your home country may also tax ordinary dividends, exempt-interest
dividends, capital gain distributions and gains arising from redemptions or exchanges
of your fund shares. Fund shares held by the estate of a non-U.S. investor may be
subject to U.S. estate tax. You may wish to contact your tax advisor to determine the
U.S. and non-U.S. tax consequences of your investment in the fund.
BACKUP WITHHOLDING. When you open an ------------------------------------------
account, IRS regulations require that you WHAT IS A BACKUP WITHHOLDING?
provide your taxpayer identification Backup withholding occurs when the fund
number ("TIN"), certify that it is is required to withhold and pay over to
correct, and certify that you are not the IRS 31% of your distributions and
subject to backup withholding under IRS redemption proceeds. You can avoid backup
rules. If you fail to provide a correct withholding by providing the fund with
TIN or the proper tax certifications, the your TIN, and by completing the tax
IRS requires the fund to withhold 31% of certifications on your shareholder
all the distributions (including ordinary application that you were asked to sign
dividends and capital gain distributions), when you opened your account. However, if
and redemption proceeds paid to you. The the IRS instructs the fund to begin
fund is also required to begin backup backup withholding, it is required to do
withholding on your account if the IRS so even if you provided the fund with
instructs the fund to do so. The fund your TIN and these tax certifications,
reserves the right not to open your and backup withholding will remain in
account, or, alternatively, to redeem your place until the fund is instructed by the
shares at the current Net Asset Value, IRS that it is no longer required.
less any taxes withheld, if you fail to
provide a correct TIN, fail to provide the -------------------------------------------
proper tax certifications, or the IRS
instructs the fund to begin backup
withholding on your account.
</TABLE>
THIS TAX DISCUSSION IS FOR GENERAL INFORMATION ONLY. PROSPECTIVE INVESTORS
SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE FEDERAL, STATE, LOCAL OR
FOREIGN TAX CONSEQUENCES OF AN INVESTMENT IN THE FUND. FOR A MORE COMPLETE
DISCUSSION OF THESE RULES AND RELATED MATTERS, PLEASE SEE "ADDITIONAL
INFORMATION ON DISTRIBUTIONS AND TAXES" IN THE SAI.
HOW IS THE FUND ORGANIZED?
The fund is an open-end management investment company, commonly called a
mutual fund. It was organized as a California corporation in 1982, and is
registered with the SEC. The fund offers three classes of shares: Franklin
Federal Tax-Free Income Fund - Class A, Franklin Federal Tax-Free Income Fund
- - Class B and Franklin Federal Tax-Free Income Fund - Class C. Additional
classes of shares may be offered in the future.
Shares of each class represent proportionate interests in the assets of the
fund and have the same voting and other rights and preferences as any other
class of the fund for matters that affect the fund as a whole. For matters
that only affect one class, however, only shareholders of that class may
vote. Each class will vote separately on matters affecting only that class,
or expressly required to be voted on separately by state or federal law.
The fund has cumulative voting rights. This gives each shareholder a number
of votes equal to the number of shares owned times the number of Board
members to be elected. You may cast all of your votes for one candidate or
distribute your votes between two or more candidates.
The fund does not intend to hold annual shareholder meetings. The fund may
hold special meetings, however, for matters requiring shareholder approval. A
meeting may be called by the Board to consider the removal of a Board member
if requested in writing by shareholders holding at least 10% of the
outstanding shares. In certain circumstances, we are required to help you
communicate with other shareholders about the removal of a Board member. A
special meeting may also be called by the Board in its discretion.
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
OPENING YOUR ACCOUNT
To open your account, please follow the steps below. This will help avoid any
delays in processing your request.
1. Read this prospectus carefully.
2. Determine how much you would like to invest. The fund's minimum
investments are:
o To open a regular account $1,000
o To open a custodial account
for a minor (an UGMA/UTMA account) $ 100
o To open an account with an
automatic investment plan $ 50
o To add to an account $ 50
We reserve the right to change the amount of these minimums from time to
time or to waive or lower these minimums for certain purchases. We also
reserve the right to refuse any order to buy shares.
3. Carefully complete and sign the enclosed account application, including
the optional shareholder privileges section. By applying for privileges
now, you can avoid the delay and inconvenience of having to send an
additional application to add privileges later. PLEASE ALSO INDICATE WHICH
CLASS OF SHARES YOU WANT TO BUY. IF YOU DO NOT SPECIFY A CLASS, WE WILL
INVEST YOUR PURCHASE IN CLASS A SHARES. It is important that we receive a
signed application since we will not be able to process any redemptions
from your account until we receive your signed application.
4. Make your investment using the table below.
METHOD STEPS TO FOLLOW
- ------------------------------------------------------------------------------
BY MAIL For an initial investment:
Return the application to the fund with your check
made payable to the fund.
For additional investments:
Send a check made payable to the fund. Please
include your account number on the check.
- ------------------------------------------------------------------------------
BY WIRE 1. Call Shareholder Services or, if that number is
busy, call 1-650/312-2000 collect, to receive a
wire control number and wire instructions. You
need a new wire control number every time you
wire money into your account. If you do not have
a currently effective wire control number, we
will return the money to the bank, and we will
not credit the purchase to your account.
2. For an initial investment you must also return
your signed account application to the fund.
IMPORTANT DEADLINES: If we receive your call before
1:00 p.m. Pacific time and the bank receives the
wired funds and reports the receipt of wired funds to
the fund by 3:00 p.m. Pacific time, we will credit
the purchase to your account that day. If we receive
your call after 1:00 p.m. or the bank receives the
wire after 3:00 p.m., we will credit the purchase to
your account the following business day.
- ------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- ------------------------------------------------------------------------------
CHOOSING A SHARE CLASS
Each class has its own sales charge and expense structure, allowing you to
choose the class that best meets your situation. Your financial
representative can help you decide.
CLASS A* Class B* Class C*
- --------------------------------------------------------------------------------
o Front-end sales o No front-end sales o Front-end sales
charge of 4.25% or charge charge of 1%
less
o Contingent Deferred o Contingent Deferred o Contingent Deferred
Sales Charge of 1% on Sales Charge of 4% or Sales Charge of 1% on
purchases of $1 less on shares you shares you sell
million or more sold sell within six years within 18 months
within one year
o Lower annual expenses o Higher annual o Higher annual
than Class B or C due expenses than Class A expenses than Class A
to lower Rule 12b-1 (same as Class C) due (same as Class B) due
fees to higher Rule 12b-1 to higher Rule 12b-1
fees. Automatic fees. No conversion
conversion to Class A to Class A shares, so
shares after eight annual expenses do
years, reducing future not decrease
annual expenses.
o No maximum purchase o Maximum purchase o Maximum purchase
amount amount of $249,999. amount of $999,999.
We invest any investment We invest any
of $250,000 or more in investment of $1
Class A shares, since million or more in
a reduced front-end Class A shares, since
sales charge is there is no front-end
available and Class sales charge and
A's annual expenses Class A's annual
are lower. expenses are lower.
*Before January 1, 1999, Class A shares were designated Class I and Class C
shares were designated Class II. The fund began offering Class B shares on
January 1, 1999.
PURCHASE PRICE OF FUND SHARES
For Class A shares, the sales charge you pay depends on the dollar amount you
invest, as shown in the table below. The sales charge for Class C shares is
1% and, unlike Class A, does not vary based on the size of your purchase.
There is no front-end sales charge for Class B shares.
TOTAL SALES CHARGE AMOUNT PAID TO
AS A PERCENTAGE OF DEALER AS A
AMOUNT OF PURCHASE OFFERING NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE PRICE INVESTED OFFERING PRICE
- ------------------------------------------------------------------
CLASS A
Under $100,000 4.25% 4.44% 4.00%
$100,000 but less than
$250,000 3.50% 3.63% 3.25%
$250,000 but less than
$500,000 2.50% 2.56% 2.25%
$500,000 but less than
$1,000,000 2.00% 2.04% 1.85%
$1,000,000 or more* None None None
CLASS B* None None None
CLASS C
Under $1,000,000* 1.00% 1.01% 1.00%
*A Contingent Deferred Sales Charge of 1% may apply to Class A purchases of
$1 million or more and any Class C purchase. A Contingent Deferred Sales
Charge of up to 4% may apply to any Class B purchase. Please see "How Do I
Sell Shares? - Contingent Deferred Sales Charge." Please also see "Other
Payments to Securities Dealers" below for a discussion of payments
Distributors may make out of its own resources to Securities Dealers for
certain purchases.
SALES CHARGE REDUCTIONS AND WAIVERS
- - IF YOU QUALIFY TO BUY SHARES UNDER ONE OF THE SALES CHARGE REDUCTION OR
WAIVER CATEGORIES DESCRIBED BELOW, PLEASE INCLUDE A WRITTEN STATEMENT WITH
EACH PURCHASE ORDER EXPLAINING WHICH PRIVILEGE APPLIES. IF YOU DON'T INCLUDE
THIS STATEMENT, WE CANNOT GUARANTEE THAT YOU WILL RECEIVE THE SALES CHARGE
REDUCTION OR WAIVER.
CUMULATIVE QUANTITY DISCOUNTS - CLASS A ONLY. To determine if you may pay a
reduced sales charge, the amount of your current Class A purchase is added to
the cost or current value, whichever is higher, of your existing shares in
the Franklin Templeton Funds, as well as those of your spouse, children under
the age of 21 and grandchildren under the age of 21. If you are the sole
owner of a company, you may also add any company accounts, including
retirement plan accounts.
LETTER OF INTENT - CLASS A ONLY. You may buy Class A shares at a reduced
sales charge by completing the Letter of Intent section of the account
application. A Letter of Intent is a commitment by you to invest a specified
dollar amount during a 13 month period. The amount you agree to invest
determines the sales charge you pay on Class A shares.
BY COMPLETING THE LETTER OF INTENT SECTION OF THE ACCOUNT APPLICATION, YOU
ACKNOWLEDGE AND AGREE TO THE FOLLOWING:
o You authorize Distributors to reserve 5% of your total intended purchase in
Class A shares registered in your name until you fulfill your Letter.
o You give Distributors a security interest in the reserved shares and
appoint Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the Letter.
o Although you may exchange your shares, you may not sell reserved shares
until you complete the Letter or pay the higher sales charge.
Your periodic statements will include the reserved shares in the total shares
you own. We will pay or reinvest dividend and capital gain distributions on
the reserved shares as you direct.
If you would like more information about the Letter of Intent privilege,
please see "How Do I Buy, Sell and Exchange Shares? - Letter of Intent" in
the SAI or call Shareholder Services.
GROUP PURCHASES - Class A Only. If you are a member of a qualified group, you
may buy Class A shares at a reduced sales charge that applies to the group as
a whole. The sales charge is based on the combined dollar value of the group
members' existing investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the fund, and
o Meets other uniform criteria that allow Distributors to achieve cost
savings in distributing shares.
SALES CHARGE WAIVERS. If one of the following sales charge waivers applies to
you or your purchase of fund shares, you may buy shares of the fund without a
front-end sales charge or a Contingent Deferred Sales Charge. All of the
sales charge waivers listed below apply to purchases of Class A shares only,
except for items 1 and 2 which also apply to Class B and C purchases.
Certain distributions, payments or redemption proceeds that you receive may
be used to buy shares of the fund without a sales charge if you reinvest them
within 365 days of their payment or redemption date. They include:
1. Dividend and capital gain distributions from any Franklin Templeton Fund.
The distributions generally must be reinvested in the same class of
shares. Certain exceptions apply, however, to Class C shareholders who
chose to reinvest their distributions in Class A shares of the fund
before November 17, 1997, and to Advisor Class or Class Z shareholders of
a Franklin Templeton Fund who may reinvest their distributions in Class A
shares of the fund.
2. Redemption proceeds from the sale of shares of any Franklin Templeton
Fund. The proceeds must be reinvested in the same class of shares, except
proceeds from the sale of Class B shares will be reinvested in Class A
shares.
2. If you paid a Contingent Deferred Sales Charge when you sold your Class A
or C shares, we will credit your account with the amount of the
Contingent Deferred Sales Charge paid but a new Contingent Deferred Sales
Charge will apply. For Class B shares reinvested in Class A, a new
Contingent Deferred Sales Charge will not apply, although your account
will not be credited with the amount of any Contingent Deferred Sales
Charge paid when you sold your Class B shares. If you own both Class A
and B shares and you later sell your shares, we will sell your Class A
shares first, unless otherwise instructed.
Proceeds immediately placed in a Franklin Bank CD also may be reinvested
without an initial sales charge if you reinvest them within 365 days from
the date the CD matures, including any rollover.
This waiver does not apply to shares you buy and sell under our exchange
program. Shares purchased with the proceeds from a money fund may be
subject to a sales charge.
3. Dividend or capital gain distributions from a real estate investment trust
(REIT) sponsored or advised by Franklin Properties, Inc.
4. Annuity payments received under either an annuity option or from death
benefit proceeds, only if the annuity contract offers as an investment
option the Franklin Valuemark Funds or the Templeton Variable Products
Series Fund. You should contact your tax advisor for information on any
tax consequences that may apply.
5. Redemption proceeds from a repurchase of shares of Franklin Floating Rate
Trust, if the shares were continuously held for at least 12 months.
If you immediately placed your redemption proceeds in a Franklin Bank CD
or a Franklin Templeton money fund, you may reinvest them as described
above. The proceeds must be reinvested within 365 days from the date the
CD matures, including any rollover, or the date you redeem your money
fund shares.
6. Redemption proceeds from the sale of Class A shares of any of the
Templeton Global Strategy Funds if you are a qualified investor.
If you paid a contingent deferred sales charge when you sold your Class A
shares from a Templeton Global Strategy Fund, we will credit your account
with the amount of the contingent deferred sales charge paid but a new
Contingent Deferred Sales Charge will apply.
If you immediately placed your redemption proceeds in a Franklin
Templeton money fund, you may reinvest them as described above. The
proceeds must be reinvested within 365 days from the date they are
redeemed from the money fund.
Various individuals and institutions also may buy Class A shares without a
front-end sales charge or Contingent Deferred Sales Charge, including:
1. Trust companies and bank trust departments agreeing to invest in Franklin
Templeton Funds over a 13 month period at least $1 million of assets
held in a fiduciary, agency, advisory, custodial or similar capacity and
over which the trust companies and bank trust departments or other plan
fiduciaries or participants, in the case of certain retirement plans,
have full or shared investment discretion. We will accept orders for
these accounts by mail accompanied by a check or by telephone or other
means of electronic data transfer directly from the bank or trust
company, with payment by federal funds received by the close of business
on the next business day following the order.
2. An Eligible Governmental Authority. Please consult your legal and
investment advisors to determine if an investment in the fund is
permissible and suitable for you and the effect, if any, of payments by
the fund on arbitrage rebate calculations.
3. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for
clients participating in comprehensive fee programs. The minimum initial
investment is $250.
4. Qualified registered investment advisors who buy through a broker-dealer
or service agent who has entered into an agreement with Distributors
5. Registered Securities Dealers and their affiliates, for their investment
accounts only
6. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
7. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family
members, consistent with our then-current policies. The minimum initial
investment is $100.
8. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
9. Accounts managed by the Franklin Templeton Group
10. Certain unit investment trusts and their holders reinvesting
distributions from the trusts
OTHER PAYMENTS TO SECURITIES DEALERS
The payments described below may be made to Securities Dealers who initiate
and are responsible for Class B and C purchases and certain Class A purchases
made without a sales charge. The payments are subject to the sole discretion
of Distributors, and are paid by Distributors or one of its affiliates and
not by the fund or its shareholders.
1. Class A purchases of $1 million or more - up to 0.75% of the amount
invested.
2. Class B purchases - up to 3% of the amount invested.
3. Class C purchases - up to 1% of the purchase price.
4. Class A purchases by trust companies and bank trust departments, Eligible
Governmental Authorities, and broker-dealers or others on behalf of
clients participating in comprehensive fee programs - up to 0.25% of the
amount invested.
A Securities Dealer may receive only one of these payments for each
qualifying purchase. Securities Dealers who receive payments in connection
with investments described in paragraphs 1 or 3 above will be eligible to
receive the Rule 12b-1 fee associated with the purchase starting in the
thirteenth calendar month after the purchase.
FOR BREAKPOINTS THAT MAY APPLY AND INFORMATION ON ADDITIONAL COMPENSATION
PAYABLE TO SECURITIES DEALERS IN CONNECTION WITH THE SALE OF FUND SHARES,
PLEASE SEE "HOW DO I BUY, SELL AND EXCHANGE SHARES? - OTHER PAYMENTS TO
SECURITIES DEALERS" IN THE SAI.
FOR INVESTORS OUTSIDE THE U.S.
The distribution of this prospectus and the offering of fund shares may be
limited in many jurisdictions. An investor who wishes to buy shares of the fund
should determine, or have a broker-dealer determine, the applicable laws and
regulations of the relevant jurisdiction. Investors are responsible for
compliance with tax, currency exchange or other regulations applicable to
redemption and purchase transactions in any jurisdiction to which they may be
subject. Investors should consult appropriate tax and legal advisors to obtain
information on the rules applicable to these transactions.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment from your fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and
a purchase of shares, an exchange is a taxable transaction.
If you own Class A shares, you may exchange into any of our money funds
except Franklin Templeton Money Fund. Franklin Templeton Money Fund is the
only money fund exchange option available to Class B and C shareholders.
Unlike our other money funds, shares of Franklin Templeton Money Fund may not
be purchased directly and no drafts (checks) may be written on Franklin
Templeton Money Fund accounts.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund, its investment goal
and policies, and its rules and requirements for exchanges. For example, some
Franklin Templeton Funds do not accept exchanges and others may have
different investment minimums. Some Franklin Templeton Funds do not offer
Class B or C shares.
METHOD STEPS TO FOLLOW
- ------------------------------------------------------------------------------
BY MAIL 1. Send us signed written instructions
2. Include any outstanding share certificates for the
shares you want to exchange
- ------------------------------------------------------------------------------
BY PHONE Call Shareholder Services or TeleFACTS(R)
- If you do not want the ability to exchange by phone
to apply to your account, please let us know.
- ------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- ------------------------------------------------------------------------------
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
WILL SALES CHARGES APPLY TO MY EXCHANGE?
You can exchange shares between most Franklin Templeton Funds, generally
without paying any additional sales charges. If you exchange shares held for
less than six months, however, you may be charged the difference between the
front-end sales charge of the two funds if the difference is more than 0.25%.
If you exchange shares from a money fund, a sales charge may apply no matter
how long you have held the shares.
CONTINGENT DEFERRED SALES CHARGE. We will not impose a Contingent Deferred
Sales Charge when you exchange shares. Any shares subject to a Contingent
Deferred Sales Charge at the time of exchange, however, will remain so in the
new fund. The purchase price for determining a Contingent Deferred Sales
Charge on exchanged shares will be the price you paid for the original shares.
For accounts with shares subject to a Contingent Deferred Sales Charge, we
will first exchange any shares in your account that are not subject to the
charge. If there are not enough of these to meet your exchange request, we
will exchange shares subject to the charge in the order they were purchased.
If you exchange Class A shares into one of our money funds, the time your
shares are held in that fund will not count towards the completion of any
Contingency Period. If you exchange your Class B or C shares for the same
class of shares of Franklin Templeton Money Fund, however, the time your
shares are held in that fund will count towards the completion of any
Contingency Period.
For more information about the Contingent Deferred Sales Charge, please see
"How Do I Sell Shares?"
EXCHANGE RESTRICTIONS
Please be aware that the following restrictions apply to exchanges:
o You must meet the applicable minimum investment amount of the fund you
are exchanging into, or exchange 100% of your fund shares.
o You may only exchange shares within the same class, except as noted
below. If you exchange your Class B shares for the same class of shares of
another Franklin Templeton Fund, the time your shares are held in that
fund will count towards the eight year period for automatic conversion to
Class A shares.
o Generally exchanges may only be made between identically registered
accounts, unless you send written instructions with a signature guarantee.
You may, however, exchange shares from a fund account requiring two or
more signatures into an identically registered money fund account
requiring only one signature for all transactions. Please notify us in
writing if you do not want this option to be available on your account.
Additional procedures may apply. Please see "Transaction Procedures and
Special Requirements."
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Your exchange may be restricted or refused if you have: (i) requested an
exchange out of the fund within two weeks of an earlier exchange request,
(ii) exchanged shares out of the fund more than twice in a calendar
quarter, or (iii) exchanged shares equal to at least $5 million, or more
than 1% of the fund's net assets. Shares under common ownership or control
are combined for these limits. If you have exchanged shares as described
in this paragraph, you will be considered a Market Timer. Each exchange by
a Market Timer, if accepted, will be charged $5. Some of our funds do not
allow investments by Market Timers.
Because excessive trading can hurt fund performance, operations and
shareholders, we may refuse any exchange purchase if (i) we believe the fund
would be harmed or unable to invest effectively, or (ii) the fund receives or
anticipates simultaneous orders that may significantly affect the fund.
LIMITED EXCHANGES BETWEEN DIFFERENT CLASSES OF SHARES
Certain funds in the Franklin Templeton Funds offer classes of shares not
offered by the fund, such as "Advisor Class" or "Class Z" shares. Because the
fund does not currently offer an Advisor Class, you may exchange Advisor
Class shares of any Franklin Templeton Fund for Class A shares of the fund at
Net Asset Value. If you do so and you later decide you would like to exchange
into a fund that offers an Advisor Class, you may exchange your Class A
shares for Advisor Class shares of that fund. Certain shareholders of Class Z
shares of Franklin Mutual Series Fund Inc. may also exchange their Class Z
shares for Class A shares of the fund at Net Asset Value.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time.
METHOD STEPS TO FOLLOW
- ------------------------------------------------------------------------------
BY MAIL 1. Send us signed written instructions. If you would
like your redemption proceeds wired to a bank
account, your instructions should include:
o The name, address and telephone number of the
bank where you want the proceeds sent
o Your bank account number
o The Federal Reserve ABA routing number
o If you are using a savings and loan or credit
union, the name of the corresponding bank and
the account number
2. Include any outstanding share certificates for
the shares you are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may
need to send additional documents. Accounts
under court jurisdiction may have other
requirements.
- ------------------------------------------------------------------------------
BY PHONE Call Shareholder Services. If you would like your
redemption proceeds wired to a bank account, other
than an escrow account, you must first sign up for
the wire feature. To sign up, send us written
instructions, with a signature guarantee. To avoid
any delay in processing, the instructions should
include the items listed in "By Mail" above.
Telephone requests will be accepted:
o If the request is $100,000 or less. Institutional
accounts may exceed $100,000 by completing a
separate agreement. Call Institutional Services to
receive a copy.
o If there are no share certificates issued for the
shares you want to sell or you have already
returned them to the fund
o Unless the address on your account was changed by
phone within the last 15 days
- If you do not want the ability to redeem by phone
to apply to your account, please let us know.
- ------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- ------------------------------------------------------------------------------
We will send your redemption check within seven days after we receive your
request in proper form. If you would like the check sent to an address other
than the address of record or made payable to someone other than the
registered owners on the account, send us written instructions signed by all
account owners, with a signature guarantee. We are not able to receive or pay
out cash in the form of currency.
The wiring of redemption proceeds is a special service that we make available
whenever possible for redemption requests of $1,000 or more. If we receive
your request in proper form before 1:00 p.m. Pacific time, your wire payment
will be sent the next business day. For requests received in proper form
after 1:00 p.m. Pacific time, the payment will be sent the second business
day. By offering this service to you, the fund is not bound to meet any
redemption request in less than the seven day period prescribed by law.
Neither the fund nor its agents shall be liable to you or any other person
if, for any reason, a redemption request by wire is not processed as
described in this section.
If you sell shares you recently purchased with a check or draft, we may delay
sending you the proceeds until your check or draft has cleared, which may
take seven business days or more. A certified or cashier's check may clear in
less time.
Under unusual circumstances, we may suspend redemptions or postpone payment
for more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
CONTINGENT DEFERRED SALES CHARGE
For Class A purchases, if you did not pay a front-end sales charge because
you invested $1 million or more or agreed to invest $1 million or more under
a Letter of Intent, a Contingent Deferred Sales Charge may apply if you sell
all or a part of your investment within the Contingency Period. Once you have
invested $1 million or more, any additional Class A investments you make
without a sales charge may also be subject to a Contingent Deferred Sales
Charge if they are sold within the Contingency Period. For any Class C
purchase, a Contingent Deferred Sales Charge may apply if you sell the shares
within the Contingency Period. The charge is 1% of the value of the shares
sold or the Net Asset Value at the time of purchase, whichever is less.
For Class B shares, there is a Contingent Deferred Sales Charge if you sell
your shares within six years, as described in the table below. The charge is
based on the value of the shares sold or the Net Asset Value at the time of
purchase, whichever is less.
THIS % IS DEDUCTED
IF YOU SELL YOUR CLASS B FROM YOUR PROCEEDS AS A
SHARES WITHIN THIS MANY CONTINGENT DEFERRED
YEARS AFTER BUYING THEM SALES CHARGE
- ------------------------------------------
1 Year 4
2 Years 4
3 Years 3
4 Years 3
5 Years 2
6 Years 1
7 Years 0
For each class, we will first redeem any shares in your account that are not
subject to a Contingent Deferred Sales Charge. If there are not enough of
these to meet your request, we will redeem shares subject to the charge in
the order they were purchased.
Unless otherwise specified, when you request to sell a stated DOLLAR AMOUNT,
we will redeem additional shares to cover any Contingent Deferred Sales
Charge. For requests to sell a stated NUMBER OF SHARES, we will deduct the
amount of the Contingent Deferred Sales Charge, if any, from the sale
proceeds.
WAIVERS. We waive the Contingent Deferred Sales Charge for:
o Account fees
o Redemptions by the fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before February
1, 1995
o Redemptions through a systematic withdrawal plan set up on or after
February 1, 1995, up to 1% monthly, 3% quarterly, 6% semiannually or 12%
annually of your account's Net Asset Value depending on the frequency of
your plan
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
The fund receives income generally in the form of interest and other income
derived from its investments. This income, less the expenses incurred in the
fund's operations, is its net investment income from which income dividends
may be distributed. Thus, the amount of dividends paid per share may vary
with each distribution.
The fund intends to pay a dividend at least monthly representing its net
investment income. Capital gains, if any, may be distributed annually. The
amount of this distribution will vary and there is no guarantee the fund will
pay dividends. The fund does not pay "interest" or guarantee any fixed rate
of return on an investment in its shares.
To receive a distribution, you must be a shareholder on the record date. The
record date for the fund's distributions will vary. Please keep in mind that
if you invest in the fund shortly before the record date of a distribution,
any distribution will lower the value of the fund's shares by the amount of
the distribution. If you invest in the fund shortly before the fund deducts a
capital gain distribution from its Net Asset Value, you will receive some of
your investment back in the form of a taxable distribution. If you would like
information on upcoming record dates for the fund's distributions, please
call 1-800/DIAL BEN.
Dividends and capital gains are calculated and distributed the same way for
each class. The amount of any income dividends per share will differ,
however, generally due to the difference in the Rule 12b-1 fees of each class.
DISTRIBUTION OPTIONS
You may receive your distributions from the fund in any of these ways:
1. BUY ADDITIONAL SHARES OF THE FUND - You may reinvest distributions you
receive from the fund in additional shares of the fund (without a sales
charge or imposition of a Contingent Deferred Sales Charge). This is a
convenient way to accumulate additional shares and maintain or increase your
earnings base.
2. BUY SHARES OF OTHER FRANKLIN TEMPLETON FUNDS - You may direct your
distributions to buy shares of another Franklin Templeton Fund (without a
sales charge or imposition of a Contingent Deferred Sales Charge). Many
shareholders find this a convenient way to diversify their investments.
Please note that distributions may only be directed to an existing account.
3. RECEIVE DISTRIBUTIONS IN CASH - You may receive your distributions from
the fund in cash. If you have the money sent to another person or to a
checking or savings account, you may need a signature guarantee. If you send
the money to a checking or savings account, please see "Electronic Fund
Transfers" under "Services to Help You Manage Your Account."
Distributions may be reinvested only in the same class of shares, except as
follows: (i) Class C shareholders who chose to reinvest their distributions
in Class A shares of the fund or another Franklin Templeton Fund before
November 17, 1997, may continue to do so; and (ii) Class B and C shareholders
may reinvest their distributions in shares of any Franklin Templeton money
fund.
PLEASE INDICATE ON YOUR APPLICATION THE DISTRIBUTION OPTION YOU HAVE CHOSEN,
OTHERWISE WE WILL REINVEST YOUR DISTRIBUTIONS IN THE SAME SHARE CLASS OF THE
FUND. You may change your distribution option at any time by notifying us by
mail or phone. Please allow at least seven days before the record date for us
to process the new option.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
SHARE PRICE
When you buy shares, you pay the Offering Price. This is the Net Asset Value
per share of the class you wish to purchase, plus any applicable sales
charges. When you sell shares, you receive the Net Asset Value per share
minus any applicable Contingent Deferred Sales Charges.
The Net Asset Value we use when you buy or sell shares is the one next
calculated after we receive your transaction request in proper form. If you
buy or sell shares through your Securities Dealer, however, we will use the
Net Asset Value next calculated after your Securities Dealer receives your
request, which is promptly transmitted to the fund. Your redemption proceeds
will not earn interest between the time we receive the order from your dealer
and the time we receive any required documents.
HOW AND WHEN SHARES ARE PRICED
The fund is open for business each day the NYSE is open. We determine the Net
Asset Value per share of each class as of the close of the NYSE, normally
1:00 p.m. Pacific time. You can find the prior day's closing Net Asset Value
and Offering Price for each class in many newspapers.
The Net Asset Value of all outstanding shares of each class is calculated on
a pro rata basis. It is based on each class' proportionate participation in
the fund, determined by the value of the shares of each class. Each class,
however, bears the Rule 12b-1 fees payable under its Rule 12b-1 plan. To
calculate Net Asset Value per share of each class, the assets of each class
are valued and totaled, liabilities are subtracted, and the balance, called
net assets, is divided by the number of shares of the class outstanding. The
fund's assets are valued as described under "How Are Fund Shares Valued?" in
the SAI.
WRITTEN INSTRUCTIONS
Written instructions must be signed by all registered owners. To avoid any
delay in processing your transaction, they should include:
o Your name,
o The fund's name,
o The class of shares,
o A description of the request,
o For exchanges, the name of the fund you are exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the
evening if preferred.
JOINT ACCOUNTS. For accounts with more than one registered owner, the fund
accepts written instructions signed by only one owner for transactions and
account changes that could otherwise be made by phone. For all other
transactions and changes, all registered owners must sign the instructions.
Please keep in mind that if you have previously told us that you do not want
telephone exchange or redemption privileges on your account, then we can only
accept written instructions to exchange or redeem shares if they are signed
by all registered owners on the account.
SIGNATURE GUARANTEES
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $100,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered
owners,
3) The proceeds are not being sent to the address of record, preauthorized
bank account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential claims
based on the instructions received.
A signature guarantee verifies the authenticity of your signature. You should
be able to obtain a signature guarantee from a bank, broker, credit union,
savings association, clearing agency, or securities exchange or association.
A NOTARIZED SIGNATURE IS NOT SUFFICIENT.
SHARE CERTIFICATES
We will credit your shares to your fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate
is lost, stolen or destroyed, you may have to pay an insurance premium of up
to 2% of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form and to send the certificate and assignment form in separate
envelopes.
TELEPHONE TRANSACTIONS
You may initiate many transactions and changes to your account by phone.
Please refer to the sections of this prospectus that discuss the transaction
you would like to make or call Shareholder Services.
When you call, we will request personal or other identifying information to
confirm that instructions are genuine. We may also record calls. If our lines
are busy or you are otherwise unable to reach us by phone, you may wish to
ask your investment representative for assistance or send us written
instructions, as described elsewhere in this prospectus.
For your protection, we may delay a transaction or not implement one if we
are not reasonably satisfied that the instructions are genuine. If this
occurs, we will not be liable for any loss. We also will not be liable for
any loss if we follow instructions by phone that we reasonably believe are
genuine or if you are unable to execute a transaction by phone.
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, we need you to tell us how you want your shares
registered. How you register your account will affect your ownership rights
and ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
JOINT OWNERSHIP. If you open an account with two or more owners, we register
the account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of
survivorship" is shown as "Jt Ten" on your account statement. For any account
with two or more owners, we cannot accept instructions to change owners on
the account unless all owners agree in writing, even if the law in your state
says otherwise. If you would like another person or owner to sign for you,
please send us a current power of attorney.
GIFTS AND TRANSFERS TO MINORS. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this
form of registration, a minor may not be named as an account owner.
TRUSTS. You should register your account as a trust only if you have a valid
written trust document. This avoids future disputes or possible court action
over who owns the account.
REQUIRED DOCUMENTS. For corporate, partnership and trust accounts, please
send us the following documents when you open your account. This will help
avoid delays in processing your transactions while we verify who may sign on
the account.
TYPE OF ACCOUNT DOCUMENTS REQUIRED
- ------------------------------------------------------------------------------
CORPORATION Corporate Resolution
- ------------------------------------------------------------------------------
PARTNERSHIP 1. The pages from the partnership agreement that
identify the general partners, or
2. A certification for a partnership agreement
- ------------------------------------------------------------------------------
TRUST 1. The pages from the trust document that identify
the trustees, or
2. A certification for trust
- ------------------------------------------------------------------------------
STREET OR NOMINEE ACCOUNTS. If you have fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the
shares to the street or nominee name account of another Securities Dealer.
Both dealers must have an agreement with Distributors or we cannot process
the transfer. Contact your Securities Dealer to initiate the transfer. We
will process the transfer after we receive authorization in proper form from
your delivering Securities Dealer. Accounts may be transferred electronically
through the NSCC. For accounts registered in street or nominee name, we may
take instructions directly from the Securities Dealer or your nominee.
IMPORTANT INFORMATION IF YOU HAVE AN INVESTMENT REPRESENTATIVE
If there is a Securities Dealer or other representative of record on your
account, we are authorized: (1) to provide confirmations, account statements
and other information about your account directly to your dealer and/or
representative; and (2) to accept telephone and electronic instructions
directly from your dealer or representative, including instructions to exchange
or redeem your shares. Electronic instructions may be processed through
established electronic trading systems and programs used by the fund. Telephone
instructions directly from your representative will be accepted unless you have
told us that you do not want telephone privileges to apply to your account.
KEEPING YOUR ACCOUNT OPEN
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $250, or less than $50
for employee accounts and custodial accounts for minors. We will only do this
if the value of your account fell below this amount because you voluntarily
sold your shares and your account has been inactive (except for the
reinvestment of distributions) for at least six months. Before we close your
account, we will notify you and give you 30 days to increase the value of
your account to $1,000, or $100 for employee accounts and custodial accounts
for minors. These minimums do not apply to accounts managed by the Franklin
Templeton Group.
SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
AUTOMATIC INVESTMENT PLAN
Our automatic investment plan offers a convenient way to invest in the fund.
Under the plan, you can have money transferred automatically from your
checking or savings account to the fund each month to buy additional shares.
If you are interested in this program, please refer to the account
application included with this prospectus or contact your investment
representative. The market value of the fund's shares may fluctuate and a
systematic investment plan such as this will not assure a profit or protect
against a loss. You may discontinue the program at any time by calling
Shareholder Services.
AUTOMATIC PAYROLL DEDUCTION - CLASS A ONLY
You may have money transferred from your paycheck to the fund to buy
additional Class A shares. Your investments will continue automatically
until you instruct the fund and your employer to discontinue the plan. To
process your investment, we must receive both the check and payroll deduction
information in required form. Due to different procedures used by employers
to handle payroll deductions, there may be a delay between the time of the
payroll deduction and the time we receive the money.
SYSTEMATIC WITHDRAWAL PLAN
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or
annual basis. The value of your account must be at least $5,000 and the
minimum payment amount for each withdrawal must be at least $50.
If you would like to establish a systematic withdrawal plan, please complete the
systematic withdrawal plan section of the account application included with this
prospectus and indicate how you would like to receive your payments. You may
choose to direct your payments to buy the same class of shares of another
Franklin Templeton Fund or have the money sent directly to you, to another
person, or to a checking or savings account. If you choose to have the money
sent to a checking or savings account, please see "Electronic Fund Transfers"
below. Once your plan is established, any distributions paid by the fund will be
automatically reinvested in your account.
You will generally receive your payment by the end of the month in which a
payment is scheduled. When you sell your shares under a systematic withdrawal
plan, it is a taxable transaction.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, you may not want to set up a systematic withdrawal plan if
you plan to buy shares on a regular basis. Shares sold under the plan may
also be subject to a Contingent Deferred Sales Charge. Please see "Contingent
Deferred Sales Charge" under "How Do I Sell Shares?"
You may discontinue a systematic withdrawal plan, change the amount and
schedule of withdrawal payments, or suspend one payment by notifying us by
mail or by phone at least seven business days before the end of the month
preceding a scheduled payment. Please see "How Do I Buy, Sell and Exchange
Shares? - Systematic Withdrawal Plan" in the SAI for more information.
ELECTRONIC FUND TRANSFERS
You may choose to have dividend and capital gain distributions or payments
under a systematic withdrawal plan sent directly to a checking or savings
account. If the account is with a bank that is a member of the Automated
Clearing House, the payments may be made automatically by electronic funds
transfer. If you choose this option, please allow at least fifteen days for
initial processing. We will send any payments made during that time to the
address of record on your account.
TELEFACTS(R)
From a touch-tone phone, you may call our TeleFACTS system (day or night) at
1-800/247-1753 to:
o obtain information about your account;
o obtain price and performance information about any Franklin Templeton
Fund;
o exchange shares (within the same class) between identically registered
Franklin Templeton Class A, B or C accounts; and
o request duplicate statements and deposit slips for Franklin Templeton
accounts.
You will need the code number for each class to use TeleFACTS. The code
number is 116 for Class A, 316 for Class B and 216 for Class C.
STATEMENTS AND REPORTS TO SHAREHOLDERS
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your
account, including additional purchases and dividend reinvestments. PLEASE
VERIFY THE ACCURACY OF YOUR STATEMENTS WHEN YOU RECEIVE THEM.
o Financial reports of the fund will be sent every six months. To reduce
fund expenses, we attempt to identify related shareholders within a
household and send only one copy of a report. Call Fund Information if you
would like an additional free copy of the fund's financial reports.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the fund may be
available to institutional accounts. Institutional investors may also be
required to complete an institutional account application. For more information,
call Institutional Services.
AVAILABILITY OF THESE SERVICES
The services above are available to most shareholders. If, however, your
shares are held by a financial institution, in a street name account, or
networked through the NSCC, the fund may not be able to offer these services
directly to you. Please contact your investment representative.
WHAT IF I HAVE QUESTIONS ABOUT MY ACCOUNT?
If you have any questions about your account, you may write to Investor
Services at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California
94403-7777. The fund, Distributors and the manager are also located at this
address. You may also contact us by phone at one of the numbers listed below.
HOURS OF OPERATION (PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
- ------------------------------------------------------------------------------
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plan Services 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with
high quality service. You will hear a regular beeping tone if your call is
being recorded.
GLOSSARY
USEFUL TERMS AND DEFINITIONS
BOARD - The Board of Directors of the fund
CD - Certificate of deposit
CLASS A , CLASS B AND CLASS C - The fund offers three classes of shares,
designated "Class A" , "Class B" and "Class C." The three classes have
proportionate interests in the fund's portfolio. They differ, however,
primarily in their sales charge structures and Rule 12b-1 plans.
CODE - Internal Revenue Code of 1986, as amended
CONTINGENCY PERIOd - For Class A shares, the 12 month period during which a
Contingent Deferred Sales Charge may apply. The contingency period is six
years for Class B shares and 18 months for Class C shares. The holding period
begins on the day you buy your shares. For example, if you buy shares on the
18th of the month, they will age one month on the 18th day of the next month
and each following month.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - A sales charge of 1% that may apply
if you sell your Class A or C shares within the Contingency Period. For Class
B, the maximum CDSC is 4% and declines to 0% after six years.
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Directors."
ELIGIBLE GOVERNMENTAL AUTHORity - Any state or local government or any
instrumentality, department, authority or agency thereof that has determined
the fund is a legally permissible investment and that can only buy shares of
the fund without paying sales charges.
FITCH - Fitch Investors Service, Inc.
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Templeton Capital Accumulator Fund, Inc., and Templeton Variable
Products
Series Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies
in the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
MARKET TIMERS - Market Timers generally include market timing or asset
allocation services, accounts administered so as to buy, sell or exchange
shares based on predetermined market indicators, or any person or group whose
transactions seem to follow a timing pattern or whose transactions include
frequent or large exchanges.
MOODY'S - Moody's Investors Service, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by
the number of shares outstanding.
NSCC - National Securities Clearing Corporation
NYSE - New York Stock Exchange
OFFERING PRICE - The public offering price is based on the Net Asset Value
per share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 4.25% for Class A and 1% for Class C. There is no
front-end sales charge for Class B. We calculate the offering price to two
decimal places using standard rounding criteria.
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
TELEFACTS(R) - Franklin Templeton's automated customer servicing system
WE/OUR/US - Unless the context indicates a different meaning, these terms
refer to the fund and/or Investor Services, Distributors, or other wholly
owned subsidiaries of Resources.
FRANKLIN FEDERAL TAX-FREE INCOME FUND
Annual Report
Thank you for investing with Franklin Templeton. We encourage our investors to
maintain a long-term perspective, and to expect that mixed in with the good
years can be some bad years. It's important to remember that all securities
markets move both up and down, as do mutual fund share prices. We appreciate
your past support and look forward to serving your investment needs in the years
ahead.
Charles B. Johnson (right),
Chairman of Franklin Federal
Tax-Free Income Fund and
Thomas J. Kenny (left),
Director of Franklin Municipal
Bond Department.
CONTENTS
Shareholder Letter...................................... 1
Special Feature:
Q&A with Municipal
Bond Department......................................... 3
Manager's Discussion.................................... 8
Performance Summaries
Class I................................................ 11
Class II............................................... 13
Financial Highlights &
Statement of Investments................................ 15
Financial Statements.................................... 40
Notes to
Financial Statements.................................... 43
Independent
Auditors' Report........................................ 45
SHAREHOLDER LETTER
Dear Shareholder:
We are pleased to bring you Franklin Federal Tax-Free Income Fund's annual
report for the period ended April 30, 1998.
During the year under review, the U.S. economy continued on its path of moderate
growth, modest inflation and relatively stable-to-lower interest rates. Economic
growth was solid, as measured by the 1998 first quarter, annualized Gross
Domestic Product (GDP) gain of 4.8%. The Consumer Price Index (CPI), a widely
used measure of inflation, continued to trend downward. The CPI's annualized
increase for March 1998 was a surprisingly low 2.25%, considering the U.S.
economy is in its seventh consecutive year of expansion.
After peaking in the second quarter of 1997, interest rates declined due to
benign inflation and the presumption that the Asian monetary crises would slow
the U.S. economy. The Asian crises also contributed to a flight to quality into
U.S. Treasury bonds and U.S. dollar denominated assets. The 30-year Treasury
yield ended the reporting period at 5.95%, down from 6.95% on April 30, 1997.1
The yield on the Bond Buyer 40 Index, a representative municipal bond index,
declined from 5.89% on April 30, 1997, to 5.39% on April 30, 1998.2 The overall
interest rate decline resulted in a strong year for fixed-income securities in
1997, contributing to an increase in the fund's NAV and share price.
The favorable interest rate environment provided attractive opportunities for
issuers to refinance existing debt or issue new debt. Municipal supply in the
first quarter of 1998 was 70% higher than in the same period of 1997. Looking
forward, the recent economic environment should be beneficial for municipalities
and municipal bonds. Credit rating upgrades substantially outpaced downgrades
from national credit rating agencies during the reporting period.
We encourage you to discuss your financial goals with an investment
representative. He or she can address concerns about volatility and help you
diversify your investments and stay focused on the long term. Mutual funds offer
a level of diversification that is almost impossible for individual investors to
achieve on their own. Municipal bonds continue to be an attractive investment
for diversifying a heavily weighted stock portfolio. As always, we appreciate
your support, welcome your questions and comments, and look forward to serving
your investment needs in the years ahead.
Sincerely,
Charles B. Johnson
Chairman
Franklin Federal Tax-Free Income Fund
Thomas J. Kenny
Director
Franklin Municipal Bond Department
Q
&
A
SPECIAL FEATURE:
Q&A WITH FRANKLIN'S
MUNICIPAL BOND DEPARTMENT
Thomas J. Kenny, Director of Franklin Templeton's Municipal Bond Department, and
portfolio managers Sheila Amoroso and Bernie Schroer discuss the issues that
shaped the recent municipal bond market.
Q: HOW WOULD YOU DESCRIBE THE MUNICIPAL BOND MARKET'S RECENT PERFORMANCE?
TOM KENNY: Long-term interest rates trended lower in 1997, and remained in a
fairly narrow trading range during the early months of 1998. This lower interest
rate environment led to a substantial increase in the supply of municipal bonds
coming to market, both for new projects and refinancing purposes. Demand has not
kept pace with supply, which, in our opinion, has created some excellent buying
opportunities.
Q: RECENTLY, THERE HAS BEEN A LOT OF DISCUSSION ABOUT THE ASIAN MARKET
VOLATILITY. DO YOU THINK THE PROBLEMS THERE WILL HAVE ANY IMPACT ON THE U.S.
BOND MARKET THIS YEAR?
BERNIE SCHROER: The decline in Asia's currency and equity markets may help the
U.S. bond market. In 1997, we experienced a strong U.S. economy, which normally
would have pressured the Federal Reserve (the Fed) to raise interest rates,
causing bond prices to fall. Instead, the Fed left interest rates alone,
probably in part due to the Asian turmoil and the dampening effect it could have
on U.S. economic growth this year.
Q: HAVE THE RECENT TAX LAW CHANGES HAD ANY IMPACT ON THE MUNICIPAL BOND MARKET?
SHEILA AMOROSO: Changes in the tax law did not alter the tax advantages of
municipal bonds. Municipals still distribute income free from regular federal,
and in many cases, state income taxes.*
Q: WHAT ROLE CAN MUNICIPAL BONDS PLAY IN A DIVERSIFIED PORTFOLIO?
SHEILA: After three years of healthy returns due to historic stock market gains,
individuals have seen an increase in the percentage of equities in their
portfolios. As a result, many investors are beginning to re-examine asset
allocation. Municipal bonds generally enjoy low volatility while providing
tax-free income, which can offset some of the risks associated with investing in
a portfolio composed mainly of stocks. The chart on page 6 shows how adding
municipal bonds in different proportions to a stock portfolio has historically
lowered volatility in providing solid after-tax returns. In short, prudent
investors may be able to reduce their risk, and maintain their potential for
competitive return, by including municipal bonds in their portfolios.
*For investors subject to regular federal or state alternative minimum tax, all
or a portion of municipal bond interest and municipal bond fund dividends may be
subject to such tax, depending on the source. Fund distributions of capital
gains and of ordinary income from accrued market discount, if any, are generally
taxable.
"Franklin tax-free income funds can help investors diversify a heavily weighted
stock portfolio, while providing a convenient and effective way to participate
in the municipal bond market."
BERNIE: Municipal bonds remain a strong investment for investors looking for
tax-free income. Franklin tax-free income funds can help investors diversify a
heavily weighted stock portfolio, while providing a convenient and effective way
to participate in the municipal bond market.
Q: LOOKING AHEAD, WHAT DO YOU THINK MIGHT AFFECT THE MUNICIPAL BOND MARKET AND
THE FRANKLIN TAX-FREE INCOME FUNDS?
TOM: Municipal bonds generally share the same trends as U.S. government
securities, such as Treasury bonds. These securities are sensitive to a variety
of factors that affect interest rates in general, including the Federal
Reserve's monetary policy. During most of 1997, the Fed was biased toward
raising interest rates in order to stave off inflationary pressures as the
economy continued its solid growth. However, toward the end of the year and into
1998, the Fed appears to have adopted a more neutral stance for a couple of
reasons. First, although the economy is experiencing moderate growth, inflation
remains subdued. Also, the potential still exists for the Asian crisis to slow
the U.S. economy.
Regardless of changing market conditions, our focus will remain on providing
shareholders with high current income free from regular federal, and depending
on the fund, state income taxes.* Franklin has become the nation's largest
tax-free fund manager**, in part by adhering to a consistent, disciplined
investment philosophy, which historically has proved successful in both strong
and weak bond markets. Of course, past performance is no guarantee of future
results.
*For investors subject to regular federal or state alternative minimum tax, all
or a portion of municipal bond interest and municipal bond fund dividends may be
subject to such tax, depending on the source. Fund distributions of capital
gains and of ordinary income from accrued market discount, if any, are generally
taxable.
**Source: Strategic Insight, 11/97.
MANAGER'S DISCUSSION
YOUR FUND'S OBJECTIVE: FRANKLIN FEDERAL TAX-FREE INCOME FUND SEEKS TO PROVIDE
HIGH, CURRENT INCOME EXEMPT FROM REGULAR FEDERAL INCOME TAX THROUGH A NATIONALLY
DIVERSIFIED PORTFOLIO CONSISTING OF MUNICIPAL SECURITIES.1
When investing in the municipal market, we strive to purchase securities
offering long-term value. Prospects for value in the market are dynamic and can
change daily. In our vigilant search throughout the fund's fiscal year, we found
value in two key areas: insured securities and New York securities.
INSURED SECURITIES
Insured municipal bonds are insured against default by insurance companies. An
insurance company pledges to make all interest and principal payments when due,
if the issuer of the bond defaults on its obligations. Insured bonds usually
trade based on the insurer's credit rating rather than the rating of the
underlying issuer, since the insurance company is ultimately at risk for the
repayment of principal and interest. Some of the major municipal bond insurance
firms include MBIA and AMBAC Indemnity Corporation. Because of their lower risk
and the cost of insurance protection, insured bonds will pay slightly lower
yields. However, insured municipal bonds are generally considered among the
safest investments, as reflected in their high credit quality rating.
As individual state economies enjoyed healthy growth, state and local
governments witnessed an increase in their revenues. Voter resistance toward
higher taxes helped restrain government spending, causing government fiscal
positions and credit ratings to strengthen. As credit qualities rose, municipal
bond insurance became relatively cheap for state and local governments.
Furthermore, increased competition among the municipal insurance companies
contributed to lower insurance costs for issuers. Municipal bond insurance tends
to provide the greatest marketability for issuers, because it attracts the
widest variety of investors. Approximately 60% of the long-term new issues
during the past year have come with insurance, continuing the trend we have
experienced during the past few years.2 The fund's exposure to insured
securities reflected this trend, increasing from 17.5% of long-term assets on
April 30, 1997, to 22.5% at the end of the reporting period.3
The availability of insurance for new issues, as well as secondary securities,
contributed to a narrowing of quality spreads in the municipal market. The
sustained, low interest-rate environment created greater demand for higher
yielding, lower-quality securities. As the supply of these lower-quality
securities declined, the demand drove the prices of these securities higher. As
a result, insured securities offered attractive yields relative to other sectors
of the municipal market.
As illustrated by the chart, 51.2% of the fund's long-term investments were
invested in high-grade bonds at the close of the period. High-grade bonds rated
AAA or AA by Standard & Poor's, or Aaa or Aa by Moody's, two national credit
rating agencies, generally are considered to carry little credit risk.4
Increasing our emphasis on high-quality bonds can help protect the fund against
the risk of issuers defaulting on their interest payments or principal
repayments.
GRAPHIC MATERIAL 1 OMITTED - SEE APPENDIX AT END OF DOCUMENT
1. These dividends are generally subject to state and local income taxes, if
any. For investors subject to federal or state alternate minimum tax, a small
portion of this income may be subject to such tax. Distributions of capital
gains and of ordinary income from accrued market discount, if any, are generally
taxable.
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 16 of
this report.
2. Source: The Bond Buyer.
3. Fund shares are not insured by any U.S. or other government agency, are
subject to market risks and will fluctuate in value. Insurance relates only to
the payment of principal and interest on the portfolio's insured securities and
the terms of the insurance as outlined in the prospectus. No representation is
made as to any insurer's ability to meet its commitments. 4. This does not
indicate Standard & Poor's or Moody's rating of the fund.
Past performance is not predictive of future results.
NEW YORK SECURITIES
We also found value in New York securities, and at the end of the fund's
reporting period our exposure was 17.2% of total market value, up from 14.61% on
April 30, 1997. New York is generally one of the largest issuers of municipal
bonds, and has been the largest so far in 1998. Due to the large supply of
securities, the sector was priced attractively in the market.
Both New York City and New York state enjoyed improved financial positions. In
August 1997, Standard and Poor's upgraded the state's credit rating from A- to
A. New York City was recently upgraded by Moody's to a3, and is currently rated
A- by Fitch IBCA, and BBB+ by S&P(R).5 These positive factors contributed to New
York securities being one of the best performing sectors in the market
throughout the year under review.
The chart to the left shows that the fund was invested across a broad range of
sectors on April 30, 1998. Also, your fund held investments in all 50 states and
Puerto Rico. The fund had its largest holdings in securities issued in New York,
Illinois and Texas, as illustrated below.
Going forward, we believe municipal bond supply should moderate during the last
half of the year, and demand will remain solid. Most importantly, given the
fund's current taxable-equivalent distribution rate, municipals should provide
an attractive investment for fixed-income investors.
GRAPHIC MATERIAL 2 OMITTED - SEE APPENDIX AT END OF DOCUMENT
GRAPHIC MATERIAL 3 OMITTED - SEE APPENDIX AT END OF DOCUMENT
PERFORMANCE SUMMARY
CLASS I
Franklin Federal Tax-Free Income Fund - Class I share price, as measured by net
asset value, increased 35 cents, from $11.90 on April 30, 1997, to $12.25 on
April 30, 1998. During the 12-month reporting period, shareholders received
income distributions totaling 68.8 cents ($0.6880) per share. Distributions will
vary based on the earnings of the fund's portfolio, and past distributions are
not predictive of future trends.
Based on an annualization of April's monthly per-share dividend of 5.6 cents
($0.056) and the maximum offering price of $12.79 on April 30, 1998, your fund's
distribution rate was 5.25%. This tax-free rate is generally higher than the
after-tax return on a comparable taxable investment. For example, an investor in
the maximum federal income tax bracket of 39.6% would need to earn 8.69% from a
taxable investment of similar quality to match the fund's tax-free distribution
rate.
The chart on page 12 compares your fund's Class I shares' performance with that
of the unmanaged Lehman Brothers Municipal Bond Index. The index includes over
40,000 municipal securities from across the country, while your fund consists of
approximately 930 municipal bonds. Of course, such unmanaged market indices have
inherent performance differentials over any fund. They do not pay management
fees to cover salaries of securities analysts or portfolio managers, nor do they
pay commissions to buy and sell bonds. Unlike unmanaged indices, mutual funds
are never 100% invested because they need cash on hand to redeem shares. In
addition, the performance shown for the fund includes the maximum initial sales
charge, all fund expenses and account fees. If operating expenses such as
Franklin Federal Tax-Free Income Fund's had been applied to this index, the
index's performance would have been lower. Please remember that an index is
simply a measure of performance and one cannot invest in it directly.
Your fund's Class I shares' performance exceeded the rate of inflation, as
measured by the Consumer Price Index (CPI), keeping your purchasing power well
ahead of inflation -- a primary goal of any investment.
GRAPHIC MATERIAL 4 OMITTED - SEE APPENDIX AT END OF DOCUMENT
CLASS I
Periods ended 4/30/98
SINCE
INCEPTION
1-YEAR 5-YEAR 10-YEAR (10/17/83)
- --------------------------------------------------------------------------------
Cumulative Total Return1 8.92% 36.39% 121.20% 256.80%
Average Annual Total Return2 4.28% 5.49% 7.79% 8.80%
Distribution Rate3 5.25%
Taxable Equivalent Distribution Rate4 8.69 %
30-Day Standardized Yield5 4.39%
Taxable Equivalent Yield4 7.27%
1. Cumulative total return measures the change in value of an investment over
the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the current, maximum 4.25%
initial sales charge. See Note below.
3. Distribution rate is based on an annualization of April's 5.6 cent per share
monthly dividend and the maximum offering price of $12.79 on April 30, 1998.
4. Taxable equivalent distribution rate and yield assume the 1998 maximum
federal income tax rate of 39.6%.
5. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended April 30, 1998.
Note: Prior to July 1, 1994, fund shares were offered at a lower initial sales
charge with dividends reinvested at the offering price; thus actual total
returns would differ. Effective May 1, 1994, the fund eliminated the sales
charge on reinvested dividends and implemented a Rule 12b-1 plan, which affects
subsequent performance.
All total return calculations assume reinvestment of dividends and capital gains
at net asset value. Since markets can go down as well as up, investment return
and principal value will fluctuate with market conditions, and you may have a
gain or loss when you sell your shares.
CLASS II
Franklin Federal Tax-Free Income Fund - Class II share price, as measured by net
asset value, increased 34 cents, from $11.90 on April 30, 1997, to $12.24 on
April 30, 1998. During the 12-month reporting period, shareholders received
income distributions totaling 61.92 cents ($0.6192) per share. Distributions
will vary based on the earnings of the fund's portfolio, and past distributions
are not predictive of future trends.
Based on an annualization of April's monthly per-share dividend of 5.00 cents
($0.0500), plus an annual dividend adjustment of 0.12 cents ($0.0012), and the
maximum offering price of $12.36 on April 30, 1998, your fund's distribution
rate was 4.86%. This tax-free rate is generally higher than the after-tax return
on a comparable taxable investment. For example, an investor in the maximum
federal income tax bracket of 39.6% would need to earn 8.05% from a taxable
investment of similar quality to match the fund's tax-free distribution rate.
The chart on page 14 compares your fund's Class II shares' performance with that
of the unmanaged Lehman Brothers Municipal Bond Index. The index includes over
40,000 municipal securities from across the country, while your fund consists of
approximately 930 municipal bonds. Of course, such unmanaged market indices have
inherent performance differentials over any fund. They do not pay management
fees to cover salaries of securities analysts or portfolio managers, nor do they
pay commissions to buy and sell securities. Unlike unmanaged indices, mutual
funds are never 100% invested because they need cash on hand to redeem shares.
In addition, the performance shown for the fund includes the maximum initial
sales charge, all fund expenses and account fees. If operating expenses such as
Franklin Federal Tax-Free Income Fund's had been applied to this index, the
index's performance would have been lower. Please remember that an index is
simply a measure of performance and one cannot invest in it directly.
Your fund's Class II shares' performance exceeded the rate of inflation, as
measured by the Consumer Price Index (CPI), keeping your purchasing power well
ahead of inflation -- a primary goal of any investment.
GRAPHIC MATERIAL 7 OMITTED - SEE APPENDIX AT END OF DOCUMENT
GRAPHIC MATERIAL 8 OMITTED - SEE APPENDIX AT END OF DOCUMENT
GRAPHIC MATERIAL 9 OMITTED - SEE APPENDIX AT END OF DOCUMENT
CLASS II
Periods ended 4/30/98
SINCE
INCEPTION
1-YEAR (5/1/95)
- -----------------------------------------------------------------------------
Cumulative Total Return1 8.22% 22.68%
Average Annual Total Return2 6.15% 6.69%
Distribution Rate3 4.86%
Taxable Equivalent Distribution Rate4 8.05%
30-Day Standardized Yield5 3.95%
Taxable Equivalent Yield4 6.54%
1. Cumulative total return measures the change in value of an investment over
the periods indicated and does not include sales charges.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the 1.0% initial sales
charge and 1.0% contingent deferred sales charge (CDSC), applicable to shares
redeemed within 18 months of investment.
3. Distribution rate is based on an annualization of April's 5.12 cent per share
monthly dividend and the maximum offering price of $12.36 on April 30, 1998.
4. Taxable equivalent distribution rate and yield assume the 1998 maximum
federal income tax rate of 39.6%.
5. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended April 30, 1998.
All total return calculations assume reinvestment of dividends and capital gains
at net asset value. Since markets can go down as well as up, investment return
and principal value will fluctuate with market conditions, and you may have a
gain or loss when you sell your shares.
1. Source: Standard & Poor's(R) Micropal (Federal Reserve H15 Report).
2. Source: Standard & Poor's Micropal (Bond Buyer 40). Index is composed of 40
actively traded municipal bonds and does not represent the performance of any
Franklin Templeton fund. Investors cannot invest directly in this unmanaged
index.
FRANKLIN FEDERAL TAX-FREE INCOME FUND
Financial Highlights
<TABLE>
<CAPTION>
Year Ended April 30,
<S> <C> <C> <C> <C> <C>
CLASS I 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year................................. $11.90 $11.83 $11.73 $11.81 $12.24
--------------------------------------------
Income from investment operations:
Net investment income............................................. .69 .71 .74 .75 .77
Net realized and unrealized gains (losses)........................ .35 .07 .10 (.05) (.41)
---------------------------------------------
Total from investment operations................................... 1.04 .78 .84 .70 .36
Less distributions from net investment income...................... (.69) (.71) (.74) (.78) (.79)
---------------------------------------------
Net asset value, end of year....................................... $12.25 $11.90 $11.83 $11.73 $11.81
=============================================
Total return*...................................................... 8.92% 6.81% 7.33% 6.21% 2.58%
Ratios/supplemental data
Net assets, end of year (000's).................................... $7,022,961 $6,905,488 $7,012,601 $6,886,941 $6,804,262
Ratios to average net assets:
Expenses.......................................................... .59% .58% .57% .59% .52%
Net investment income............................................. 5.70% 6.00% 6.20% 6.47% 6.27%
Portfolio turnover rate............................................ 14.54% 16.43% 25.10% 19.88% 24.59%
</TABLE>
<TABLE>
<CAPTION>
CLASS II
Per share operating performance
(for a share outstanding throughout the year)
<S> <C> <C> <C>
Net asset value, beginning of year $11.90 $11.82 $11.73**
-------------------------------------
Income from investment operations:
Net investment income .63 .66 .68
Net realized and unrealized gains .33 .06 .09
-------------------------------------
Total from investment operations .96 .72 .77
Less distributions from net investment income (.62) (.64) (.68)
-------------------------------------
Net asset value, end of year $12.24 $11.90 $11.82
=====================================
Total return* 8.22% 6.28% 6.68%
Ratios/supplemental data
Net assets, end of year (000's) $135,195 $71,944 $34,110
Ratios to average net assets:
Expenses 1.17% 1.16% 1.15%
Net investment income 5.12% 5.42% 5.68%
Portfolio turnover rate 14.54% 16.43% 25.10%
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized. Prior to May 1, 1994, dividends from net
investment income were reinvested at the offering price.
**The Fund paid a dividend to shareholders of record on the beginning of
business, May 1, 1995 in the amount of $0.062 per share. The net asset value per
share at the beginning of period includes this dividend.
See notes to financial statements.
<TABLE>
<CAPTION>
FRANKLIN FEDERAL TAX-FREE INCOME FUND
Statement of Investments, April 30, 1998
PRINCIPAL
AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 97.4%
BONDS 95.3%
ALABAMA 1.5%
<S> <C> <C>
Alabama HFA, SFMR, Collateralized Home Mortgage, Series D-2, 5.75%, 10/01/23 .............. $ 5,400,000 $ 5,522,094
Alabama Water Pollution Control Authority, Revolving Fund, Series B,
Pre-Refunded, 7.75%, 8/15/12 .............................................................. 6,180,000 6,715,126
Birmingham GO, Street Improvement, Warrants, Pre-Refunded, 8.00%, 7/01/13 ................. 5,000,000 5,131,450
Citronelle IDB, PCR, Stauffer Chemical Project, Guaranteed by Imperial Chemical, Plc., Series
1982, 8.00%, 12/01/12 ..................................................................... 1,000,000 1,088,670
Courtland IDB, PCR, Refunding, Champion International Corp. Project, 6.15%, 6/01/19........ 5,000,000 5,321,250
Courtland IDBR, Refunding, Champion International Corp., Series A, 7.20%, 12/01/13......... 12,000,000 13,308,840
Fairfield IDB, Environmental Improvement Revenue, Refunding, USX
Corp. Projects, 5.45%, 9/01/14 ............................................................ 1,445,000 1,443,324
Jefferson County Sewer Revenue, Warrants, FGIC Insured,
Refunding, Series A, 5.625%, 2/01/22 ...................................................... 4,000,000 4,144,840
Refunding, Series A, 5.375%, 2/01/27 ...................................................... 19,000,000 19,096,900
Series D, 5.75%, 2/01/22 .................................................................. 15,995,000 16,730,130
Series D, 5.75%, 2/01/27 .................................................................. 19,715,000 20,621,101
Montgomery Medical Clinic Board, Health Care Facilities Revenue,
Refunding, Jackson Hospital
and Clinic, AMBAC Insured, 6.00%, 3/01/26 ................................................. 5,385,000 5,699,861
-----------
104,823,586
-----------
Alaska 2.0%
Alaska Industrial Development and Export Authority, Revolving Fund,
Series A, 7.95%, 4/01/10 .................................................................. 1,775,000 1,902,907
Alaska State HFC,
Collateralized Home Mortgage, Series A-1, 6.75%, 12/01/32 ................................. 3,560,000 3,781,290
Refunding, Mortgage, Series A, MBIA Insured, 6.00%, 12/01/15 .............................. 4,565,000 4,804,389
Refunding, Mortgage, Series A, MBIA Insured, 6.10%, 12/01/37 .............................. 34,000,000 35,759,500
Refunding, Series A, MBIA Insured, 5.875%, 12/01/24......................................... 17,875,000 18,583,565
Refunding, Series A, MBIA Insured, 5.875%, 12/01/30......................................... 11,600,000 11,989,528
Series A, Pre-Refunded, 6.60%, 12/01/23 ................................................... 8,000,000 8,788,160
Veterans Mortgage Program, MBIA Insured, 6.75%, 12/01/25.................................... 20,530,000 22,056,611
Anchorage Parking Authority Revenue, Refunding, 5th Avenue Garage Lease Project,
6.50%, 12/01/02 ........................................................................... 3,360,000 3,584,750
6.75%, 12/01/08 ........................................................................... 3,500,000 3,751,195
Valdez Marine Terminal Revenue, Refunding, BP Pipelines, Inc. Project,
Series A, 5.85%, 8/01/25 .................................................................. 25,000,000 25,634,000
Series C, 5.65%, 12/01/28 ................................................................. 500,000 507,040
-------
141,142,935
---------
Arizona .1%
Tempe IDA, Residential Care Facilities Revenue, Volunteers of
America Care Facilities, 9.00%, 6/01/18 ................................................... 5,540,000 5,660,440
---------
Arkansas 1.1%
Arkansas State Development Financing Authority, Driver's License Revenue, State Police Headquarters,
Wireless Data, FGIC Insured, 5.40%, 6/01/18 .............................................. 4,000,000 4,094,840
Desha County Residential Housing Facilities Board, SFMR, Refunding, 7.50%, 4/01/11 ........ 2,130,000 2,267,832
Independence County Public Health and Education Facilities Board,
Capital Revenue, Refunding & Improvement,
White River Control Project, Pre-Refunded, 8.00%, 6/01/09 ................................ 3,115,000 3,309,158
Jefferson County PCR, Refunding, Arkansas Power and Light Co. Project, 6.30%, 6/01/18 ..... 1,465,000 1,571,755
Pope County PCR, Refunding, Power and Light Co. Project, 6.30%,
12/01/16................................................................................... 2,600,000 2,760,056
11/01/20................................................................................... 60,000,000 62,634,600
University of Central Arkansas, AMBAC Insured,
Academic Facilities Revenue, Series B, 5.875%, 4/01/16 .................................... 250,000 265,505
Academic Facilities Revenue, Series B, 6.00%, 4/01/21 ..................................... 1,000,000 1,074,890
Athletic Facilities Revenue, Series C, 6.00%, 4/01/21 ..................................... 1,000,000 1,074,890
Athletic Facilities Revenue, Series C, 6.125%, 4/01/26 .................................... 825,000 882,783
Refunding, Housing System Revenue, Series A, 6.00%, 4/01/21 ............................... 1,000,000 1,074,890
---------
81,011,199
---------
Bonds (cont.)
California 6.2%
Alhambra COP, Clubhouse Facility Project, 11.25%
1/01/08 ................................................................................... $ 410,000 $ 420,197
1/01/09 ................................................................................... 455,000 466,279
1/01/10 ................................................................................... 500,000 512,350
Burbank RDA, Refunding, Tax Allocation, Series A, 6.25%, 12/01/24 ......................... 5,325,000 5,640,293
California Health Facilities, Financing Authority Revenue, Refunding, St. Francis Medical Center,
Series H, AMBAC Insured, 6.30%, 10/01/15 ................................................. 2,800,000 3,068,968
California State Educational Facilities Authority Revenue, 6.00%,
National University, Connie Lee Insured, 5/01/09 .......................................... 3,580,000 3,872,701
Pooled College and University Projects, Series B, 12/01/20 ................................ 6,025,000 6,310,465
California State GO,
6.00%, 5/01/18 ............................................................................ 535,000 564,473
5.90%, 4/01/23 ............................................................................ 1,200,000 1,250,256
FGIC Insured, 6.00%, 5/01/20 .............................................................. 850,000 905,412
FGIC Insured, Pre-Refunded, 6.00%, 8/01/19 ................................................ 11,000,000 12,117,930
FGIC Insured, Pre-Refunded, 6.00%, 5/01/20 ................................................ 11,650,000 12,801,486
Pre-Refunded, 6.00%, 5/01/18 .............................................................. 6,465,000 7,086,028
Pre-Refunded, 5.90%, 4/01/23 .............................................................. 10,550,000 11,411,302
Series 1994, 5.90%, 5/01/08 ............................................................... 3,070,000 3,325,271
California State GO, Veterans Bonds,
Series BC, 6.00%, 2/01/10 ................................................................. 1,000,000 1,021,500
Series BD, BE, and BF, 6.55%, 2/01/25 ..................................................... 18,745,000 19,155,516
California State Public Works Board, Lease Revenue, Various University of California Projects,
Series A, Pre-Refunded, 6.375%, 10/01/14 .................................................. 4,000,000 4,485,200
10/01/19 .................................................................................. 2,000,000 2,242,600
California Statewide Communities Development Authority Revenue, COP, Sutter Health Obligation Group,
MBIA Insured, 6.00%, 8/15/25 ............................................................. 14,750,000 15,708,898
Chino USD, COP, Refunding, FSA Insured, 5.90%, 9/01/15 .................................... 8,250,000 8,727,840
Coalinga Public Finance Authority Revenue, Series B, 6.25%, 9/15/07 ....................... 1,020,000 1,039,574
Commerce, Refuse to Energy Authority Revenue, Refunding, Series 1994, 8.75%, 7/01/10 ...... 1,000,000 1,189,120
Foothill/Eastern Transportation Corridor Agency, Toll Road Revenue, Senior Lien,
Series A, 6.50%, 1/01/32................................................................... 59,240,000 63,841,171
Forty-Niner Shops, Inc., Auxiliary Organization, California State Long
Beach Project, 6.875%, 4/01/07.............................................................. 1,090,000 1,164,752
4/01/12 ................................................................................... 1,565,000 1,653,031
Los Angeles County MTA, Sales Tax Revenue, Refunding, Proposition C-2, Series A,
Senior Subordinated Lien, AMBAC Insured, 5.00%, 7/01/23 .................................. 10,000,000 9,571,700
Los Angeles CRDA, Housing Revenue, Refunding, Series A, AMBAC Insured, 6.55%, 1/01/27 ..... 3,180,000 3,432,269
Los Angeles Department of Water and Power, Electric Plant Revenue,
Refunding, 6.40%, 11/01/31 ................................................................ 14,925,000 15,852,290
Refunding, MBIA Insured, 6.00%, 2/01/28 ................................................... 3,000,000 3,149,700
Second Issue, MBIA Insured, 6.40%, 11/01/31 ............................................... 10,500,000 11,243,190
Los Angeles GO, Series A, FGIC Insured, 6.20%, 9/01/14 .................................... 8,100,000 8,709,039
Los Angeles Regional Airport Improvements Corp., Lease Revenue, Refunding,
Facilities Sub-Lease, International Airport, 6.35%, 11/01/25 .............................. 18,500,000 20,096,365
United Airlines, Inc. Project, 6.875%, 11/15/12 ........................................... 8,400,000 9,226,308
Pomona Public Financing Authority Revenue, Series Q, MBIA Insured, 5.90%, 12/01/25 ........ 4,000,000 4,221,200
Sacramento County Airport Systems Revenue, Sub-Series D, MBIA Insured, 6.00%, 7/01/16 ..... 6,480,000 6,958,548
San Bernardino County COP, Medical Center Financing Project, Series A, 5.875%, 8/01/26 .... 33,315,000 34,920,117
San Francisco City and County RDA Revenue, George Moscone Convention Center, Lease
Revenue, 6.75%, 7/01/24 ................................................................... 7,080,000 7,909,351
San Francisco City and County RDA Revenue, Tax Allocation Redevelopment
Project, 6.50%, 8/01/22 ................................................................... 12,680,000 13,752,474
San Francisco City and County Sewer Revenue, Series A, FGIC Insured, 5.90%, 10/01/20 ...... 10,380,000 10,912,390
San Joaquin Hills Transportation Corridor Agency, Toll Road Revenue,
5.00%, 1/01/33 ............................................................................ 5,000,000 4,542,900
Pre-Refunded, 7.00%, 1/01/30 .............................................................. 16,785,000 18,914,681
Pre-Refunded, 6.75%, 1/01/32 .............................................................. 10,000,000 11,164,500
Bonds (cont.)
California (cont.)
University of California Revenues,
Hospital Facilities, U.C. Davis Medical Center, AMBAC Insured, 5.75%, 7/01/24 ............. $25,000,000 $ 26,134,750
Research Facilities, Series B, Pre-Refunded, 6.55%, 9/01/24 ............................... 26,780,000 29,908,172
Windsor RDA Revenue, Tax Allocation, Windsor Project, 7.00%, 9/01/24 ...................... 2,405,000 2,603,797
---------
443,206,354
---------
Colorado 4.1%
Colorado HFA, GO, Series A, 7.50%, 5/01/29 ................................................ 1,595,000 1,680,460
Colorado Post-Secondary Educational Facilities Authority Revenue, Refunding & Improvement,
University of Denver Project, MBIA Insured, 5.375%, 3/01/18 .............................. 6,000,000 6,084,060
Denver City and County Airport Revenue,
Series A, 8.875%, 11/15/12 ................................................................ 12,130,000 13,981,523
Series A, 7.50%, 11/15/23 ................................................................. 13,590,000 15,519,916
Series A, 8.50%, 11/15/23 ................................................................. 72,960,000 80,846,246
Series A, 8.00%, 11/15/25 ................................................................. 21,785,000 23,898,924
Series A, Pre-Refunded, 7.50%, 11/15/12 ................................................... 11,200,000 12,794,992
Series A, Pre-Refunded, 8.875%, 11/15/12 .................................................. 4,515,000 5,245,888
Series A, Pre-Refunded, 7.50%, 11/15/23 ................................................... 2,930,000 3,447,936
Series A, Pre-Refunded, 8.50%, 11/15/23 ................................................... 6,985,000 7,805,877
Series A, Pre-Refunded, 7.25%, 11/15/25 ................................................... 24,525,000 27,822,632
Series A, Pre-Refunded, 8.00%, 11/15/25 ................................................... 2,540,000 2,813,997
Series B, 7.25%, 11/15/23 ................................................................. 2,120,000 2,347,730
Series B, Pre-Refunded, 7.25%, 11/15/23 ................................................... 530,000 597,761
Series D, 7.75%, 11/15/21 ................................................................. 8,950,000 9,970,300
Series D, 7.00%, 11/15/25 ................................................................. 7,835,000 8,380,238
Series D, Pre-Refunded, 7.75%, 11/15/21 ................................................... 2,510,000 2,824,980
Series D, Pre-Refunded, 7.00%, 11/15/25 ................................................... 2,175,000 2,357,874
Denver City and County Special Facilities, Airport Revenue, United Airlines, Inc. Project, Series A,
6.875%, 10/01/32 .......................................................................... 47,980,000 51,969,057
Littleton MFR, Rental Housing, Riverpointe Project I, Series 1985, 8.00%, 12/01/22 ........ 16,105,000 16,525,179
----------
296,915,570
----------
Delaware
Delaware State EDA Revenue, Refunding, Water Development, Wilmington,
Series B, 6.45%, 12/01/07.................................................................. 1,160,000 1,327,504
Delaware State Housing Authority, Refunding, MFMR, Series D, 6.75%, 7/01/06 ............... 2,000,000 2,199,560
---------
3,527,064
---------
District of Columbia .6%
District of Columbia GO, Series E, MBIA Insured, 6.00%, 6/01/13 ........................... 4,000,000 4,256,040
District of Columbia HFA, MFHR, FHA Insured,
Mayfair Mansions Apartments, 8.85%, 2/01/31 ............................................... 6,110,000 6,310,897
Refunding, Series A, 7.10%, 9/01/12 ....................................................... 1,830,000 1,947,578
Refunding, Series A, 7.15%, 3/01/24 ....................................................... 6,575,000 6,968,448
District of Columbia HFA, SFMR, Refunding, Series B, 5.85%, 12/01/18 ...................... 2,830,000 2,904,089
District of Columbia Hospital Revenue, Washington Hospital Center Corp., Series A,
Pre-Refunded, 9.00%, 1/01/08 .............................................................. 3,955,000 4,471,009
District of Columbia Redevelopment Land Agency, Sports Arena, Special Tax
Revenue, 5.625%, 11/01/10 ................................................................. 1,240,000 1,259,456
District of Columbia Revenue,
Association of American Medical Colleges, Pre-Refunded, 7.50%, 2/15/20 .................... 5,685,000 6,098,015
Catholic University of America, 6.45%, 10/01/23 ........................................... 5,265,000 5,726,530
---------
39,942,062
---------
Florida 2.7%
Bay County Resource Recovery Revenue, Refunding, MBIA Insured, 6.50%, 7/01/07,
Series A................................................................................... 2,100,000 2,308,299
Series B................................................................................... 11,020,000 12,113,074
Broward County Resource Recovery Revenue, Broward Waste Energy Co., L.P.,
North Project, Series 1984, 7.95%, 12/01/08................................................ 40,950,000 44,214,534
Callaway/Bay County Waste Water Systems Revenue, Series A, FGIC Insured, 6.00%, 9/01/26 ... 1,000,000 1,089,160
Dunes Community Development District Revenue, Water and Sewer Project,
Pre-Refunded, 8.25%, 10/01/18 ............................................................. 3,800,000 3,942,728
Florida State Board Of Education, Capital Outlay, Public Education, Refunding,
Series 1992, 6.40%, 6/01/19 ............................................................... 22,475,000 24,121,519
Bonds (cont.)
Florida (cont.)
Florida State Department of General Services, Division of Facilities Management Revenue, Florida
Facilities Pool, Pre-Refunded, 8.125%, 9/01/17 ........................................... $ 2,000,000 $ 2,067,360
Florida State Department of Transportation, Right of Way Acquisition
and Bridge, 5.375%, 7/01/26................................................................ 10,000,000 10,017,100
Florida State Department of Transportation, Turnpike Revenue, Series A,
Pre-Refunded, 7.75%, 7/01/09............................................................... 7,125,000 7,571,880
Lakeland Retirement Community, First Mortgage Revenue, Carpenters Home
Estate Project, 9.50%, 9/01/06............................................................. 3,600,000 3,642,228
Manatee County IDR, Manatee Hospital and Health Systems, Inc.,
Pre-Refunded, 9.25%, 3/01/21............................................................... 6,500,000 7,451,730
Manatee County School Board COP, MBIA Insured, Pre-Refunded, 6.125%, 7/01/16 .............. 5,000,000 5,600,450
Santa Rosa County Health Facilities Authority Revenue, Refunding,
Gulf Breeze Hospital, Inc., Pre-Refunded, 8.70%, 10/01/14 ................................. 2,500,000 2,598,900
St. Augustine Water and Sewer Revenue, Refunding, Series A, MBIA Insured, 6.20%,
10/01/00 .................................................................................. 840,000 882,134
10/01/01 .................................................................................. 890,000 947,636
10/01/02 .................................................................................. 940,000 1,013,282
10/01/03 .................................................................................. 1,005,000 1,094,154
10/01/04 .................................................................................. 1,065,000 1,171,564
10/01/05 .................................................................................. 1,130,000 1,250,537
10/01/06 .................................................................................. 1,200,000 1,337,844
10/01/07 .................................................................................. 1,275,000 1,424,213
10/01/08 .................................................................................. 1,355,000 1,502,709
10/01/12 .................................................................................. 6,300,000 6,928,425
Sunrise Utility Systems Revenue, Refunding, AMBAC Insured, 5.20%, 10/01/22 ................ 2,000,000 1,975,380
Tampa Capital Improvement Program Revenue, Series A, 10/01/18,
Custodial Receipts, 5.805%................................................................. 37,250,000 37,490,263
8.25%...................................................................................... 11,010,000 11,177,352
----------
194,934,455
----------
Georgia 2.3%
Burke County Development Authority, PCR, Georgia Power Co., Plant Vogle Project, MBIA Insured,
Series 1984-1, 6.60%, 7/01/24 ............................................................. 105,000,000 109,490,850
Series 1984-7, 6.625%, 10/01/24 ........................................................... 8,025,000 8,409,558
Fulton County Development Authority, Special Facilities Revenue, Refunding,
Delta Air Lines, Inc. Project,
6.85%, 11/01/07 ........................................................................... 3,400,000 3,676,012
6.95%, 11/01/12 ........................................................................... 5,500,000 5,972,835
Gainsville and Hall County Hospital Authority Revenue Anticipation Certificates, Refunding,
Northeast Georgia Healthcare Project, MBIA Insured, 6.00%, 10/01/25 ....................... 7,975,000 8,456,531
Georgia Municipal Electric Authority Power Revenue,
Series B, 6.375%, 1/01/16 ................................................................. 14,000,000 14,897,680
Series EE, 6.40%, 1/01/23 ................................................................. 6,325,000 6,904,054
Georgia State HFA Revenue, Homeownership Opportunity Program, Series C, 6.60%, 12/01/23 ... 3,865,000 4,127,279
Monroe County Development Authority, PCR, Georgia Power Co., AMBAC Insured, 6.25%, 7/01/19 4,300,000 4,468,431
----------
166,403,230
----------
Hawaii 1.1%
Hawaii State Airports System Revenue,
FGIC Insured, 7.00%, 7/01/20 .............................................................. 1,000,000 1,087,300
Second Series, 7.00%, 7/01/07 ............................................................. 12,000,000 12,992,160
Second Series, 6.90%, 7/01/12 ............................................................. 500,000 577,285
Second Series, 7.00%, 7/01/18 ............................................................. 2,830,000 3,046,665
Hawaii State Department of Budget and Finance, Special Purposes Mortgage Revenue,
Hawaii Electric Light Co. Project, 7.20%, 12/01/14 ........................................ 200,000 212,190
Hawaii Electric Light Co. Project, Series A, 7.35%, 1/01/20 ............................... 1,000,000 1,060,000
Hawaii Electric Light Co. Project, Series A, MBIA Insured, 5.65%, 10/01/27 ................ 20,000,000 20,412,200
Kaiser Hospital, 6.25%, 3/01/21 ........................................................... 900,000 945,576
Refunding, Kapiolani Health Care System, 6.00%, 7/01/19 ................................... 2,600,000 2,735,434
Wahiawa General Hospital Project, 7.50%, 7/01/12 .......................................... 1,000,000 1,112,140
Hawaii State Department of Budget and Finance, Special Purposes Revenue,
6.00%, 7/01/11 ............................................................................ 1,000,000 1,073,030
6.20%, 7/01/16 ............................................................................ 2,000,000 2,146,280
6.25%, 7/01/21 ............................................................................ 6,250,000 6,726,375
Bonds (cont.)
Hawaii (cont.)
Hawaii State Department of Budget and Finance, Special Purposes Revenue, (cont.)
Refunding, The Queens Health System, Series A, 5.75%, 7/01/26 ............................. $ 5,800,000 $ 5,961,182
Hawaii State SFMR,
HFC, Series A, 7.00%, 7/01/11 ............................................................. 230,000 246,631
HFC, Series A, 7.10%, 7/01/24 ............................................................. 3,350,000 3,595,187
HFC, Series B, 6.90%, 7/01/16 ............................................................. 360,000 387,126
HFC, Series B, 7.00%, 7/01/31 ............................................................. 11,880,000 12,792,503
Housing and Development Corp., Purchase Revenue, Series A, 5.75%, 7/01/30 ................. 2,500,000 2,545,125
---------
79,654,389
---------
Idaho .1%
Idaho Housing Agency, Refunding, Series D-1, 6.45%, 7/01/19 ............................... 2,195,000 2,354,116
Idaho Housing Agency, SFMR, Senior Bond, Series B-1, FGIC Insured,
7.85%, 7/01/09 ............................................................................ 925,000 960,252
7.90%, 1/01/21 ............................................................................ 1,410,000 1,457,150
Power County PCR, Refunding, FMC Corp. Project, 5.625%, 10/01/14 .......................... 2,200,000 2,243,494
---------
7,015,012
---------
Illinois 6.2%
Bryant PCR, Refunding, Central Illinois Light Co. Project, 6.50%,
Series A, 2/01/18 ......................................................................... 7,200,000 7,721,424
Series C, 1/01/10 ......................................................................... 5,000,000 5,400,450
Chicago Board of Education, Chicago School Reform, MBIA Insured, 6.00%,
12/01/16................................................................................... 9,700,000 10,389,767
12/01/26................................................................................... 7,600,000 8,070,288
Chicago Board of Education, Chicago School Reform, Series A,
AMBAC Insured, 5.25%, 12/01/30............................................................. 8,830,000 8,574,813
Chicago COP, AMBAC Insured, 7.75%, 7/15/11 ................................................ 20,400,000 24,344,340
Chicago Gas Supply Revenue, Refunding, The Peoples Gas Light, Series A, 6.10%, 6/01/25 .... 12,000,000 12,710,280
Chicago-O'Hare International Airport Revenue, Special Facilities,
American Airlines, Inc. Project, 8.20%, 12/01/24 .......................................... 11,720,000 14,040,677
United Airlines, Inc. Project, 8.45%, 5/01/07 ............................................. 4,300,000 4,664,855
United Airlines, Inc. Project, 8.50%, 5/01/18 ............................................. 12,305,000 13,358,185
United Airlines, Inc. Project, Series A, 8.40%, 5/01/18 ................................... 450,000 477,887
United Airlines, Inc. Project, Series C, 8.20%, 5/01/18 ................................... 27,600,000 29,271,456
Chicago SFMR, Collateralized, Series A, 7.25%, 9/01/28 .................................... 4,000,000 4,545,760
Cook County, Orland Park School District No. 135, Refunding, FGIC Insured, 5.90%, 12/01/14 10,000,000 10,503,400
Cook County, Refunding, 11/15/22,
Capital Improvement, FGIC Insured, 5.875%, ................................................ 10,000,000 10,677,600
Series A, MBIA Insured, 5.625%, ........................................................... 20,000,000 20,589,600
Cook County School District No. 140, Tinley Park, Refunding, Series A, AMBAC
Insured, 6.00%, 12/01/15 .................................................................. 8,750,000 9,446,413
Illinois Development Finance Authority, PCR, Commonwealth Edison Co. Project,
Series 1991, 7.25%, 6/01/11 ............................................................... 7,500,000 8,103,525
Refunding, Central Illinois Public Services Co., Series A, 6.375%, 1/01/28 ................ 15,200,000 15,996,632
Refunding, Illinois Power Co. Project, Series A, 7.375%, 7/01/21 .......................... 26,550,000 30,484,445
Illinois HDA, Homeowner Mortgage, Series A-1, 6.85%, 8/01/17............................... 4,245,000 4,655,237
Illinois HDA, MF Program, Lawndale Redevelopment Project, 7.10%, 12/01/34 ................. 20,000,000 21,859,200
Refunding, Series A, 7.10%, 7/01/26 ....................................................... 12,915,000 13,793,607
Series 1, 6.625%, 9/01/12 ................................................................. 12,000,000 12,801,120
Series 1, 6.75%, 9/01/21 .................................................................. 7,550,000 8,027,387
Series C, 7.35%, 7/01/11 .................................................................. 2,265,000 2,384,705
Illinois HDA, RMR, Series B, 7.25%, 8/01/17 ............................................... 7,065,000 7,495,117
Illinois Health Facilities Authority Revenue,
Refunding, Edwards Hospital Project, Pre-Refunded, 7.00%, 2/15/22 ......................... 2,000,000 2,209,220
Refunding, Loyola University Health System, Series A, MBIA Insured, 5.625%, 7/01/18 ....... 9,195,000 9,435,725
Refunding, Northwestern Medical Facility Foundation, MBIA Insured, 5.125%, 11/15/28 ....... 7,500,000 7,139,175
Refunding, Servantcor, Series A, Pre-Refunded, 7.875%, 8/15/19 ............................ 1,000,000 1,067,370
Refunding, Servantcor, Series B, Pre-Refunded, 7.875%, 8/15/19 ............................ 3,000,000 3,202,110
Bonds (cont.)
Illinois (cont.)
Illinois Health Facilities Authority Revenue, (cont.)
Refunding, Westlake Community Hospital, 7.875%, 1/01/13 ................................... $ 6,200,000 $ 6,448,124
South Suburban Hospital, ETM, 7.00%, 2/15/18 .............................................. 4,200,000 5,030,256
South Suburban Hospital, Pre-Refunded, 7.00%, 2/15/18 ..................................... 2,800,000 3,092,908
Victory Health Services, Series A, 5.75%, 8/15/27 ......................................... 8,015,000 8,132,179
Illinois State COP, FSA Insured, 6.875%, 7/01/07 .......................................... 2,600,000 2,866,318
Illinois State Dedicated Tax Revenue, Civic Center, Series A,
AMBAC Insured, 6.00%, 12/15/15............................................................. 2,950,000 3,013,927
Metropolitan Pier and Exposition Authority, Dedicated State Tax Revenue, McCormick Place
Expansion Project, Series A, 6.50%,
6/15/22.................................................................................... 5,000 5,447
6/15/27.................................................................................... 555,000 604,140
FGIC Insured, 6/15/07 ..................................................................... 5,000 5,500
Metropolitan Pier and Exposition Authority, Hospitality Facilities Revenue, McCormick Place
Convention Center,
5.75%, 7/01/06 ............................................................................ 1,645,000 1,704,269
6.25%, 7/01/17 ............................................................................ 9,500,000 10,147,045
7.00%, 7/01/26 ............................................................................ 12,000,000 14,443,080
Onterie Center HFC, Mortgage Revenue, Refunding, Series A, MBIA Insured, 7.05%, 7/01/27 ... 4,350,000 4,654,674
Regional Transportation Authority, Series A, AMBAC Insured, 6.125%, 6/01/22 ............... 3,970,000 4,145,871
Southwestern Illinois Development Authority,
Anderson Hospital Project, Series A, 7.00%, 8/15/22 ....................................... 6,200,000 6,709,516
IDR, Spectrulite Consortium, Inc. Project, 6.20%, 2/01/05 ................................. 1,825,000 1,959,594
IDR, Spectrulite Consortium, Inc. Project, 6.625%, 2/01/10 ................................ 3,050,000 3,285,033
Private Activity Revenue, Glenmark Recovery, 8.50%, 8/01/10 ............................... 2,815,000 3,087,042
Solid Waste Disposal Revenue, LaCede Steel Co., 8.375%, 8/01/08 ........................... 4,985,000 5,498,555
Solid Waste Disposal Revenue, LaCede Steel Co., 8.50%, 8/01/20 ............................ 5,390,000 5,958,214
Upper River Valley Development Authority, Environmental Facilities Revenue, General Electric Co.
Project, 5.45%, 2/01/23 ................................................................... 3,600,000 3,561,084
Will County Exempt Facilities Revenue, Mobil Oil Refining Corp. Project, 6.00%, 2/01/27 ... 7,130,000 7,389,817
-----------
445,184,363
-----------
Indiana 1.1%
Carmel Industrial RDA, County Option, Income Tax Lease, Rent Revenue,
MBIA Insured, 5.25%, 1/01/18............................................................... 1,090,000 1,087,264
Hammond Industrial Sewer and Solid Waste Disposal Revenue, American Maize-Products Co.,
Project A, 8.00%, 12/01/24 ................................................................ 17,000,000 19,790,380
Hammond PCR, Stauffer Chemical Project, Guaranteed by Imperial Chemical, Plc.,
Series 1982, 8.00%, 11/01/12 .............................................................. 2,355,000 2,557,153
Indiana Bond Bank, Special Program, Series A, 8.375%, 2/01/18 ............................. 585,000 601,737
Indiana Health Facility Financing Authority, Hospital Revenue, Hancock Memorial
Hospital Project, Series 1990, Pre-Refunded, 8.30%, 8/15/20 ............................... 3,500,000 3,869,495
Indiana State Educational Facilities Authority Revenue,
Manchester College Project, 6.85%, 10/01/18................................................ 3,240,000 3,419,626
Indiana State Housing Financing Authority, SFMR, Refunding, Series A,
6.75%, 1/01/10 ............................................................................ 2,940,000 3,147,593
6.80%, 1/01/17 ............................................................................ 12,835,000 13,739,996
Indianapolis Local Public Improvement, Series D,
6.75%, 2/01/20 ............................................................................ 13,075,000 14,080,075
Refunding, 6.50%, 2/01/22 ................................................................. 4,625,000 4,632,261
Jasper County EDR, Georgia Pacific Corp. Project, 5.625%, 12/01/27 ........................ 2,500,000 2,487,375
Muncies Edit Building Corp., First Mortgage, Series A, AMBAC Insured, 6.60%, 12/01/17 ..... 2,000,000 2,179,940
Sullivan PCR, Refunding, Indiana-Michigan Power Co. Project, Series C, 5.95%, 5/01/09...... 6,000,000 6,271,500
77,864,395
Iowa .2%
Iowa Financing Authority, SFMR, Series F, 5.70%, 1/01/27 .................................. 10,780,000 11,011,123
----------
Kansas
Kansas State Development Financial Authority Revenue, Sisters of Charity Leavenworth,
MBIA Insured, 5.125%, 12/01/18 ............................................................ 2,000,000 1,971,160
---------
Kentucky 2.1%
Ashland PCR, Refunding, Ashland Oil, Inc. Project, 6.65%, 8/01/09 ......................... 3,900,000 4,204,395
Henderson County Solid Waste Disposal Revenue, MacMillan Bloedel Project, 7.00%, 3/01/25 .. 10,000,000 10,892,300
Jefferson County MFHR, Watterson Park Apartments Project, Series A, 6.35%, 11/15/11 ....... 4,870,000 5,131,422
Bonds (cont.)
Kentucky (cont.)
Kenton County Airport Board Revenue, Special Facilities, Delta Air Lines, Inc.,
7.80%, 12/01/15 ........................................................................... $20,000,000 $ 21,318,600
Project A, 7.50%, 2/01/20 ................................................................. 10,000,000 11,033,300
Project A, 7.125%, 2/01/21 ................................................................ 9,330,000 10,176,044
Project B, 7.25%, 2/01/22 ................................................................. 3,350,000 3,679,975
Kentucky Economic Development Financing Authority, Hospital Systems Revenue,
Refunding & Improvement, Appalachian Regional Facility,
5.80%, 10/01/12 ........................................................................... 1,000,000 1,025,890
5.85%, 10/01/17 ........................................................................... 5,615,000 5,764,921
Kentucky Housing Corp. Revenue,
Series A, 6.70%, 7/01/17 .................................................................. 780,000 829,117
Series B, 6.625%, 7/01/14 ................................................................. 4,910,000 5,194,387
Kentucky State Development Financing Authority, Hospital Revenue,
Claire Medical Center Project, Pre-Refunded, 7.125%, 9/01/21 .............................. 700,000 771,561
Kentucky State Property and Buildings Commission Revenue, Project No. 48,
Pre-Refunded, 8.00%, 8/01/08 .............................................................. 4,500,000 4,633,065
Mount Sterling Lease Revenue, Kentucky League Cities, Series A,
6.10%, 3/01/08 ............................................................................ 20,375,000 21,752,758
6.20%, 3/01/18 ............................................................................ 11,765,000 12,626,433
Pendleton County, Multi-County Lease Revenue, Kentucky Association of Counties
Leasing Trust, Series A, 6.50%, 3/01/19 ................................................... 27,160,000 29,580,771
----------
148,614,939
----------
Louisiana 2.1%
Bastrop PCR, Refunding, International Paper Co. Project, 6.90%, 3/01/07 ................... 2,000,000 2,176,060
Calcasieu Parish IDB, PCR, Refunding, Gulf States Utilities Co. Project, 6.75%, 10/01/12 .. 14,285,000 15,244,523
Calcasieu Parish Memorial Hospital Service District Revenue, Lake Charles Parish
Memorial Hospital Project, Series A, FSA Insured,
6.375%, 12/01/12 .......................................................................... 4,310,000 4,855,775
6.50%, 12/01/18 ........................................................................... 5,530,000 6,332,237
6.65%, 12/01/21 ........................................................................... 3,145,000 3,387,354
Calcasieu Parish Public Transportation Authority Mortgage Revenue, Refunding,
Series A, 7.75%, 6/01/12 .................................................................. 3,185,000 3,396,452
Series B, 6.375%, 11/01/02 ................................................................ 305,000 323,559
Series B, 6.875%, 11/01/12 ................................................................ 615,000 658,204
De Soto Parish Environmental Improvement Revenue, International Paper Co.
Project, Series A, 7.70%, 11/01/18......................................................... 2,500,000 2,924,625
East Baton Rouge Mortgage Financing Authority, SFM,
MBS, Series A, 6.80%, 10/01/28 ............................................................ 6,275,000 6,766,835
Series C, 7.00%, 4/01/32 .................................................................. 2,365,000 2,515,083
Series D, 7.10%, 4/01/32 .................................................................. 3,560,000 3,781,468
Lafayette Public Trust Finance Authority, SFMR, Refunding, Series A, 8.50%, 11/15/12 ...... 1,442,598 1,511,454
Louisiana HFA Mortgage Revenue, Refunding,
7.375%, 9/01/13 ........................................................................... 1,315,000 1,375,779
SF, Series B-2, 5.75%, 12/01/28 ........................................................... 2,890,000 2,953,985
Louisiana Office Facility Corp., Capital Facility Bonds, Statewide Lease, 7.75%, 12/01/10 . 3,400,000 3,748,738
Louisiana Public Facilities Authority Revenue, Refunding, MBIA Insured,
Alton Ochsner Medical Foundation Project, Series B, 6.50%, 5/15/22 ........................ 3,500,000 3,769,290
Xavier University of Louisiana Project, 5.25%, 9/01/27 .................................... 3,000,000 2,938,200
New Orleans GO, Refunding, AMBAC Insured,
6.125%, 10/01/16 .......................................................................... 10,275,000 11,027,438
6.20%, 10/01/21 ........................................................................... 8,050,000 8,603,357
Pointe Coupee Parish PCR, Refunding, Gulf States Utilities Co. Project, 6.70%, 3/01/13 .... 2,200,000 2,352,350
Quachita Parish Hospital Service District No. 1 Revenue, Glenwood Regional Medical
Center, Pre-Refunded, 7.50%, 7/01/21 ...................................................... 4,000,000 4,431,000
bTerrebonne Parish Hospital Service District No. 1, Hospital Revenue, Refunding, Terrebonne
General Medical Center Project, 5.375%, 4/01/23 .......................................... 2,500,000 2,457,750
West Feliciana Parish PCR, Gulf Systems Utilities Co. Project,
7.70%, 12/01/14 ........................................................................... 2,000,000 2,236,040
7.00%, 11/01/15 ........................................................................... 3,050,000 3,360,643
8.00%, 12/01/24 ........................................................................... 41,050,000 43,879,577
----------
147,007,776
----------
BONDS (CONT.)
MAINE .9%
Bucksport Solid Waste Disposal Revenue, Champion International Corp.
Project, 6.25%, 5/01/10 ................................................................... $ 5,000,000 $ 5,277,650
Maine Financial Authority, Solid Waste Recycling Facilities Revenue,
Great Northern Paper Co., Bowater Project, 7.75%, 10/01/22 ................................ 29,300,000 32,710,227
Maine State Health and Higher Education Facilities Authority Revenue,
FSA Insured, Series B, 7.00%, 7/01/24 ..................................................... 2,445,000 2,773,461
Maine State Housing Authority, Mortgage Purchase,
Series A-5, 6.20%, 11/15/16 ............................................................... 2,500,000 2,617,100
Series C, 6.55%, 11/15/12 ................................................................. 3,700,000 3,939,501
Series C, 6.65%, 11/15/24 ................................................................. 3,500,000 3,719,415
Series D, 6.45%, 11/15/07 ................................................................. 3,540,000 3,717,142
Series D, 6.70%, 11/15/15 ................................................................. 5,800,000 6,263,942
Rumford PCR, Refunding, Boise Cascade Corp. Project, 6.625%, 7/01/20 ...................... 4,800,000 5,189,424
---------
66,207,862
---------
MARYLAND 2.0%
Gaithersburg Hospital Facilities Improvement Revenue, Shady Grove Hospital,
Refunding & Improvement, FSA Insured, 6.00%, 9/01/21 ...................................... 10,110,000 10,639,562
Series A, Pre-Refunded, 8.25%, 9/01/21 .................................................... 43,225,000 49,276,932
Maryland State Community Development Administration, Department of Housing
and Community Development,
MFHR, Mortgage Insured, Series G, 6.55%, 5/15/19 .......................................... 5,595,000 5,917,384
SF, 7.25%, 4/01/27 ........................................................................ 965,000 1,017,129
Maryland State Health and Higher Educational Facilities Authority Revenue,
Hartford Memorial Hospital and Fallston General Hospital, 8.50%, 7/01/14 ................. 4,900,000 5,003,439
Montgomery County Housing Opportunity Community, SFMR, Refunding,
Series B, 6.625%, 7/01/28 ................................................................. 6,500,000 6,866,535
Takoma Park Hospital Facilities Revenue, Refunding, Washington Adventist
Hospital, Series A, 8.25%, 9/01/21,
Sub-Series 1, Pre-Refunded................................................................. 34,140,000 38,919,941
Sub-Series 2............................................................................... 20,125,000 22,489,486
----------
140,130,408
----------
MASSACHUSETTS 2.6%
Agawam Resource Recovery Revenue, Springfield Resource Recovery Project,
Series 1986, 8.50%, 12/01/08 .............................................................. 10,340,000 10,572,960
Massachusetts Health and Educational Facilities Authority Revenue, Notre Dame
Health Care Center, Series A, 7.875%, 10/01/22 ............................................ 2,310,000 2,482,904
Massachusetts State Consolidated Loan,
Series A, 7.50%, 6/01/04 .................................................................. 7,500,000 8,622,525
Series D, Pre-Refunded, 7.00%, 7/01/07..................................................... 1,325,000 1,452,584
Massachusetts State GO, Refunding, Series B, 6.50%, 8/01/08 ............................... 5,900,000 6,754,733
Massachusetts State Health and Educational Facilities Authority Revenue,
Framingham Union Hospital, Series B, Pre-Refunded, 8.50%, 7/01/20 ......................... 9,020,000 9,979,457
Melrose-Wakefield Hospital, Series B, Refunding, ETM, 6.35%, 7/01/06 ...................... 1,100,000 1,239,953
Sisters Providence Health System, Series A, Pre-Refunded, 6.50%, 11/15/08 ................. 1,000,000 1,115,010
Sisters Providence Health System, Series A, Pre-Refunded, 6.625%, 11/15/22 ................ 12,050,000 13,484,312
Massachusetts State HFA, HDA, Series D, FGIC Insured, 6.875%, 11/15/21 .................... 5,250,000 5,657,085
Massachusetts State HFA, Housing Projects, Refunding, Series A,
6.30%, 10/01/13 ........................................................................... 25,635,000 27,145,158
6.375%, 4/01/21 ........................................................................... 24,750,000 26,240,940
Massachusetts State HFA Revenue, SF, Series 41,
6.30%, 12/01/14 ........................................................................... 6,250,000 6,690,563
6.35%, 6/01/17 ............................................................................ 5,750,000 6,124,670
Massachusetts State HFA Revenue, SFMR, Series G, 8.10%, 12/01/14 .......................... 2,410,000 2,462,273
Massachusetts State Housing Facilities Authority, FGIC Insured,
Series C, 6.90%, 11/15/21 ................................................................. 9,715,000 10,294,791
Series D, 6.80%, 11/15/12 ................................................................. 250,000 271,090
Massachusetts State Industrial Finance Agency, Health Care Facilities Revenue,
Jewish Geriatric Services, Inc., Series B,
5.375%, 5/15/17 ........................................................................... 1,965,000 1,972,251
5.50%, 5/15/27 ............................................................................ 5,000,000 5,527,700
Massachusetts State Industrial Finance Agency Revenue, D. Youville Senior Care,
5.65%, 10/01/17 ........................................................................... 2,295,000 2,327,612
5.70%, 10/01/27 ........................................................................... 7,375,000 7,479,578
Massachusetts State Port Authority Revenue, Special Facilities, Bosfuel Project,
MBIA Insured, 5.75%, 7/01/39 .............................................................. 11,750,000 11,971,840
Bonds (cont.)
Massachusetts (cont.)
Plymouth County COP, Series A, 7.00%,
4/01/12.................................................................................... $10,000,000 $ 11,076,500
4/01/22.................................................................................... 5,000,000 5,049,300
---------
185,995,789
----------
MICHIGAN 1.6%
Battle Creek Tax Increment Finance Authority, Pre-Refunded, 7.40%, 5/01/16 ................ 2,000,000 2,337,920
Belding Area Schools, Refunding, FGIC Insured, 6.10%, 5/01/26 ............................. 3,805,000 4,077,514
Climax-Scotts Community Schools, Pre-Refunded, 6.35%, 5/01/23 ............................. 2,445,000 2,717,593
Detroit GO,
Refunding, Series B, 6.375%, 4/01/06 ...................................................... 7,265,000 7,884,632
Refunding, Series B, 6.25%, 4/01/09 ....................................................... 625,000 668,513
Series A, Pre-Refunded, 6.70%, 4/01/10 .................................................... 4,550,000 5,171,712
Detroit GO, Self-Insurance, Series A, 5.70%, 5/01/02 ...................................... 2,250,000 2,325,983
Detroit Sewage Disposal Revenue, Series A, MBIA Insured, 5.50%, 7/01/20 ................... 29,200,000 29,684,720
Detroit/Wayne County Stadium Authority, FGIC Insured, 5.25%, 2/01/27 ...................... 4,235,000 4,142,423
Kalamazoo EDC Revenue, Refunding, Limited Obligation, Friendship Village,
Series A, 6.25%, 5/15/27 .................................................................. 2,000,000 2,099,120
Michigan State Building Authority Revenue, Series II, 6.25%, 10/01/20 ..................... 15,650,000 16,509,185
Michigan State HDA, Limited Obligation Revenue, Fraser
Woods Project, FSA Insured, 6.625%, 9/15/19 ............................................... 2,500,000 2,677,825
Rental Housing Revenue, Refunding, Series A, 6.60%, 4/01/12 ............................... 5,000,000 5,399,150
Michigan State HDA, SFMR, Series A,
6.45%, 12/01/14 ........................................................................... 2,000,000 2,139,540
6.875%, 6/01/23 ........................................................................... 2,870,000 3,052,676
Michigan State HFA Revenue, Presbyterian Villages Obligation Group,
5.30%, 1/01/99 ............................................................................ 200,000 201,048
5.40%, 1/01/00 ............................................................................ 310,000 313,838
5.70%, 1/01/01 ............................................................................ 310,000 316,005
5.80%, 1/01/02 ............................................................................ 355,000 364,234
5.90%, 1/01/03 ............................................................................ 325,000 336,170
6.00%, 1/01/04 ............................................................................ 390,000 405,857
6.375%, 1/01/15 ........................................................................... 275,000 295,559
6.40%, 1/01/15 ............................................................................ 1,000,000 1,058,180
6.50%, 1/01/25 ............................................................................ 3,500,000 3,702,720
Michigan State HFA Revenue, Refunding, Series A,
Henry Ford Health, 5.25%, 11/15/25 ........................................................ 5,000,000 4,858,150
Hospital Genesys Regional Medical, 5.50%, 10/01/18 ........................................ 4,500,000 4,427,685
Hospital Genesys Regional Medical, 5.50%, 10/01/27 ........................................ 5,000,000 4,866,900
---------
112,034,852
---------
MINNESOTA 2.1%
Cloquet PCR, Refunding, Potlach Corp. Projects, 5.90%, 10/01/26............................ 9,100,000 9,509,591
Dakota County Housing, RDA, Limited Annual Appropriation Tax and Revenue,
Development Housing Facilities Project,
7.25%, 1/01/99 ............................................................................ 600,000 604,644
7.25%, 1/01/00 ............................................................................ 645,000 656,333
7.25%, 1/01/01 ............................................................................ 695,000 712,361
7.50%, 1/01/06 ............................................................................ 3,930,000 4,066,096
8.00%, 1/01/07 ............................................................................ 2,140,000 2,199,342
International Falls PCR, Refunding, Boise Cascade Corp. Project, 5.65%, 12/01/22 .......... 3,500,000 3,532,375
Minneapolis CDA and St. Paul Housing RDA, Homeownership Mortgage Revenue,
Joint Housing Program, FGIC Insured, 9.875%, 12/01/15 .................................... 5,000 5,004
Minnesota Agricultural and Economic Development Board Revenue, Refunding,
Health Care System, Fairview Hospital, Series A, MBIA Insured, 5.75%, 11/15/26 ........... 25,810,000 26,983,065
Minnesota State HFA, SFM, Series D-1,
6.45%, 7/01/11 ............................................................................ 3,505,000 3,746,495
6.50%, 1/01/17 ............................................................................ 1,380,000 1,467,865
BONDS (CONT.)
MINNESOTA (CONT.)
Minnesota State Higher Educational Facilities Authority Revenue, University
Saint Thomas, Series Four-P,
5.375%, 4/01/18 ........................................................................... $ 525,000 $ 525,567
5.40%, 4/01/23 ............................................................................ 580,000 579,176
Minnetonka MFR, Rental Housing, Ridgepointe Housing Project, Phase II, 8.00%, 5/15/22 ..... 11,230,000 11,506,820
Red Wing Housing, RDA, Jordan Tower II Project, 7.00%, 1/01/19 ............................ 1,500,000 1,592,910
bRochester Health Care Facilities Revenue, Mayo Foundation, Series A, 5.50%, 11/15/27 ...... 29,000,000 28,957,370
Roseville MFR, Rental Housing, Rosepointe No. 1 Project, 8.00%, 10/01/18 .................. 13,785,000 14,144,651
St. Louis Park EDA, Tax Increment Revenue, Refunding, FGIC Insured,
Pre-Refunded, 8.40%, 9/01/09 .............................................................. 6,000,000 6,857,580
St. Paul Port Authority,
Energy Park, Tax Increment Revenue, Refunding, Pre-Refunded, 8.00%, 12/01/07 .............. 3,500,000 3,652,810
IDR, Bandana Square, Series C, 7.70%, 12/01/00 ............................................ 230,000 228,852
IDR, Bandana Square, Series C, 7.70%, 12/01/01 ............................................ 255,000 252,738
IDR, Bandana Square, Series C, 7.70%, 12/01/02 ............................................ 270,000 268,515
IDR, Bandana Square, Series C, 7.70%, 12/01/07 ............................................ 1,690,000 1,499,368
IDR, Bandana Square, Series C, 7.80%, 12/01/12 ............................................ 3,465,000 2,939,914
IDR, Brown and Bigelow Co., Series 1979-2, 7.50%, 10/01/98 ................................ 445,000 445,009
IDR, Brown and Bigelow Co., Series 1979-2, 7.50%, 10/01/99 ................................ 480,000 480,326
IDR, Brown and Bigelow Co., Series 1979-2, 7.50%, 10/01/00 ................................ 515,000 515,613
IDR, Brown and Bigelow Co., Series 1979-2, 7.50%, 10/01/01 ................................ 550,000 550,919
IDR, Brown and Bigelow Co., Series 1979-2, 7.50%, 10/01/02 ................................ 595,000 596,255
IDR, Brown and Bigelow Co., Series 1979-2, 7.50%, 10/01/03 ................................ 640,000 641,613
IDR, Brown and Bigelow Co., Series 1979-2, 7.50%, 10/01/04 ................................ 685,000 686,987
IDR, Brown and Bigelow Co., Series 1979-2, 7.50%, 10/01/05 ................................ 740,000 747,430
IDR, Brown and Bigelow Co., Series 1979-2, 7.50%, 10/01/06 ................................ 795,000 803,117
IDR, Brown and Bigelow Co., Series 1979-2, 7.50%, 10/01/07 ................................ 855,000 863,730
IDR, Brown and Bigelow Co., Series 1979-2, 7.50%, 10/01/08 ................................ 915,000 924,342
IDR, Brown and Bigelow Co., Series 1979-2, 7.50%, 10/01/09 ................................ 670,000 676,841
IDR, Refunding, Common Bond Fund, Series C, Fort Road Medical Center, 7.95%, 9/01/01 ...... 140,000 138,635
IDR, Refunding, Common Bond Fund, Series C, Fort Road Medical Center, 7.95%, 9/01/02 ...... 155,000 153,982
IDR, Refunding, Common Bond Fund, Series C, Fort Road Medical Center, 7.95%, 9/01/10 ...... 1,705,000 1,485,055
IDR, Refunding, Common Bond Fund, Series F, Ideal Security Hardware Corp., 8.00%, 12/01/01 105,000 104,041
IDR, Refunding, Common Bond Fund, Series F, Ideal Security Hardware Corp., 8.00%, 12/01/02 115,000 114,327
IDR, Refunding, Common Bond Fund, Series F, Ideal Security Hardware Corp., 8.00%, 12/01/12 1,790,000 1,546,256
Washington County Housing RDA,
Housing Development Revenue, Orleans Apartments, Project A, 8.25%, 7/01/21 ................ 3,000,000 3,072,840
Housing Development Revenue, Raymie Johnson Apartments, Pre-Refunded, 7.70%, 12/01/19 ..... 5,210,000 5,880,058
Pooled Housing and Redevelopment, 7.20%, 1/01/22 .......................................... 5,885,000 6,294,066
---------
153,210,884
---------
MISSISSIPPI .7%
Claiborne County PCR, Refunding, Systems Energy Resources, Inc.,
7.30%, 5/01/25 ............................................................................ 5,700,000 6,028,491
6.20%, 2/01/26 ............................................................................ 36,500,000 37,427,100
Mississippi Home Corp., SFR, Refunding, Senior Series A, FGIC Insured, 9.25%, 3/01/12 ..... 1,385,000 1,482,809
Mississippi State Educational Facilities Authority Revenue, Private Nonprofit
Institutions of Higher Learning, Tougaloo College Project, Series A, 6.50%, 6/01/18 ....... 2,390,000 2,453,741
47,392,141
Missouri .3%
Hazelwood IDA, MFHR, Refunding, Lakes Apartments Project, Series A, 6.10%, 9/20/26 ........ 3,000,000 3,116,580
Missouri State Health and Educational Facilities Authority Revenue,
Series B, MBIA Insured, 6.25%, 2/15/12 .................................................... 5,000,000 5,336,300
Sisters of St. Mary's Health Care Project, BIG Insured, Pre-Refunded, 7.75%, 6/01/16 ...... 3,750,000 3,835,688
St. Louis Parking Facilities Revenue, Pre-Refunded, 6.625%, 12/15/21 ...................... 6,000,000 6,662,760
West Plains IDA, Hospital Revenue, Ozarks Medical Center Project, Series A,
Pre-Refunded 8.625%, 9/15/20 .............................................................. 3,550,000 3,945,754
---------
22,897,082
---------
BONDS (CONT.)
MONTANA .8%
Forsyth County PCR,
Puget Sound Power and Light Co. Project, AMBAC Insured, 6.80%, 3/01/22 .................... $10,000,000 $ 10,860,400
Refunding, The Montana Power Co. Colstrip Project, Series A, 6.125%, 5/01/23 .............. 3,250,000 3,389,458
Refunding, The Montana Power Co., Series B, AMBAC Insured, 5.90%, 12/01/23 ................ 4,225,000 4,492,147
Refunding, The Montana Power Co., Series B, MBIA Insured, 5.90%, 12/01/23 ................. 20,385,000 21,673,944
Montana State Health Facilities Authority Revenue, Montana Developmental
Center Project, 6.40%, 6/01/19 ............................................................ 2,000,000 2,156,040
Montana State Health Facilities Authority Revenue, Sisters of Charity Leavenworth,
MBIA Insured, 5.125%, 12/01/18 ............................................................ 5,000,000 4,909,400
Montana State Housing Board, Refunding, SF Program,
Series A, 6.50%, 12/01/22 ................................................................. 2,835,000 2,986,247
Series B-1, 6.25%, 12/01/21 ............................................................... 6,720,000 7,111,306
---------
57,578,942
---------
NEBRASKA .2%
Lancaster County Hospital Authority No. 1, Hospital Revenue, Bryan Memorial Project,
Series B, MBIA Insured, 5.375%, 6/01/22 ................................................... 6,500,000 6,502,535
Nebraska Investment Financial Authority, 7.00%, 11/01/09 .................................. 5,885,000 6,003,230
---------
12,505,765
---------
NEVADA 3.4%
Churchill County Health Care Facilities Revenue, Western Health Network,
Series A, MBIA Insured, 6.25%, 1/01/14..................................................... 2,000,000 2,158,100
Clark County Airport System Improvement Revenue, Pre-Refunded, 8.25%, 7/01/15 ............. 17,500,000 17,962,525
Clark County HFC, MFHR, FHA Insured, 7.75%, 7/01/23 ....................................... 5,075,000 5,261,100
Clark County IDR,
Nevada Power Co. Project, Series A, 5.90% 11/01/32 ........................................ 2,600,000 2,626,442
Refunding, Nevada Power Co. Project, Series B, 5.90%, 10/01/30 ............................ 15,000,000 15,134,700
Refunding, Nevada Power Co. Project, Series C, 7.20%, 10/01/22 ............................ 12,500,000 13,780,875
Southwest Gas Corp., Series A, 7.30%, 9/01/27 ............................................. 18,080,000 19,976,230
Southwest Gas Corp., Series A, 6.50%, 12/01/33 ............................................ 10,000,000 10,776,700
Southwest Gas Corp., Series B, 7.50%, 9/01/32 ............................................. 62,470,000 69,244,247
Humboldt County PCR, Refunding, Sierra Pacific Power Co., Series A,
AMBAC Insured, 6.30%, 7/01/22 ............................................................. 4,500,000 4,802,220
Nevada Housing Division, Multi-Unit Housing Revenue, Issue B, 6.55%, 10/01/25.............. 5,405,000 5,828,644
Nevada Housing Division, Refunding, Issue C-2, 6.75%, 10/01/26............................. 8,190,000 8,779,926
Nevada Housing Division, SF Program,
Issue A, FI/GML, 8.30%, 10/01/19 .......................................................... 2,950,000 3,210,898
Issue A-2, FI/GML, 8.375%, 10/01/19 ....................................................... 2,605,000 2,848,698
Refunding, Program A-1, 6.25%, 10/01/26 ................................................... 3,870,000 4,086,797
Nevada State Colorado River, Series 1994, Pre-Refunded, 6.50%, 7/01/24 .................... 15,915,000 17,729,628
Nevada State Municipal Bond Bank Project No. 40-41-A, ETM, 6.375%, 12/01/17 ............... 10,275,000 11,325,516
Reno RDA, Tax Allocation,
Downtown Redevelopment Project, Series C, Pre-Refunded, 7.75%, 9/01/05 .................... 2,695,000 2,951,375
Downtown Redevelopment Project, Series D, 7.625%, 9/01/16 ................................. 4,255,000 4,617,781
Downtown Redevelopment Project, Series D, Pre-Refunded, 7.625%, 9/01/16.................... 4,035,000 4,474,290
Refunding, Series A, 6.20%, 6/01/18 ....................................................... 3,000,000 3,096,630
Washoe County Gas and Water Facilities Revenue, Refunding, AMBAC Insured, 6.30%, 12/01/14 . 5,000,000 5,378,900
Washoe County Hospital Facility Revenue, Washoe Medical Center, Inc. Project,
Series A, AMBAC Insured, 6.25%, 6/01/13 ................................................... 9,295,000 10,126,345
----------
246,178,567
----------
NEW HAMPSHIRE 1.7%
Nashua Housing Authority, MFR, Refunding, Clocktower Project,
FGIC Insured, 6.25%, 6/20/33 .............................................................. 6,176,000 6,488,876
New Hampshire Higher Education and Health Facilities Authority Revenue,
Kendal at Hanover Project, Pre-Refunded, 8.00%, 10/01/19 .................................. 9,410,000 10,090,155
New Hampshire Catholic Charities, 5.80%, 8/01/22 .......................................... 1,000,000 1,008,110
Rivier College, 5.60%, 1/01/28 ............................................................ 4,590,000 4,437,658
St. Joseph Hospital, 7.50%, 1/01/16 ....................................................... 2,300,000 2,475,490
The Hitchcock Clinic, MBIA Insured, 6.00%, 7/01/27 ........................................ 4,275,000 4,516,837
New Hampshire State HFA,
MFHR, Series 1, 7.10%, 1/01/14 ............................................................ 4,920,000 5,204,081
SF Residential, Series A, 8.50%, 7/01/14 .................................................. 3,515,000 3,627,621
BONDS (CONT.)
NEW HAMPSHIRE (CONT.)
NEW HAMPSHIRE STATE HFA, (CONT.)
SFMR, Series E, 6.75%, 7/01/19 ............................................................ $ 6,360,000 $ 6,886,099
SFMR, Series E, 6.80%, 7/01/25 ............................................................ 4,755,000 5,147,573
New Hampshire State IDA, Pollution Control Public Service Co., 5/01/21,
Project A, 7.65%........................................................................... 6,870,000 7,316,275
Project B, 7.50%........................................................................... 50,690,000 53,992,454
Project C, 7.65%........................................................................... 7,450,000 7,933,952
---------
119,125,181
----------
NEW JERSEY .3%
Mercer County Improvement Authority, Refunding, Solid Waste, 5.75%, 9/15/16 ............... 2,500,000 2,640,850
New Jersey Health Care Facilities, Financing Authority Revenue,
Cathedral Health Service, Pre-Refunded, 7.25%, 2/15/21 .................................... 3,975,000 4,349,207
Community Memorial Hospital Association, Series C, Pre-Refunded, 8.00%, 7/01/14 ........... 900,000 923,733
Refunding, Cathedral Health Services, MBIA Insured, 5.25%, 8/01/21 ........................ 7,865,000 7,812,069
Zurbrugg Memorial Hospital Issue, Series C, 8.50%, 7/01/12 ................................ 4,150,000 4,214,242
---------
19,940,101
----------
NEW MEXICO .9%
Farmington PCR, Refunding, Public Service Co. of New Mexico, Series A,
AMBAC Insured, 6.375%, 12/15/22 ........................................................... 10,435,000 11,256,548
Lordsburg PCR, Refunding, Phelps Dodge Corp. Project, 6.50%, 4/01/13 ...................... 17,000,000 18,455,880
New Mexico State Mortgage Financial Authority, SFM, Refunding, Series A, 6.85%, 7/01/10 ... 13,875,000 14,782,564
University of New Mexico Revenue, Series 1989, Pre-Refunded, 7.90%, 6/01/19 ............... 17,000,000 18,023,400
----------
62,518,392
----------
NEW YORK 16.8%
MTA Revenue,
bCommuter Facilities, Series A, 5.25%, 7/01/28 ............................................ 5,000,000 4,809,450
Commuter Facilities, Series A, FGIC Insured, 6.00%, 7/01/16 ............................... 8,950,000 9,655,260
Commuter Facilities, Series A, FGIC Insured, 6.00%, 7/01/21 ............................... 9,225,000 9,876,008
Commuter Facilities, Series A, FGIC Insured, 6.10%, 7/01/26 ............................... 11,050,000 11,916,541
Commuter Facilities, Series C-1, FGIC Insured, 5.375%, 7/01/27 ............................ 10,000,000 10,011,700
Dedicated Tax Fund, Series A, MBIA Insured, 5.25%, 4/01/26 ................................ 11,125,000 10,948,224
Refunding, Transit Facilities, Series M, 6.00%, 7/01/14 ................................... 18,210,000 18,741,004
Service Contract, Transit Facilities, Series 6, Pre-Refunded, 7.00%, 7/01/09 .............. 3,000,000 3,293,550
Transit Facilities, Refunding, Service Contract, Series 8, 5.375%, 7/01/21 ................ 15,000,000 14,697,150
Transit Facilities, Series A, FSA Insured, 6.00%, 7/01/16 ................................. 3,630,000 3,913,031
Transit Facilities, Series A, FSA Insured, 6.10%, 7/01/21 ................................. 6,260,000 6,750,909
Transit Facilities, Series C-1, 5.625%, 7/01/27 ........................................... 10,800,000 10,901,520
New Rochelle IDA, Civic Facilities Revenue, College of New Rochelle Project,
6.625%, 7/01/12............................................................................ 1,245,000 1,320,447
New York City GO,
Refunding, Series B, 6.20%, 8/15/06 ....................................................... 1,500,000 1,634,340
Refunding, Series B, 6.30%, 8/15/08 ....................................................... 26,875,000 29,066,925
Refunding, Series B, 6.375%, 8/15/10 ...................................................... 21,740,000 23,542,463
Refunding, Series E, 5.75%, 2/15/09........................................................ 8,500,000 8,867,965
Refunding, Series F, 6.00%, 8/01/13 ....................................................... 14,000,000 15,054,760
Refunding, Series F, 5.25%, 8/01/15 ....................................................... 20,580,000 20,121,683
Refunding, Series H, 6.25%, 8/01/15 ....................................................... 13,035,000 13,881,493
Refunding, Series H, 6.125%, 8/01/25 ...................................................... 65,785,000 70,207,726
Refunding, Series H, Sub-Series H-1, 6.125%, 8/01/11 ...................................... 5,000,000 5,358,500
Refunding, Series J, 6.00%, 8/01/21 ....................................................... 28,260,000 29,524,635
Series A, 6.125%, 8/01/06 ................................................................. 14,500,000 15,636,800
Series A, 6.20%, 8/01/07 .................................................................. 21,810,000 23,484,790
Series A, 6.25%, 8/01/08 .................................................................. 4,390,000 4,726,494
Series A, 7.75%, 8/15/13.................................................................... 485,000 537,676
Series A, 7.75%, 8/15/14 .................................................................. 245,000 271,215
Series A, 6.25%, 8/01/16 .................................................................. 3,280,000 3,489,986
Series A, 7.75%, 8/15/17 .................................................................. 105,000 115,999
BONDS (CONT.)
NEW YORK (CONT.)
NEW YORK CITY GO, (CONT.)
Series A, 8.00%, 8/15/20 .................................................................. $ 5,000 $ 5,574
Series A, 8.00%, 8/15/21 .................................................................. 15,000 16,650
Series A, Pre-Refunded, 8.00%, 3/15/12 .................................................... 1,000,000 1,083,030
Series A, Pre-Refunded, 8.00%, 3/15/13 .................................................... 1,850,000 2,003,606
Series A, Pre-Refunded, 7.75%, 8/15/13..................................................... 4,325,000 4,846,768
Series A, Pre-Refunded, 8.00%, 3/15/14 .................................................... 13,400,000 14,512,602
Series A, Pre-Refunded, 8.00%, 3/15/15 .................................................... 1,115,000 1,207,578
Series A, Pre-Refunded, 8.00%, 3/15/16 .................................................... 3,000,000 3,249,090
Series A, Pre-Refunded, 6.25%, 8/01/16 .................................................... 1,720,000 1,863,138
Series A, Pre-Refunded, 8.00%, 3/15/17 .................................................... 11,660,000 12,628,130
Series A, Pre-Refunded, 7.75%, 8/15/17 .................................................... 3,180,000 3,558,452
Series B, 8.00%, 6/01/98................................................................... 15,000 15,043
Series B, 8.25%, 6/01/02 .................................................................. 205,000 229,122
Series B, 7.50%, 2/01/04 .................................................................. 10,000,000 11,060,300
Series B, 8.25%, 6/01/05 .................................................................. 1,000,000 1,202,110
Series B, 7.50%, 10/01/11 ................................................................. 190,000 200,826
Series B, 7.50%, 10/01/12 ................................................................. 630,000 665,627
Series B, 6.75%, 10/01/15 ................................................................. 50,000 54,603
Series B, 6.75%, 10/01/17 ................................................................. 1,300,000 1,411,007
Series B, 7.00%, 2/01/19 .................................................................. 15,000,000 16,352,550
Series B, 6.00%, 8/15/26 .................................................................. 2,000,000 2,082,280
Series B, ETM, 8.00%, 6/01/98.............................................................. 1,420,000 1,424,317
Series B, ETM, 8.00%, 6/01/01 ............................................................. 3,000,000 3,320,670
Series B, Pre-Refunded, 8.25%, 6/01/02 .................................................... 4,295,000 4,841,324
Series B, Pre-Refunded, 7.50%, 10/01/11 ................................................... 6,810,000 7,233,650
Series B, Pre-Refunded, 7.50%, 10/01/12 ................................................... 10,355,000 10,999,185
Series B, Pre-Refunded, 6.75%, 10/01/15 ................................................... 9,250,000 10,225,968
Series B, Sub-Series B-1, Pre-Refunded, 7.00%, 8/15/16..................................... 3,000,000 3,437,460
Series B-1, Pre-Refunded, 7.30%, 8/15/11 .................................................. 8,000,000 9,272,960
Series C, 7.25%, 8/15/24 .................................................................. 3,540,000 3,820,934
Series C, Pre-Refunded, 7.25%, 8/15/24 .................................................... 1,305,000 1,423,494
Series C, Sub-Series C-1, 7.00%, 8/01/17 .................................................. 145,000 159,396
Series C, Sub-Series C-1, 7.00%, 8/01/18 .................................................. 1,705,000 1,874,272
Series C, Sub-Series C-1, Pre-Refunded, 7.00%, 8/01/17 .................................... 1,785,000 1,988,454
Series D, 8.00%, 8/01/99 .................................................................. 1,760,000 1,843,442
Series D, 7.30%, 2/01/01 .................................................................. 2,860,000 3,065,434
Series D, 8.25%, 8/01/13 .................................................................. 145,000 162,758
Series D, 8.25%, 8/01/14 .................................................................. 85,000 95,273
Series D, 7.625%, 2/01/15 ................................................................. 700,000 777,693
Series D, 7.50%, 2/01/16 .................................................................. 255,000 282,407
Series D, 8.00%, 8/01/16 .................................................................. 50,000 55,703
Series D, 7.50%, 2/01/17 .................................................................. 865,000 956,093
Series D, 8.00%, 8/01/17 .................................................................. 100,000 111,374
Series D, 8.00%, 8/01/18 .................................................................. 50,000 55,687
Series D, 8.00%, 8/01/19 .................................................................. 30,000 33,412
Series D, 6.00%, 2/15/25 .................................................................. 31,300,000 32,605,210
Series D, ETM, 8.00%, 8/01/99 ............................................................. 240,000 251,765
Series D, ETM, 7.30%, 2/01/01 ............................................................. 2,140,000 2,304,010
Series D, Group B, 8.25%, 8/01/11.......................................................... 160,000 179,286
Series D, Group B, 8.25%, 8/01/12 ......................................................... 245,000 274,611
Series D, Pre-Refunded, 8.25%, 8/01/12 .................................................... 10,880,000 12,325,190
Series D, Pre-Refunded, 8.25%, 8/01/13 .................................................... 7,605,000 8,615,172
Series D, Pre-Refunded, 8.25%, 8/01/14 .................................................... 4,255,000 4,813,256
Series D, Pre-Refunded, 7.625%, 2/01/15 ................................................... 8,300,000 9,333,848
Series D, Pre-Refunded, 7.50%, 2/01/16 .................................................... 4,745,000 5,315,776
Series D, Pre-Refunded, 7.50%, 2/01/17 .................................................... 11,135,000 12,474,429
BONDS (CONT.)
NEW YORK (CONT.)
NEW YORK CITY GO, (CONT.)
Series E, 6.50%, 12/01/12 ................................................................. $ 135,000 $ 137,248
Series E, 6.00%, 8/01/26 .................................................................. 3,000,000 3,137,460
Series E, Pre-Refunded, 6.50%, 12/01/12 ................................................... 2,475,000 2,516,927
Series F, 8.20%, 11/15/04 ................................................................. 835,000 941,346
Series F, 6.50%, 2/15/07 .................................................................. 4,185,000 4,574,163
Series F, 6.50%, 2/15/08 .................................................................. 1,220,000 1,339,353
Series F, 6.60%, 2/15/10 .................................................................. 10,070,000 11,051,523
Series F, 8.25%, 11/15/15 ................................................................. 160,000 180,747
Series F, 8.25%, 11/15/17 ................................................................. 200,000 226,004
Series F, Pre-Refunded, 8.20%, 11/15/04 ................................................... 4,500,000 5,134,725
Series F, Pre-Refunded, 6.50%, 2/15/07 .................................................... 3,865,000 4,328,491
Series F, Pre-Refunded, 6.50%, 2/15/08 .................................................... 6,320,000 7,077,894
Series F, Pre-Refunded, 6.60%, 2/15/10 .................................................... 5,930,000 6,675,342
Series F, Pre-Refunded, 8.25%, 11/15/15 ................................................... 1,840,000 2,102,513
Series F, Pre-Refunded, 8.25%, 11/15/17 ................................................... 2,300,000 2,628,141
Series G, 6.00%, 10/15/26 ................................................................. 15,335,000 16,018,941
Series H, 7.10%, 2/01/12 .................................................................. 330,000 360,637
Series H, 7.20%, 2/01/14 .................................................................. 1,040,000 1,140,454
Series H, 7.00%, 2/01/16 .................................................................. 340,000 370,780
Series H, Pre-Refunded, 7.10%, 2/01/12 .................................................... 2,670,000 2,949,816
Series H, Pre-Refunded, 7.20%, 2/01/14 .................................................... 8,960,000 9,929,562
Series H, Pre-Refunded, 7.00%, 2/01/16 .................................................... 3,660,000 4,031,087
Series H, Sub-Series H-1, 6.125%, 8/01/09 ................................................. 11,750,000 12,540,305
Series I, 6.25%, 4/15/13 .................................................................. 36,610,000 39,208,578
Series I, 6.25%, 4/15/27 .................................................................. 7,000,000 7,496,860
New York City Health and Hospital Authority Local Government Revenue, Series A,
6.00%, 2/15/07 ............................................................................ 5,010,000 5,273,977
6.30%, 2/15/20 ............................................................................ 18,235,000 19,112,104
New York City IDA, Industrial Development Revenue, Brooklyn Navy Yard Cogeneration Partners,
5.65%, 10/01/28 ........................................................................... 5,000,000 4,999,650
5.75%, 10/01/36 ........................................................................... 5,750,000 5,800,428
New York City Municipal Water Finance Authority, Water and Sewer System Revenue,
Series A, 7.10%, 6/15/12 .................................................................. 2,455,000 2,680,516
Series A, 7.00%, 6/15/15 .................................................................. 4,980,000 5,407,931
Series B, 5.875%, 6/15/26 ................................................................. 6,500,000 6,819,540
Series B, 5.75%, 6/15/29 .................................................................. 15,000,000 15,617,400
Series B, MBIA Insured, 5.75%, 6/15/26 .................................................... 3,000,000 3,160,620
Series B, Pre-Refunded, 7.00%, 6/15/19 .................................................... 2,965,000 3,019,941
New York State Dormitory Authority Lease Revenue, State University Dormitory
Facilities, 5.50%, 7/01/27 ................................................................ 8,915,000 9,016,720
New York State Dormitory Authority Revenue,
City University General Resources, Series 2, MBIA Insured, 6.25%, 7/01/19 ................. 4,000,000 4,240,080
City University System Consolidation, Series 1, 5.375%, 7/01/24 ........................... 23,000,000 22,601,870
City University System Consolidation, Third Issue-1, 5.25%, 7/01/25 ....................... 10,000,000 9,608,000
City University System, Third Generation Resources, Series 2, 6.00%, 7/01/20 .............. 16,860,000 17,601,166
Mental Health Services Facilities, Series A, 6.00%, 8/15/17 ............................... 18,000,000 19,037,880
Mental Health Services Facilities, Series A, 5.75%, 2/15/27 ............................... 5,000,000 5,120,550
Our Lady Nursing Home, FHA Insured, 5.90%, 8/01/20 ........................................ 6,750,000 7,077,375
Refunding, City University System, Third Generation Resources, Series 2, 6.00%, 7/01/26 ... 5,500,000 5,728,690
Refunding, City University System, Third Generation Resources, Series 2,
Pre-Refunded, 6.00%, 7/01/26 .............................................................. 14,150,000 15,678,766
Refunding, State University Educational Facilities, Series B, 7.375%, 5/15/14 ............. 4,240,000 4,556,262
Refunding, State University Educational Facilities, Series B, 7.00%, 5/15/16 .............. 2,000,000 2,129,160
Saint Barnabas Hospital, 5.35%, 8/01/17 ................................................... 5,500,000 5,533,990
Second Hospital, Interfaith Medical Center, Series D, 5.30%, 2/15/19 ...................... 5,000,000 4,852,500
Second Hospital, Interfaith Medical Center, Series D, 5.40%, 2/15/28 ...................... 8,000,000 7,814,000
State University Educational Facilities, Pre-Refunded, 6.00%, 5/15/18 ..................... 5,000,000 5,534,750
BONDS (CONT.)
NEW YORK (CONT.)
New York State Energy Research and Development Authority, Electric Facilities Revenue, Series A,
Long Island Light, 7.15%, 6/01/20 ......................................................... $17,500,000 $ 19,127,500
Long Island Light, 7.15%, 2/01/22 ......................................................... 1,500,000 1,639,500
Refunding, Consolidated Edison Co., Inc., 6.10%, 8/15/20 .................................. 8,500,000 9,084,715
New York State HFA, Refunding, Health Facilities, New York City, Series A, 5.90%, 5/01/05 . 14,070,000 14,877,055
New York State HFA, Refunding, Housing Project Mortgage, Series A, FSA Insured,
6.10%, 11/01/15 ........................................................................... 5,475,000 5,798,189
6.125%, 11/01/20 .......................................................................... 4,230,000 4,471,025
New York State HFA, Service Contract Revenue,
Refunding, Series C, 5.875%, 9/15/14 ...................................................... 4,675,000 4,828,106
Refunding, Series C, 6.125%, 3/15/20 ...................................................... 25,500,000 26,561,565
Refunding, Series C, 5.50%, 9/15/22 ....................................................... 17,505,000 17,503,600
Series A, 6.375%, 9/15/14 ................................................................. 25,000 26,890
Series A, 6.375%, 9/15/16 ................................................................. 3,785,000 4,048,739
Series A, Pre-Refunded, 6.375%, 9/15/14 ................................................... 3,130,000 3,507,697
Series A, Pre-Refunded, 6.50%, 3/15/25 .................................................... 10,000,000 11,384,800
New York State Medical Care Facilities, Financial Agency Revenue,
Hospital and Nursing Home, FSA Mortgage Insured, 6.50%, 2/15/34 ........................... 6,980,000 7,494,635
Hospital Mortgage, Series A, AMBAC Insured, Pre-Refunded, 6.50%, 8/15/29 .................. 7,600,000 8,591,192
Refunding, Hospital and Nursing Home, FSA Mortgage Insured, 6.40%, 8/15/14 ................ 10,800,000 11,824,704
The Hospital for Special Surgery, Series A, 6.375%, 8/15/24 ............................... 12,500,000 13,513,875
bNew York State Tollway Authority, General Revenue, Series D, 5.375%, 1/01/27 .............. 5,000,000 4,981,450
New York State Tollway Authority, Service Contract Revenue, Local Highway and Bridge,
6.25%, 4/01/14 ............................................................................ 11,600,000 12,433,112
5.75%, 4/01/16 ............................................................................ 13,200,000 13,601,148
New York State Urban Development Corp., Correctional Capital Facilities,
Series 5, 6.10%, 1/01/12................................................................... 7,685,000 8,123,122
New York State Urban Development Corp. Revenue, Youth Facilities, 6.00%, 4/01/17 .......... 11,720,000 12,332,604
Warren and Washington Counties IDA Revenue, Refunding, Adirondack Resource
Recovery Project, Series A, 7.90%, 12/15/07 ............................................... 4,490,000 4,669,465
-------------
1,201,107,694
-------------
NORTH CAROLINA 2.6%
Charlotte-Mecklenberg Hospital Authority, Health Care System Revenue,
5.90%, 1/15/16 ............................................................................ 7,010,000 7,428,567
Pre-Refunded, 5.90%, 1/15/16 .............................................................. 2,890,000 3,171,631
Series A, 5.875%, 1/15/26 ................................................................. 5,000,000 5,226,850
North Carolina Eastern Municipal Power Agency, Power System Revenue,
Refunding, Series A, 6.50%, 1/01/17 ....................................................... 25,700,000 27,284,919
Refunding, Series A, 6.50%, 1/01/24 ....................................................... 3,250,000 3,284,320
Refunding, Series B, 6.25%, 1/01/12 ....................................................... 6,875,000 7,119,819
Refunding, Series B, 6.00%, 1/01/22 ....................................................... 1,250,000 1,314,988
Refunding, Series B, 6.25%, 1/01/23 ....................................................... 39,030,000 42,395,557
Refunding, Series B, FGIC Insured, 6.25%, 1/01/23 ......................................... 4,000,000 4,315,440
Refunding, Series B, MBIA Insured, 5.80%, 1/01/16 ......................................... 11,175,000 11,811,081
Refunding, Series B, MBIA Insured, 5.875%, 1/01/21 ........................................ 13,325,000 14,052,545
Series B, 6.00%, 1/01/05 .................................................................. 1,355,000 1,430,799
Series D, 5.875%, 1/01/13 ................................................................. 7,440,000 7,613,873
Series G, 5.75%, 12/01/16 ................................................................. 14,420,000 14,586,407
North Carolina Municipal Power Agency No. 1, Catawba Electric Revenue, Refunding,
5.75%, 1/01/15 ............................................................................ 12,435,000 12,479,144
Series 1982, 6.25%, 1/01/17 ............................................................... 15,620,000 16,495,501
Wake County IPC, Financing Authority Revenue, Carolina Power and Light, 6.90%, 4/01/09 .... 5,000,000 5,323,550
---------
185,334,991
---------
NORTH DAKOTA .4%
Dickinson Health Care Facilities Revenue, BHS Long-Term Care, Inc., 7.625%, 2/15/20 ....... 7,750,000 8,177,258
Ellendale MFHR, Ellendale Manor Apartments Project, 9.75%, 7/01/16 ........................ 310,000 310,831
BONDS (CONT.)
NORTH DAKOTA (CONT.)
Mercer County PCR, Basin Electric Power Corp.,
Second Series, AMBAC Insured, 6.05%, 1/01/19 .............................................. $ 9,130,000 $ 9,835,475
Series E, 7.00%, 1/01/19 .................................................................. 11,540,000 12,050,299
Wahpeton MFHR, Evergreen Apartments Project, 9.75%, 7/01/16 ............................... 757,000 759,104
---------
31,132,967
---------
OHIO 1.6%
Dayton Special Facilities Revenue, Refunding, Emery Air Freight Corp.,
Emery Worldwide Air, Inc., Series E, 6.05%, 10/01/09 ...................................... 4,000,000 4,320,280
Emery Worldwide Air, Inc., Series F, 6.05%, 10/01/09 ...................................... 2,750,000 2,970,193
bSeries A, 5.625%, 2/01/18 ................................................................ 6,000,000 6,120,900
Franklin County Convention Facilities Authority, Tax and Lease Revenue
Anticipation Bonds, MBIA Insured, 5.00%, 12/01/27 ......................................... 7,500,000 7,165,500
Franklin County Nursing Home, First Mortgage Revenue, Volunteers of
America Care Facilities Project, 8.75%, 11/01/18 .......................................... 2,775,000 2,862,218
Montgomery County Health Systems Revenue,
Franciscan Facility, Series B-2, 8.10%, 7/01/01 ........................................... 1,800,000 1,916,010
Franciscan Medical Center-Dayton, 5.50%, 7/01/18 .......................................... 1,995,000 1,973,274
Refunding, Franciscan at Saint Leonard, 5.50%, 7/01/18 .................................... 3,625,000 3,589,874
Series B-2, 8.10%, 7/01/18 ................................................................ 3,705,000 4,416,323
Series B-2, Pre-Refunded, 8.10%, 7/01/18 .................................................. 8,295,000 10,364,520
Montgomery County Hospital Revenue, Refunding, Grandview Hospital and Medical Center,
5.50%, 12/01/10 ........................................................................... 1,300,000 1,322,217
5.60%, 12/01/11 ........................................................................... 1,000,000 1,021,310
5.65%, 12/01/12 ........................................................................... 925,000 947,061
Ohio HFA, Residential Mortgage Revenue,
Series A-1, GNMA Secured, 5.40%, 9/01/29 .................................................. 5,870,000 5,825,623
Series C, 5.75%, 9/01/28 .................................................................. 7,760,000 7,940,886
Ohio State Air Quality Development Authority Revenue,
Refunding, Dayton Power and Light Co. Project, 6.10%, 9/01/30 ............................. 12,000,000 12,807,000
Toledo Edison, Series B, 8.00%, 5/15/19 ................................................... 6,325,000 6,769,142
Ohio State EDR, Good Samaritan Medical Center, Series 1990-3, 7.875%, 12/01/10 ............ 1,550,000 1,644,457
Ohio State Solid Waste Disposal Revenue, USG Corp. Project, 5.65%, 3/01/33 ................ 5,330,000 5,329,467
Ohio State Water Development Authority Revenue, Refunding, Dayton Power,
Series A, 6.40%, 8/15/27................................................................... 3,250,000 3,506,945
Ohio State Water Development Facilities Authority, PCR, Toledo Edison,
Series A, 8.00%, 5/15/19................................................................... 10,000,000 10,702,200
University of Cincinnati COP, University Center Project, MBIA Insured, 5.125%, 6/01/24 .... 10,500,000 10,227,000
-----------
113,742,400
-----------
OKLAHOMA 1.2%
Canadian County HFA, SFMR, Series A,
7.70%, 9/01/05 ............................................................................ 1,390,000 1,452,550
7.80%, 9/01/12 ............................................................................ 2,905,000 3,041,884
Oklahoma State Turnpike System Authority, First Senior Revenue,
7.875%, 1/01/21 ........................................................................... 610,000 636,285
Pre-Refunded, 7.875%, 1/01/21 ............................................................. 19,090,000 19,959,931
Stillwater Medical Center Authority Revenue,
Series A, 6.10%, 5/15/09 .................................................................. 3,440,000 3,600,201
Series B, 6.35%, 5/15/12 .................................................................. 1,235,000 1,310,409
Series B, 6.50%, 5/15/19 .................................................................. 3,390,000 3,635,538
Tulsa County Home Financial Authority, Mortgage Revenue, Series D,
GNMA Insured, 6.95%, 12/01/22 ............................................................. 530,000 561,381
Tulsa County Municipal Airport Revenue, American Airlines, Inc.,
7.35%, 12/01/11 ........................................................................... 4,000,000 4,454,000
6.25%, 6/01/20............................................................................. 18,530,000 19,674,228
7.375%, 12/01/20 .......................................................................... 11,000,000 11,896,940
Tulsa County Parking Authority, Series B,
6.90%, 12/01/07 ........................................................................... 3,000,000 3,298,830
7.00%, 12/01/14 ........................................................................... 5,500,000 5,970,910
Tulsa Housing Assistance Corp. Revenue, First Lien, Refunding, 6.80%, 7/01/11 ............. 2,740,000 2,912,072
BONDS (CONT.)
OKLAHOMA (CONT.)
Tulsa Industrial Authority, Hospital Revenue, St. John Medical Center
Project, Series A, 6.25%, 2/15/14 ......................................................... $ 2,000,000 $ 2,147,720
Valley View Hospital Authority Revenue, Refunding, Valley View
Regional Medical Center, 6.00%, 8/15/14 ................................................... 4,000,000 4,117,040
---------
88,669,919
---------
OREGON .2%
Oregon State Department of Administrative Services COP, Series A,
AMBAC Insured, 5.80%, 5/01/24.............................................................. 5,000,000 5,291,300
Oregon State EDR, Georgia Pacific Corp. Project,
Refunding, Series 183, 5.70%, 12/01/25 .................................................... 3,500,000 3,520,440
Series CLVII, 6.35%, 8/01/25 .............................................................. 5,500,000 5,790,840
---------
14,602,580
----------
PENNSYLVANIA 3.5%
Allegheny County Hospital Development Authority Revenue, Refunding, University
of Pittsburgh Health Center, Series A, MBIA Insured, 5.625%, 4/01/27 ..................... 6,550,000 6,707,855
Allegheny County IDA Revenue, Environmental Improvement, 6.70%, 12/01/20 .................. 5,250,000 5,692,103
Beaver County IDA, PCR, Ohio Edison Co., Beaver Valley Project, Series A, 7.75%, 9/01/24 .. 14,250,000 15,056,123
Cambria County HDA, Hospital Revenue, Conemaugh Valley Memorial Hospital, Refunding, Series B,
6.30%, 7/01/08 ............................................................................ 9,600,000 10,319,904
6.375%, 7/01/18 ........................................................................... 10,740,000 11,399,436
Pre-Refunded, 8.875%, 7/01/18 ............................................................. 3,000,000 3,082,890
Delaware County IDA Revenue, Refunding, Philadelphia Electric,
Series 1991, 7.375%, 4/01/21 .............................................................. 6,500,000 7,052,500
Delaware River Port Authority Revenue, Pennsylvania and New Jersey,
Series 1995, FGIC Insured, 5.50%, 1/01/26 ................................................. 5,000,000 5,127,600
Delaware Valley Regional Finance Authority, Local Government Revenue,
Series B, AMBAC Insured, 5.60%, 7/01/17 ................................................... 5,000,000 5,315,650
Lancaster County Solid Waste Management Authority, Resource Recovery
System Revenue, Series A, Pre-Refunded, 8.50%, 12/15/10 ................................... 22,500,000 23,059,350
Lehigh County IDA, PCR, Refunding, Pennsylvania Power and Light Co. Project,
Series A, MBIA Insured, 6.15%, 8/01/29 .................................................... 4,000,000 4,324,480
Montgomery County Higher Education and Health Authority, Hospital Revenue,
Pre-Refunded, Jeanes Health System Project, 8.75%, 7/01/20 ............................... 5,500,000 6,106,980
Pennsylvania EDA, Financing Authority Revenue, Macmillan, L.P. Project, 7.60%, 12/01/20 ... 5,000,000 5,445,650
Pennsylvania EDA, Financing Resources Recovery Revenue,
Colver Project, Series D, 7.125%, 12/01/15 ................................................ 13,500,000 15,011,190
Pennsylvania State Financial Authority Revenue, Refunding, Municipal
Capital Improvements Program, 6.60%, 11/01/09 ............................................. 33,280,000 36,450,253
Pennsylvania State HFA,
Refunding, Rental Housing, FGIC Insured, 6.40%, 7/01/12 ................................... 10,590,000 11,299,318
SFM, Series 1991, 7.15%, 4/01/15 .......................................................... 3,635,000 3,851,828
Pennsylvania State Higher Educational Facilities Authority, College and University Revenues,
Lycoming College, Pre-Refunded, 8.375%, 10/01/18 ......................................... 2,000,000 2,075,680
Pennsylvania State Pooled Finance Authority, Lease Revenue, Capital Improvement,
Series B, MBIA Insured, 8.00%, 11/01/09 ................................................... 4,445,000 4,656,626
Philadelphia Gas Works Revenue,
Series 13, Pre-Refunded, 7.70%, 6/15/21 ................................................... 2,850,000 3,179,090
Series A, 6.375%, 7/01/26 ................................................................. 3,950,000 4,147,026
Philadelphia GO, Refunding, Series A, 11.50%,
8/01/98 ................................................................................... 1,545,000 1,570,894
8/01/99 ................................................................................... 2,400,000 2,595,000
8/01/00 ................................................................................... 1,000,000 1,140,230
Philadelphia Hospital and Higher Education Facilities Authority Revenue,
Albert Einstein Medical Center, 7.50%, 4/01/99 ............................................ 3,955,000 4,057,790
Mortgage, North Philadelphia Health Systems, Series A, FHA Secured, 5.30%, 1/01/18 ........ 3,330,000 3,281,782
Mortgage, North Philadelphia Health Systems, Series A, FHA Secured, 5.35%, 1/01/23 ........ 5,780,000 5,686,248
Mortgage, North Philadelphia Health Systems, Series A, FHA Secured, 5.375%, 1/01/28 ....... 3,765,000 3,701,635
Philadelphia Hospitals and Higher Education Facilities Authority Revenue,
Temple University Hospital, 5.875%, 11/15/23 .............................................. 5,000,000 5,128,150
Philadelphia Housing RDA Revenue, Sub-Series 2-B, 8.625%, 8/01/26 ......................... 3,690,000 3,741,918
Philadelphia Municipal Authority, Gas Works Lease Revenue, 7.50%, 5/01/01 ................. 1,000,000 1,047,930
Philadelphia School District, Series B, AMBAC Insured, 5.375%, 4/01/19 .................... 7,000,000 7,016,800
Philadelphia Water and Sewer Revenue, Series 10, ETM, 7.35%, 9/01/04 ...................... 10,790,000 12,198,095
South Fork Municipal Authority, Hospital Revenue, Conemaugh Valley Memorial
Hospital Project, Series A, MBIA Insured, 5.75%, 7/01/26 ................................. 5,000,000 5,198,450
Westmoreland County IDA Revenue, Refunding, Citizens General Hospital Project,
Series A, 8.25%, 7/01/13 .................................................................. 3,000,000 3,044,670
---------
248,771,124
---------
BONDS (CONT.)
PUERTO RICO 1.0%
Puerto Rico Commonwealth Highway and Transportation Authority Revenue, Series Y, 7/01/36,
5.00%...................................................................................... $59,000,000 $ 55,377,990
5.50%...................................................................................... 7,000,000 7,235,900
Puerto Rico Commonwealth Urban Renewal and Housing Corp., Refunding, 7.875%, 10/01/04 ..... 3,200,000 3,413,120
Puerto Rico Electric Power Authority Revenue, Refunding, Pre-Refunded,
Series M, 8.00%, 7/01/08................................................................... 2,000,000 2,053,240
Puerto Rico Municipal Finance Agency, Series A, Pre-Refunded, 8.25%, 7/01/08 .............. 5,000,000 5,134,600
---------
73,214,850
---------
RHODE ISLAND 1.4%
Providence Special Obligation Tax Increment, Series A, 7.65%, 6/01/16 ..................... 9,900,000 11,124,729
Rhode Island Clean Water Financial Agency Revenue, Drinking Water Providence,
Series A, AMBAC Insured, 6.70%, 1/01/15 ................................................... 2,200,000 2,446,312
Rhode Island Housing and Mortgage Finance Corp., Homeownership Opportunity,
Series 2, 7.75%, 4/01/22................................................................... 1,895,000 1,981,981
Series 10-A, 6.50%, 10/01/22 .............................................................. 20,200,000 21,427,958
Series 10-A, 6.50%, 4/01/27 ............................................................... 13,085,000 13,859,239
Series 13, 6.70%, 10/01/15 ................................................................ 7,400,000 7,986,376
Series 13, 6.85%, 4/01/27 ................................................................. 3,705,000 4,007,328
Series 15-A, 6.85%, 10/01/24 .............................................................. 15,000,000 16,076,700
Series 16-A, 6.375%, 10/01/26.............................................................. 2,720,000 2,877,787
Series 17-A, 6.25%, 4/01/17 ............................................................... 2,320,000 2,442,728
Rhode Island Port Authority and Economic Development Corp., Refunding,
Shepard Building Project, Series B, AMBAC Insured,
Pre-Refunded, 6.75%, 6/01/25 ............................................................. 3,000,000 3,400,830
Rhode Island State Health and Educational Building Corp. Revenue,
Health Facilities, Tockwotton Home, Pre-Refunded, 7.25%, 4/15/17 .......................... 3,000,000 3,351,150
Roger William Realty, Elmhurst Nursing Home, FHA Insured, 7.50%, 8/01/29 .................. 940,000 978,634
St. Antoine Residence, 6.70%, 11/15/12 .................................................... 2,320,000 2,515,553
St. Antoine Residence, 6.75%, 11/15/18 .................................................... 2,750,000 2,973,163
---------
97,450,468
---------
SOUTH CAROLINA 1.1%
Berkeley County School District COP, Berkeley School Facilities Group, Inc.,
AMBAC Insured, 6.30%, 2/01/16 ............................................................. 1,800,000 1,952,784
Piedmont Municipal Power Agency, South Carolina Electric Revenue, Refunding,
6.55%, 1/01/16 ............................................................................ 18,115,000 18,154,310
6.60%, 1/01/21 ............................................................................ 25,505,000 25,562,131
Series A, 5.75%, 1/01/24 .................................................................. 3,150,000 3,149,685
Series A, AMBAC Insured, 5.75%, 1/01/24 ................................................... 5,050,000 5,051,768
Richland County PCR, Refunding, Union Camp Corp. Project, Series C, 6.55%, 11/01/20 ....... 3,000,000 3,245,550
South Carolina State Housing, Finance and Development Authority, Mortgage
Revenue, Series A-2, AMBAC Insured, 5.80%, 7/01/27 ........................................ 6,405,000 6,669,078
South Carolina State Public Service Authority Revenue, Refunding, Series A,
AMBAC Insured 6.375%, 7/01/21 ............................................................. 12,765,000 13,558,728
Spartanburg County Health Services District, Inc., Hospital Revenue, Series A,
MBIA Insured, 5.50%, 4/15/27 .............................................................. 3,000,000 3,034,320
---------
80,378,354
---------
SOUTH DAKOTA .4%
Lawrence County PCR, Refunding, Black Hills Power and Light Co. Project, 6.70%, 6/01/10 ... 5,000,000 5,425,950
South Dakota State HDA, Homeownership Mortgage,
Series A, 6.30%, 5/01/17 .................................................................. 4,130,000 4,355,828
Series A, 7.15%, 5/01/27 .................................................................. 10,580,000 11,165,920
Series B, 7.10%, 5/01/17 .................................................................. 3,115,000 3,292,088
Series D, 6.65%, 5/01/14 .................................................................. 3,480,000 3,771,102
Series G, 7.125%, 5/01/14 ................................................................. 3,435,000 3,769,844
---------
31,780,732
---------
TENNESSEE .8%
Franklin IDB, MFHR, Refunding, Landings Apartment Project, Series
A, FSA Insured, 6.00%, 10/01/26 ........................................................... 2,000,000 2,091,200
Hamilton County IDB, MFHR, Patten Towers Apartments, Series A,
6.125%, 8/01/05 ........................................................................... 2,515,000 2,619,750
6.30%, 8/01/07 ............................................................................ 1,000,000 1,048,370
BONDS (CONT.)
TENNESSEE (CONT.)
Knox County Health, Educational and Housing Facilities Board, MFHR, GNMA Secured,
East Towne Village Project, 8.20%, 7/01/28 ................................................ $ 4,750,000 $ 4,930,833
Memphis-Shelby County Airport Authority, Special Facilities and Project
Revenue, Federal Express Corp.,
7.875%, 9/01/09 ........................................................................... 14,690,000 16,431,940
6.75%, 9/01/12 ............................................................................ 6,520,000 7,111,234
Metropolitan Government Nashville & Davidson County, Health and Educational
Board Revenue, Multi Modal Health Facility,
Asset Guaranty Insurance Co. Insured, 5.50%, 5/01/23 ..................................... 995,000 1,002,612
Metropolitan Nashville Airport Authority Revenue, Series C, FGIC Insured, 6.60%, 7/01/15 .. 1,940,000 2,091,572
Mount Pleasant IDR, PCR, Stauffer Chemical Co. Project, 8.00%, 12/01/12 ................... 1,990,000 2,164,523
Nashville and Davidson County Revenue, IDB, Refunding & Improvement,
Osco Treatment, Inc., 6.00%, 5/01/03....................................................... 5,000,000 5,209,350
bShelby County Health Educational and Housing Facility Board Hospital Revenue,
MBIA Insured, 5.00%, 4/01/18 .............................................................. 5,000,000 4,810,650
Tennessee HDA, Homeownership Program,
Series 1992, 6.80%, 7/01/17 ............................................................... 2,360,000 2,502,780
Series P, 7.70%, 7/01/16 .................................................................. 4,580,000 4,734,438
Tennessee State Local Development Authority Revenue, Community Provider
Pooled Loan Program, 6.45%, 10/01/14 ...................................................... 2,275,000 2,451,790
---------
59,201,042
---------
TEXAS 6.7%
Austin Combined Utility System Revenue, Series A, Pre-Refunded, 8.00%, 11/15/16 ........... 18,100,000 19,981,857
Austin Utility System Revenue, Refunding, FGIC Insured, 6.25%, 5/15/16 .................... 11,310,000 12,259,361
Bexar County Health Facilities Development Corp. Revenue, FSAInsured,
Incarnate Word Facility, 6.00%, 11/15/15................................................... 4,500,000 4,806,045
Refunding, Incarnate Word Health Services, 6.10%, 11/15/23 ................................ 8,300,000 8,926,484
Bexar County HFC, MFHR, Sunpark Apartments Project, 6.875%, 12/01/12 ...................... 1,725,000 1,800,745
Bexar Metropolitan Water District, Water Works Systems Revenue, Refunding,
MBIA Insured, 5.875%, 5/01/22.............................................................. 5,000,000 5,225,250
Brazos River Authority, Collateralized, PCR, Texas Utilities Electric Co. Project, Series A,
8.25%, 1/01/19 ............................................................................ 15,000,000 15,650,250
bRefunding, AMBAC Insured, 5.55%, 5/01/33 ................................................. 23,965,000 24,027,069
Brazos River Authority Revenue, Refunding, Houston Industries Inc. Project,
Series C, AMBAC Insured, 5.125%, 5/01/19 ................................................. 12,000,000 11,765,520
Dallas-Fort Worth International Airport Facilities, Improvement Corp.
Revenue, American Airlines, Inc.,
8.00%, 11/01/24 ........................................................................... 99,000,000 107,863,470
Refunding, 6.00%, 11/01/14 ................................................................ 29,400,000 31,188,990
El Paso HFC, SFMR, Series A, 8.75%, 10/01/11 .............................................. 4,325,000 4,672,990
Fort Worth Higher Education Financial Corp., Higher Education Revenue,
Texas Christian University Project, 5.00%, 3/15/27 ........................................ 4,000,000 3,761,520
Grand Prairie Health Facilities Development Corp., Hospital Revenue, Refunding,
Dallas/Ft. Worth Medical Center Project, AMBAC Insured, 6.875%, 11/01/10 .................. 2,700,000 3,066,714
Gulf Coast Waste Disposal Authority, Environmental Improvement Revenue,
Refunding, UXS Corp. Projects, 5.50%, 9/01/17 ............................................. 3,250,000 3,242,038
Harris County IDR, Marine Terminal Revenue, Refunding, 6.95%, 2/01/22 ..................... 20,250,000 22,010,130
Harris County Toll Road Revenue, Multiple Mode, Senior Lien, Pre-Refunded, Series D,
8.25%, 8/15/07 ............................................................................ 4,000,000 4,167,480
8.30%, 8/15/17 ............................................................................ 5,000,000 5,210,000
Houston Water and Sewer System Revenue, Refunding,
Junior Lien, Series A, MBIA Insured, Pre-Refunded, 6.20%, 12/01/20 ........................ 22,500,000 24,854,625
Series B, 6.375%, 12/01/14 ................................................................ 21,000,000 22,447,740
Joshua ISD, Refunding, Series B, 6.125%, 2/15/26 .......................................... 20,000 20,201
Lower Neches Valley Authority IDC Revenue, Refunding,
Mobil Oil Refunding Corp., 5.55%, 3/01/33 ................................................. 2,500,000 2,499,775
Lubbock HFC, SFMR, Refunding, MBS Program, Series A, GNMA Secured, 6.125%, 12/01/17 ....... 1,000,000 1,053,380
Matagorda County Navigation District No. 1, PCR, Collateralized, Refunding,
Central Power and Light Co. Project, MBIA Insured, 6.10%, 7/01/28 ......................... 25,300,000 26,479,233
Houston Lighting and Power Co., 6.00%, 7/01/28 ............................................ 19,200,000 20,013,312
Houston Lighting and Power Co., Series A, AMBAC Insured, 6.70%, 3/01/27 ................... 5,500,000 5,934,170
Matagorda County Navigation District No. 1 Revenue, Refunding, Houston
Industries Inc. Project, Series A, MBIA Insured, 5.25%,
11/01/29 ................................................................................. 7,500,000 7,199,100
Mesquite HFC, SFMR, Series 1983, 10.75%, 9/01/14 .......................................... 1,010,000 1,042,704
North Central Health Facilities Development Corp. Revenue, Health Resources
Systems, Series B, MBIA Insured, 5.125%, 2/15/22 .......................................... 5,985,000 5,796,652
Nueces River Authority Environmental Improvement Revenue, Refunding,
Asarco Inc. Project, 5.60%, 1/01/27 ....................................................... 4,000,000 4,006,440
BONDS (CONT.)
TEXAS (CONT.)
Port Corpus Christi Industrial Development Corp. Revenue, Refunding, Valero, 5.40%, 4/01/18,
Series B................................................................................... $ 4,000,000 $ 3,937,480
Series C................................................................................... 6,000,000 5,906,220
Red River Pollution Control Authority, Refunding, West Texas Utilities
Co. Project, MBIA Insured, 6.00%, 6/01/20 ................................................. 5,000,000 5,318,350
Sabine River Authority PCR, Refunding,
Southwestern Electric Power Co., MBIA Insured, 6.10%, 4/01/18 ............................. 4,000,000 4,282,080
Texas Utilities Electric Co. Project, 6.55%, 10/01/22 ..................................... 7,700,000 8,325,086
San Antonio Electric and Gas Revenue, Refunding, 5.50%, 2/01/20 ........................... 10,000,000 10,260,100
San Antonio Water Revenue, Senior Lien, MBIA Insured,
6.50%, 5/15/10 ............................................................................ 2,795,000 3,043,336
Pre-Refunded, 6.50%, 5/15/10 .............................................................. 1,440,000 1,574,640
Tarrant County Health Facilities Development Corp., Health Services Revenue, Texas Health
Resources System, Series A, MBIA Insured, 5.00%, 2/15/26 ................................. 10,000,000 9,454,500
Tarrant County Health Facilities Development Corp., Hospital Revenue,
Ft. Worth Osteopathic Hospital, MBIA Insured, 5.25%, 5/15/28 .............................. 5,010,000 4,877,035
Texas Housing Agency, Residential Development Mortgage Revenue, Series D, 8.35%,
1/01/08 ................................................................................... 1,335,000 1,399,334
7/01/08 ................................................................................... 2,885,000 3,024,028
Texas Water Development Board Revenue, State Revolving Fund, 6.00%, 7/15/13 ............... 2,500,000 2,657,450
Texas Water Resources Finance Authority Revenue, 7.625%, 8/15/08 .......................... 2,365,000 2,456,715
Travis County HFC, SFMR, Refunding, Series A, 6.95%, 10/01/27 ............................. 3,735,000 4,082,019
Tyler Health Facilities Development Corp., Hospital Revenue, Refunding, East Texas
Medical Center Project, Series A, MBIA Insured, 5.50%, 11/01/17 .......................... 1,735,000 1,763,055
---------
483,334,673
---------
U.S. TERRITORIES .1%
Virgin Islands HFA Mortgage Revenue, Series B, GNMA Secured, Pre-Refunded, 8.10%, 12/01/18 690,000 720,312
bVirgin Islands Public Financing Authority Revenue, Refunding, Subordinated Lien,
Fund Loan Notes, Series D, 5.50%,
10/01/01................................................................................... 1,755,000 1,773,708
10/01/02................................................................................... 1,700,000 1,716,320
10/01/03................................................................................... 1,850,000 1,867,002
---------
6,077,342
---------
UTAH 1.3%
Carbon County, Solid Waste Disposal Revenue, Refunding, Laidlaw, Inc. Project,
Series A, 7.50%, 2/01/10 .................................................................. 5,050,000 5,709,278
Intermountain Power Agency, Power Supply Revenue,
Refunding, Series A, 6.15%, 7/01/14 ....................................................... 25,000,000 27,150,500
Refunding, Series B, 7.75%, 7/01/20 ....................................................... 34,805,000 35,696,704
Second Crossover, Series 86-C, 5.75%, 7/01/20 ............................................. 5,500,000 5,502,145
Salt Lake City College Revenue, Westminster College Project,
5.70%, 10/01/17 ........................................................................... 1,000,000 1,008,530
5.75%, 10/01/27 ........................................................................... 1,000,000 1,010,070
Utah State HFA, Refunding, Series A, 6.50%, 5/01/19 ....................................... 2,945,000 3,078,261
Utah State HFA, SFM,
Refunding, 6.80%, 1/01/12 ................................................................. 1,590,000 1,694,129
Series A, 8.50%, 7/01/19 .................................................................. 355,000 364,177
Series B, 6.55%, 7/01/19 .................................................................. 3,450,000 3,712,338
Series B, 6.55%, 7/01/26 .................................................................. 3,655,000 3,901,676
Series C-1, 6.80%, 7/01/12 ................................................................ 255,000 271,700
Series C-1, 8.375%, 7/01/19 ............................................................... 1,880,000 1,888,742
Series D, 8.60%, 7/01/19 .................................................................. 295,000 295,738
Series E-1, 6.65%, 7/01/20 ................................................................ 2,510,000 2,680,404
Series G-1, 8.10%, 7/01/16 ................................................................ 860,000 882,326
---------
94,846,718
---------
VERMONT .1%
Vermont HFA, SF, Series 5, 7.00%, 11/01/27 ................................................ 9,400,000 10,090,148
BONDS (CONT.)
VIRGINIA .5%
Danville IDA Revenue, Regional Medical Center, FGIC Insured, 6.50%,
10/01/19................................................................................... $ 5,885,000 $ 6,433,305
10/01/24................................................................................... 5,840,000 6,384,113
Henrico County IDA, Public Facilities Lease Revenue, Regional Jail Project, 6.00%, 8/01/15 7,250,000 7,662,598
Richmond Public Utility Revenue, Refunding, Series A, 5.125%, 1/15/28 ..................... 5,510,000 5,302,328
Virginia State HDA, Commonwealth Mortgage,
Series C, Sub-Series C-6, 6.25%, 1/01/15 .................................................. 5,120,000 5,354,547
Series H, Sub-Series H-2, 6.55%, 1/01/17 .................................................. 4,755,000 5,134,687
---------
36,271,578
---------
WASHINGTON 2.5%
Chelan County PUD No. 1, Cheland Hydro Consolidated System Revenue,
Series A, 5.65%, 7/01/32................................................................... 5,000,000 5,040,750
Pierce County EDC, Refunding, Solid Waste-Steilacoom Revenue, 6.60%, 8/01/22 .............. 32,480,000 34,491,811
Port Moses Lake Public Corp., Washington PCR, Union Carbide Corp.,
7.50%, 8/01/04 ............................................................................ 2,100,000 2,100,588
7.875%, 8/01/06 ........................................................................... 1,000,000 1,030,260
SeaTac GO, Series 1994, 6.50%, 12/01/13 ................................................... 2,760,000 3,025,015
Seattle Municipality, Metropolitan Seattle Sewer Revenue,
Refunding, Series V, 6.20%, 1/01/32 ....................................................... 9,680,000 10,080,849
Series W, MBIA Insured, 6.25%, 1/01/21 .................................................... 2,500,000 2,660,350
Seattle Special Obligation, Chinatown International District, 5.90%, 8/01/26 .............. 4,810,000 5,003,410
Snohomish County USD No. 6, 6.50%, 12/01/11 ............................................... 7,000,000 7,995,540
University of Washington Alumni Association, Lease Revenue, Medical
Center Roosevelt II, 6.30%, 8/15/14 ....................................................... 4,000,000 4,369,400
Washington State Public Power Supply System Revenue,
Nuclear Project No. 1, Refunding, Series A,
6.05%, 7/01/12 ............................................................................ 35,355,000 37,540,293
MBIA Insured, 6.25%, 7/01/17 .............................................................. 19,965,000 21,237,769
Washington State Public Power Supply System Revenue, Nuclear Project No. 2, Series A,
6.25%, 7/01/12 ............................................................................ 3,200,000 3,436,512
Refunding, 6.00%, 7/01/09 ................................................................. 18,330,000 19,731,878
Refunding, 6.30%, 7/01/12 ................................................................. 7,700,000 8,598,051
Washington State Public Power Supply System Revenue, Nuclear Project No. 3,
Refunding, Series B, 5.50%, 7/01/18 ....................................................... 10,050,000 10,053,819
----------
176,396,295
----------
WEST VIRGINIA .8%
Braxton County Solid Waste Disposal Revenue, Weyerhaeuser Co. Project,
6.50%, 4/01/25 ............................................................................ 3,500,000 3,790,920
Refunding, 5.40%, 5/01/25 ................................................................. 10,000,000 9,787,200
Putnam County PCR, Refunding, FMC Corp. Project, 5.625%, 10/01/13 ......................... 1,700,000 1,733,609
Taylor County PCR, Union Carbide Corp., 7.625%, 8/01/05 ................................... 2,400,000 2,802,240
West Virginia State Hospital Financing Authority Revenue, Refunding &
Improvement, Logan General Hospital Project, 7.25%, 7/01/20.............................. 7,000,000 6,894,440
West Virginia State Housing Development Fund, Housing Finance, Series D,
7.00%, 5/01/17 ............................................................................ 6,000,000 6,412,800
7.05%, 11/01/24 ........................................................................... 9,000,000 9,635,130
West Virginia State, Series A, FGIC Insured, 5.20%, 11/01/26 .............................. 10,000,000 9,796,100
West Virginia State Water Development Authority Revenue, Loan Program II,
Series A, Pre-Refunded, 8.625%, 11/01/28 .................................................. 5,000,000 5,215,100
---------
56,067,539
---------
WISCONSIN 1.0%
Janesville IDR, Simmons Manufacturing Co., 7.00%, 10/15/17 ................................ 2,200,000 2,323,376
Madison Industrial Gas and Electric Co. Project, Series A, 6.75%, 4/01/27 ................. 4,220,000 4,567,179
Wisconsin Housing and EDA, Homeownership Revenue,
Refunding, Series A, 6.10%, 11/01/10 ...................................................... 9,190,000 9,799,481
Series 1, 6.75%, 9/01/15 .................................................................. 10,230,000 10,944,361
Series 1, 6.75%, 9/01/17 .................................................................. 3,000,000 3,203,700
Series A, 6.90%, 3/01/16 .................................................................. 1,985,000 2,174,925
Series A, 6.45%, 3/01/17 .................................................................. 5,500,000 5,867,565
Series A, 7.10%, 3/01/23 .................................................................. 10,580,000 11,289,389
Series B, 7.05%, 11/01/22 ................................................................. 3,000,000 3,214,140
BONDS (CONT.)
WISCONSIN (CONT.)
Wisconsin State Health and Educational Facilities Authority Revenue, Mercy Health Systems
Corp., AMBAC Insured, 6.125%,
8/15/13 ................................................................................... $ 6,500,000 $ 7,006,805
8/15/17 ................................................................................... 7,500,000 8,033,250
---------
68,424,171
---------
WYOMING .3%
Wyoming CDA, Housing Revenue, Refunding, Series 6, 6.10%, 12/01/28 ........................ 11,540,000 12,088,842
Wyoming CDA, MF Mortgage, Series A,
6.90%, 6/01/12 ............................................................................ 1,425,000 1,490,849
6.95%, 6/01/24 ............................................................................ 3,530,000 3,707,487
Wyoming CDA, SFM,
Series A, 7.25%, 6/01/21 .................................................................. 2,500,000 2,696,724
Series G, 7.375%, 6/01/17 ................................................................. 1,295,000 1,369,902
---------
21,353,804
Total Bonds (Cost $6,377,095,789).......................................................... 6,819,855,407
-------------
ZERO COUPON BONDS 2.1%
Calcasieu Parish, Louisiana, Memorial Hospital Service District Revenue, Lake Charles
Parish Memorial Hospital Project, Series A, 12/01/22 ..................................... 11,040,000 7,261,338
Chicago RMR, Refunding, Series B, MBIA Insured, 10/01/09 .................................. 10,705,000 4,867,884
Coldwater, Michigan, Community Schools, MBIA Insured, Pre-Refunded, 5/01/18 ............... 5,935,000 1,967,214
Colorado Springs Airport Revenue, Series C,
1/01/03 ................................................................................... 1,660,000 1,305,921
1/01/05.................................................................................... 1,610,000 1,127,836
1/01/07.................................................................................... 1,675,000 1,039,353
1/01/08 ................................................................................... 800,000 465,391
1/01/11.................................................................................... 1,450,000 693,811
Cook County, Illinois, Community Consolidated School District No. 54, Schaumburg Township,
Series B, FGIC Insured, Pre-Refunded,
1/01/07 ................................................................................... 3,505,000 2,222,905
1/01/08 ................................................................................... 4,800,000 2,848,655
1/01/09 ................................................................................... 4,380,000 2,430,111
1/01/10 ................................................................................... 5,760,000 2,994,853
Florida State Mid-Bay Bridge Authority Revenue, Series A, Senior Lien, AMBAC Insured,
10/01/23................................................................................... 5,000,000 1,266,100
10/01/24................................................................................... 3,000,000 715,980
Harrison, Michigan, Community Schools, AMBAC Insured, 5/01/20 ............................. 6,000,000 1,621,200
Jefferson County, Kentucky, Capital Projects Corp., Lease Revenue, Refunding, Series A,
8/15/07 ................................................................................... 1,640,000 1,059,013
8/15/08 ................................................................................... 4,505,000 2,719,938
8/15/09.................................................................................... 4,580,000 2,595,393
8/15/10.................................................................................... 4,620,000 2,474,611
8/15/13.................................................................................... 6,825,000 3,138,475
8/15/14 ................................................................................... 6,860,000 2,950,965
8/15/16.................................................................................... 7,005,000 2,682,984
8/15/17.................................................................................... 7,115,000 2,576,056
Metropolitan Pier and Exposition Authority, Illinois, Dedicated State Tax Revenue,
McCormick Place Expansion Project, Series A, FGIC Insured,
6/15/08 ................................................................................... 8,500,000 5,209,990
6/15/09 ................................................................................... 11,000,000 6,389,020
6/15/10 ................................................................................... 8,000,000 4,372,880
6/15/11 ................................................................................... 9,690,000 4,974,942
6/15/12.................................................................................... 250,000 209,924
Pre-Refunded, 6/15/12 ..................................................................... 11,550,000 10,081,994
Miami, Dade County Special Obligation, Series B, Subordinated Lien, MBIA Insured,10/01/34 . 5,500,000 736,120
Owensboro, Kentucky, Electric Light and Power Revenue, Series B, AMBAC Insured, 1/01/08 ... 5,250,000 3,330,284
Zero Coupon Bonds (cont.)
San Joaquin Hills, California, Transportation Corridor Agency, Toll Road Revenue,
Refunding, Series A, 1/15/21 .............................................................. $50,000,000 $ 31,694,500
Senior Lien, Pre-Refunded, 1/01/23 ........................................................ 7,000,000 1,932,000
Shreveport, Louisiana, Water and Sewer Revenue, Series B, FGIC Insured,
12/01/07................................................................................... 490,000 289,912
12/01/08 .................................................................................. 2,530,000 1,396,686
12/01/09 .................................................................................. 4,080,000 2,106,300
12/01/10................................................................................... 5,630,000 2,711,914
Spring, Texas, ISD, Refunding, FGIC Insured, Pre-Refunded, 8/15/08 ........................ 7,000,000 3,507,140
University of Illinois Revenues, AMBAC Insured, 4/01/10 ................................... 14,250,000 7,869,420
Washington State Public Power Supply System Revenue, Nuclear Project No. 3, Refunding, Series B,
Nuclear Project No. 2, Series A, 7/01/13 .................................................. 11,000,000 4,919,860
Nuclear Project No. 3, Series B, 7/01/12 .................................................. 6,400,000 3,039,423
Nuclear Project No. 3, Series B, 7/01/14 .................................................. 15,000,000 6,312,300
-----------
Total Zero Coupon Bonds (Cost $104,239,858)................................................ 154,110,596
-----------
Total Long Term Investments (Cost $6,481,335,647) ......................................... 6,973,966,003
aShort Term Investments .1%
Burke County Development Authority, PCR, Georgia Power Co. Vogtle, Fourth Series,
Daily VRDN and Put, 4.05%, 9/01/25 ........................................................ 2,900,000 2,900,000
New York City Municipal Water Financing Authority, Water and Sewer Systems Revenue,
Series C, FGIC Insured, Daily VRDN and Put, 4.20%, 6/15/23 ............................... 200,000 200,000
Northeastern Hospital and Educational Authority Health Care Revenue, Wyoming Valley Health Care,
Series A, Refunding, AMBAC Insured, Weekly VRDN and Put, 4.10%, 1/01/24 .................. 1,100,000 1,100,000
Uinta County PCR, Refunding, Chevron USA Inc. Proj., Letter of Credit from
Chevron Corp., Daily VRDN and Put, 4.10%, 8/15/20 ......................................... 2,400,000 2,400,000
--------------
Total Short Term Investments (Cost $6,600,000) ............................................ 6,600,000
--------------
Total Investments (Cost $6,487,935,647) 97.5% ............................................. 6,980,566,003
Other Assets, less Liabilities 2.5% ....................................................... 177,589,587
---------------
Net Assets 100.0% ......................................................................... $7,158,155,590
===============
</TABLE>
See glossary of terms on page 39.
aVariable rate demand notes (VRDNs) are tax-exempt obligations which contain a
floating or variable interest rate adjustment formula and an unconditional right
of demand to receive payment of the principal balance plus accrued interest at
specified dates. bSufficient collateral has been segregated for securities
traded on a when-issued or delayed delivery basis.
FRANKLIN FEDERAL TAX-FREE INCOME FUND Statement of Investments, April 30, 1998
(cont.)
Glossary of Terms
AMBAC - American Municipal Bond Assurance Corp.
BIG - Bond Investors Guaranty Insurance Co. (Acquired by MBIA in 1989 and no
longer does business under this name.)
CDA - Community Development Authority/Agency
COP - Certificate of Participation
CRDA - Community Redevelopment Authority/Agency
EDA - Economic Development Authority
EDC - Economic Development Corp.
EDR - Economic Development Revenue
ETM - Escrow to Maturity
FGIC - Financial Guaranty Insurance Co.
FHA - Federal Housing Authority/Agency
FI/GML - Federally Insured or Guaranteed Mortgage Loans
FSA - Financial Security Assistance (Some of the securities shown as FSA
Insured were originally insured by Capital Guaranty Insurance Co.
(CGIC) which was acquired by FSA in 1995 and no longer does business
under this name.)
GNMA - Government National Mortgage Association
GO - General Obligation
HDA - Housing Development Authority/Agency
HFA - Housing Finance Authority/Agency
HFC - Housing Finance Corp.
IDA - Industrial Development Authority/Agency
IDB - Industrial Development Board
IDC - Industrial Development Corp.
IDBR - Industrial Development Board Revenue
IDR - Industrial Development Revenue
IPC - Industrial Pollution Control
ISD - Independent School District
L.P. - Limited Partnership
MBIA - Municipal Bond Investors Assurance Corp.
MBS - Mortgage-Backed Securities
MF - Multi-Family
MFHR - Multi-Family Housing Revenue
MFMR - Multi-Family Mortgage Revenue
MFR - Multi-Family Revenue
MTA - Metropolitan Transit Authority
PCR - Pollution Control Revenue
PUD - Public Utility District
RDA - Redevelopment Authority/Agency
RMR - Residential Mortgage Revenue
SF - Single Family
SFM - Single Family Mortgage
SFMR - Single Family Mortgage Revenue
SFR - Single Family Revenue
USD - Unified School District
FRANKLIN FEDERAL TAX-FREE INCOME FUND
Financial Statements
<TABLE>
<CAPTION>
Statement of Assets and Liabilities
April 30, 1998
Assets:
<S> <C>
Investments in securities, at value (cost $6,487,935,647) $6,980,566,003
Cash 54,436,058
Receivables:
Investment securities sold 87,160,955
Capital shares sold 5,931,810
Interest 128,792,746
------------
Total assets 7,256,887,572
-------------
Liabilities:
Payables:
Investment securities purchased 81,326,565
Capital shares redeemed 4,225,826
Affiliates 4,405,693
Shareholders 8,447,610
Other liabilities 326,288
--------------
Total liabilities 98,731,982
--------------
Net assets, at value $7,158,155,590
==============
Net assets consist of:
Undistributed net investment income $ 5,570,212
Net unrealized appreciation 492,630,356
Accumulated net realized loss (25,878,831)
Capital shares 6,685,833,853
--------------
Net assets, at value $7,158,155,590
==============
Class I:
Net asset value per share ($7,022,960,760 / 573,422,438 shares outstanding)* $12.25
==============
Maximum offering price per share ($12.25 / 95.75%) $12.79
==============
Class II:
Net asset value per share ($135,194,830 / 11,042,906 shares outstanding)* $12.24
==============
Maximum offering price per share ($12.24 / 99%) $12.36
==============
</TABLE>
*Redemption price is equal to net asset value less any applicable contingent
deferred sales charge.
Statements of Operations (cont.)
for the year ended April 30, 1998
Investment income:
Interest $447,218,775
--------------
Expenses:
Management fees (Note 3) $32,368,130
Distribution fees (Note 3)
Class I 5,098,992
Class II 660,809
Transfer agent fees (Note 3) 2,646,361
Custodian fees 74,874
Reports to shareholders 778,124
Registration and filing fees 201,388
Professional fees 127,345
Directors' fees and expenses 132,568
Other 274,853
-----------
Total expenses 42,363,444
--------------
Net investment income 404,855,331
--------------
Realized and unrealized gains:
Net realized gain from investments 42,732,886
Net unrealized appreciation on investments 156,385,279
--------------
Net realized and unrealized gain 199,118,165
--------------
Net increase in net assets resulting from operations $603,973,496
==============
Statements of Changes in Net Assets
for the years ended April 30, 1998 and 1997
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
- --------------------------------------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income $ 404,855,331 $ 422,168,480
Net realized gain (loss) from investments 42,732,886 (3,427,474)
Net unrealized appreciation on investments 156,385,279 44,923,895
---------------------------
Net increase in net assets resulting from operations 603,973,496 463,664,901
Distributions to shareholders from:
Net investment income:
Class I (396,082,048) (418,463,139)
Class II (5,046,130) (2,758,091)
--------------------------------
Total distributions to shareholders (401,128,178) (421,221,230)
Capital share transactions: (Note 2)
Class I (83,120,865) (149,230,534)
Class II 60,999,749 37,508,022
-------------------------------
Total capital share transactions (22,121,116) (111,722,512)
Net increase (decrease) in net assets . 180,724,202 (69,278,841)
Net assets:
Beginning of year 6,977,431,388 7,046,710,229
-------------------------------
End of year $7,158,155,590 $6,977,431,388
===============================
Undistributed net investment income included in net assets
End of year $ 5,570,212 $ 1,843,059
===============================
</TABLE>
FRANKLIN FEDERAL TAX-FREE INCOME FUND
Notes to Financial Statements
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Federal Tax-Free Income Fund (the Fund) is registered under the
Investment Company Act of 1940 as a diversified, open-end investment company.
The Fund seeks to provide tax-free income. The following summarizes the Fund's
significant accounting policies.
a. Security Valuation
Tax-free bonds generally trade in the over-the-counter market and are valued
within the range of the latest quoted bid and asked prices. In the absence of a
sale or reported bid and asked prices, information with respect to bond and note
transactions, quotations from bond dealers, market transactions in comparable
securities, and various relationships between securities are used to determine
the value of the security. The Fund may utilize a pricing service, bank or
broker/dealer experienced in such matters to perform any of the pricing
functions under procedures approved by the Board of Directors. Securities for
which market quotations are not readily available are valued at fair value as
determined by management in accordance with procedures established by the Board
of Directors.
b. Income Taxes
No provision has been made for income taxes because the Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and
distribute all of its taxable income.
c. Security Transactions, Investment Income, Expenses and Distributions
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Interest income and estimated expenses are accrued daily. Bond discount and
premium are amortized on an income tax basis. Distributions to shareholders are
recorded on the ex-dividend date.
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class.
d. Accounting Estimates
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.
2. CAPITAL STOCK
The Fund offers two classes of shares: Class I and Class II. The shares have the
same rights except for their initial sales load, distribution fees, voting
rights on matters affecting a single class and the exchange privilege of each
class.
At April 30, 1998, there were 10 billion shares of no par value stock
authorized, of which 3 billion each were designated as Class I and Class II.
Transactions in the Fund's shares were as follows:
<TABLE>
<CAPTION>
Year Ended April 30,
------------------------------------------------------------
1998 1997
------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------------
Class I Shares:
<S> <C> <C> <C> <C>
Shares sold 114,214,913 $1,390,939,797 82,507,276 $ 981,902,405
Shares issued in reinvestment of distributions 13,093,027 159,083,079 13,756,253 163,131,977
Shares redeemed (134,063,708) (1,633,143,741) (108,778,728) (1,294,264,916)
--------------------------------------------------------------
Net decrease (6,755,768) $ (83,120,865) (12,515,199) $ (149,230,534)
==============================================================
Class II Shares:
Shares sold 5,941,310 $ 72,517,830 3,562,296 $ 42,300,025
Shares issued in reinvestment of distributions 259,109 3,154,246 144,321 1,713,499
Shares redeemed (1,202,566) (14,672,327) (546,174) (6,505,502)
--------------------------------------------------------------
Net increase 4,997,853 $ 60,999,749 3,160,443 $ 37,508,022
==============================================================
</TABLE>
3. TRANSACTIONS WITH AFFILIATES
Certain officers and directors of the Fund are also officers or directors of
Franklin/Templeton Distributors, Inc. (Distributors), Franklin Advisers, Inc.
(Advisers), Franklin/Templeton Investor Services, Inc. (Investor Services), and
Franklin Templeton Services, Inc. (FT Services), the Fund's principal
underwriter, investment manager, transfer agent, and administrative manager,
respectively.
The Fund pays an investment management fee to Advisers based on the average net
assets of the Fund as follows:
ANNUALIZED FEE RATE MONTH-END NET ASSETS
--------------------------------------------------------------------
0.625% First $100 million
0.50% Over $100 million, up to and including $250 million
0.45% Over $250 million, up to and including $10 billion
Fees are further reduced on net assets over $10 billion.
Under an agreement with Advisers, FT Services provides administrative services
to the Fund. The fee is paid by Advisers based on average daily net assets, and
is not an additional expense of the Fund.
The Fund reimburses Distributors up to 0.10% and 0.65% per year of the average
daily net assets of Class I and Class II, respectively, for costs incurred in
marketing the Fund's shares.
Distributors paid net commissions on sales of the Fund shares, and received
contingent deferred sales charges for the year of $977,359 and $23,704,
respectively.
The Fund paid transfer agent fees of $2,646,361, of which $2,428,103 was paid to
Investor Services.
4. INCOME TAXES
At April 30, 1998, the Fund had tax basis capital losses of $25,878,831 which
may be carried over to offset future capital gains. Such losses expire as
follows:
Capital loss carryovers expiring in: 2003....... $22,451,357
2005....... 3,427,474
-------------
$25,878,831
=============
At April 30, 1998, the net unrealized appreciation based on the cost of
investments for income tax purposes of $492,630,356 was as follows:
Unrealized appreciation............. $498,531,208
Unrealized depreciation............. (5,900,852)
-------------
Net unrealized appreciation......... $492,630,356
=============
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the year
ended April 30, 1998 aggregated $1,014,522,038 and $1,095,776,729, respectively.
6. CREDIT RISK
The Fund has investments in excess of 10% of its total net assets in the state
of New York. Such concentration may subject the Fund more significantly to
economic changes occurring within that state.
FRANKLIN FEDERAL TAX-FREE INCOME FUND
Independent Auditors' Report
To the Shareholders and Board of Directors
Of the Franklin Federal Tax-Free Income Fund
We have audited the accompanying statement of assets and liabilities of the
Franklin Federal Tax-Free Income Fund, including the Fund's statement of
investments as of April 30, 1998, 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
periods presented. These financial statements and financial highlights are the
responsibility of the Fund'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 April
30, 1998, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Fund as of April 30, 1998, 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 its financial highlights for each of the periods presented, in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
San Francisco, California
June 3, 1998
FRANKLIN FEDERAL TAX-FREE INCOME FUND
Tax Information
Under Section 852(b)(5)(A) of the Internal Revenue Code, the Fund hereby
designates 100% of the distributions paid from net investment income as
exempt-interest dividends for the fiscal year ended April 30, 1998.
Franklin Federal Tax-Free Income Fund
Annual Report
April 30, 1998.
APPENDIX
DESCRIPTION OF GRAPHIC MATERIAL OMITTED FROM EDGAR FILING (PURSUANT TO ITEM
304 (a) OF REGULATION S-T)
GRAPHIC MATERIAL (1)
This chart shows in pie format the credit quality breakdown of the Franklin
Federal Tax-Free Income Fund based on total long-term investments as of
4/30/98.
AAA 37.3%
AA 13.9%
A 20.0%
BBB 25.8%
Below Investment Grade 3.0%
GRAPHIC MATERIAL (2)
This chart shows the portfolio breakdown by sector based on the percentage of
total long-term investments on 4/30/98 for the Franklin Federal Tax-Free
Income Fund.
Utilities 25.2%
Housing 13.8%
Prerefunded 13.8%
Transportation 12.7%
General Obligation 9.1%
Hospitals 8.1%
Industrial 5.7%
Other Revenue 4.1%
Education 2.8%
Certificates of Participation 2.5%
Health Care 1.5%
Tax Allocation 0.6%
Sales Tax 0.1%
GRAPHIC MATERIAL (3)
This map shows the top three state holdings of the Franklin Federal Tax-Free
Income Fund based on total market value on 4/30/98.
New York 17.2%
Illinois 7.1%
Texas 7.0%
GRAPHIC MATERIAL (4)
This chart shows the dividend distributions for Franklin Federal Tax-Free
Income Fund's Class I from 5/1/97 to 4/30/98.
May 5.8 cents
June 5.8 cents
July 5.8 cents
August 5.8 cents
September 5.8 cents
October 5.8 cents
November 5.8 cents
December 5.8 cents
January 5.6 cents
February 5.6 cents
March 5.6 cents
April 5.6 cents
Total 68.8 cents
GRAPHIC MATERIAL (5)
This chart shows in bar format the comparison between Franklin Federal
Tax-Free Income Fund's Class I distribution rate of 5.25% and the taxable
equivalent rate of 8.69% on 4/30/98.
GRAPHIC MATERIAL (6)
The following line graph compares the performance of the Franklin Federal
Tax-Free Income Fund's Class I shares to that of the Lehman Brothers
Municipal Bond Index, and to the Consumer Price Index based on a $10,000
investment from 5/1/88 to 4/30/98.
Date Franklin Federal Tax-Free Lehman Brothers CPI
Income Fund-Class I Municipal Bond
Index
5/1/88 9,572 10,000 10,000
5/31/88 9,614 -0.29% 9,971 0.34% 10,034
6/30/88 9,805 1.46% 10,117 0.43% 10,077
7/31/88 9,847 0.65% 10,182 0.42% 10,119
8/31/88 9,916 0.09% 10,191 0.42% 10,162
9/30/88 10,148 1.81% 10,376 0.67% 10,230
10/31/88 10,381 1.76% 10,559 0.33% 10,264
11/30/88 10,269 -0.92% 10,461 0.08% 10,272
12/31/88 10,441 1.02% 10,568 0.17% 10,289
1/31/89 10,606 2.07% 10,787 0.50% 10,341
2/28/89 10,537 -1.14% 10,664 0.41% 10,383
3/31/89 10,510 -0.24% 10,638 0.58% 10,444
4/30/89 10,729 2.37% 10,890 0.65% 10,511
5/31/89 10,911 2.08% 11,117 0.57% 10,571
6/30/89 11,036 1.36% 11,268 0.24% 10,597
7/31/89 11,114 1.36% 11,421 0.24% 10,622
8/31/89 11,076 -0.98% 11,310 0.16% 10,639
9/30/89 11,028 -0.30% 11,276 0.32% 10,673
10/31/89 11,127 1.22% 11,413 0.48% 10,724
11/30/89 11,286 1.75% 11,613 0.24% 10,750
12/31/89 11,387 0.82% 11,708 0.16% 10,767
1/31/90 11,308 -0.47% 11,653 1.03% 10,878
2/28/90 11,440 0.89% 11,757 0.47% 10,929
3/31/90 11,410 0.03% 11,760 0.55% 10,990
4/30/90 11,309 -0.72% 11,676 0.16% 11,007
5/31/90 11,588 2.18% 11,930 0.23% 11,032
6/30/90 11,692 0.88% 12,035 0.54% 11,092
7/31/90 11,890 1.48% 12,213 0.38% 11,134
8/31/90 11,671 -1.45% 12,036 0.92% 11,237
9/30/90 11,641 0.06% 12,043 0.84% 11,331
10/31/90 11,769 1.81% 12,261 0.60% 11,399
11/30/90 12,004 2.01% 12,508 0.22% 11,424
12/31/90 12,016 0.44% 12,563 0.00% 11,424
1/31/91 12,211 1.34% 12,731 0.60% 11,493
2/28/91 12,266 0.87% 12,842 0.15% 11,510
3/31/91 12,333 0.04% 12,847 0.15% 11,527
4/30/91 12,554 1.34% 13,019 0.15% 11,544
5/31/91 12,644 0.89% 13,135 0.30% 11,579
6/30/91 12,667 -0.10% 13,122 0.29% 11,613
7/31/91 12,870 1.22% 13,282 0.15% 11,630
8/31/91 12,995 1.32% 13,457 0.29% 11,664
9/30/91 13,190 1.30% 13,632 0.44% 11,715
10/31/91 13,270 0.90% 13,755 0.15% 11,733
11/30/91 13,341 0.28% 13,794 0.29% 11,767
12/31/91 13,606 2.15% 14,090 0.07% 11,775
1/31/92 13,639 0.23% 14,123 0.15% 11,793
2/29/92 13,650 0.03% 14,127 0.36% 11,835
3/31/92 13,708 0.04% 14,132 0.51% 11,895
4/30/92 13,837 0.89% 14,258 0.14% 11,912
5/31/92 14,038 1.18% 14,426 0.14% 11,929
6/30/92 14,240 1.68% 14,669 0.36% 11,972
7/31/92 14,721 3.00% 15,109 0.21% 11,997
8/31/92 14,526 -0.98% 14,961 0.28% 12,030
9/30/92 14,537 0.65% 15,058 0.28% 12,064
10/31/92 14,339 -0.98% 14,910 0.35% 12,106
11/30/92 14,683 1.79% 15,177 0.14% 12,123
12/31/92 14,905 1.02% 15,332 -0.07% 12,115
1/31/93 15,087 1.16% 15,510 0.49% 12,174
2/28/93 15,471 3.62% 16,072 0.35% 12,217
3/31/93 15,403 -1.06% 15,901 0.35% 12,259
4/30/93 15,524 1.01% 16,062 0.28% 12,294
5/31/93 15,621 0.56% 16,152 0.14% 12,311
6/30/93 15,872 1.67% 16,421 0.14% 12,328
7/31/93 15,893 0.13% 16,443 0.00% 12,328
8/31/93 16,160 2.08% 16,785 0.28% 12,363
9/30/93 16,324 1.14% 16,976 0.21% 12,389
10/31/93 16,356 0.19% 17,008 0.41% 12,440
11/30/93 16,284 -0.88% 16,859 0.07% 12,448
12/31/93 16,582 2.11% 17,214 0.00% 12,448
1/31/94 16,721 1.14% 17,411 0.27% 12,482
2/28/94 16,434 -2.59% 16,960 0.34% 12,524
3/31/94 15,931 -4.07% 16,269 0.34% 12,567
4/30/94 15,966 0.85% 16,408 0.14% 12,584
5/31/94 16,082 0.87% 16,551 0.07% 12,593
6/30/94 16,019 -0.61% 16,450 0.34% 12,636
7/31/94 16,246 1.83% 16,751 0.27% 12,670
8/31/94 16,308 0.35% 16,809 0.40% 12,721
9/30/94 16,148 -1.47% 16,562 0.27% 12,755
10/31/94 15,918 -1.78% 16,267 0.07% 12,764
11/30/94 15,645 -1.81% 15,973 0.13% 12,781
12/31/94 15,962 2.20% 16,324 0.00% 12,781
1/31/95 16,367 2.86% 16,791 0.40% 12,832
2/28/95 16,761 2.91% 17,280 0.40% 12,883
3/31/95 16,897 1.15% 17,478 0.33% 12,926
4/30/95 16,957 0.12% 17,499 0.33% 12,968
5/31/95 17,353 3.19% 18,058 0.20% 12,994
6/30/95 17,297 -0.87% 17,901 0.20% 13,020
7/31/95 17,432 0.95% 18,071 0.00% 13,020
8/31/95 17,598 1.27% 18,300 0.26% 13,054
9/30/95 17,690 0.63% 18,415 0.20% 13,080
10/31/95 17,916 1.45% 18,682 0.33% 13,123
11/30/95 18,189 1.66% 18,993 -0.07% 13,114
12/31/95 18,373 0.96% 19,175 -0.07% 13,105
1/31/96 18,451 0.76% 19,321 0.59% 13,182
2/29/96 18,378 -0.68% 19,189 0.32% 13,225
3/31/96 18,213 -1.28% 18,944 0.52% 13,293
4/30/96 18,200 -0.28% 18,891 0.39% 13,345
5/31/96 18,219 -0.04% 18,883 0.19% 13,371
6/30/96 18,408 1.09% 19,089 0.06% 13,379
7/31/96 18,548 0.91% 19,263 0.19% 13,404
8/31/96 18,561 -0.02% 19,259 0.19% 13,429
9/30/96 18,797 1.40% 19,528 0.32% 13,472
10/31/96 18,985 1.13% 19,749 0.32% 13,515
11/30/96 19,270 1.83% 20,110 0.19% 13,541
12/31/96 19,237 -0.42% 20,026 0.00% 13,541
1/31/97 19,284 0.19% 20,064 0.32% 13,585
2/28/97 19,460 0.92% 20,249 0.31% 13,627
3/31/97 19,279 -1.33% 19,979 0.25% 13,661
4/30/97 19,439 0.84% 20,147 0.12% 13,677
5/31/97 19,682 1.51% 20,451 -0.06% 13,669
6/30/97 19,877 1.07% 20,670 0.12% 13,685
7/31/97 20,338 2.77% 21,243 0.12% 13,702
8/31/97 20,218 -0.94% 21,043 0.19% 13,728
9/30/97 20,449 1.19% 21,293 0.25% 13,762
10/31/97 20,580 0.64% 21,430 0.25% 13,796
11/30/97 20,695 0.59% 21,556 -0.06% 13,788
12/31/97 20,963 1.46% 21,871 -0.12% 13,772
1/31/98 21,126 1.03% 22,096 0.19% 13,798
2/28/98 21,154 0.03% 22,103 0.19% 13,824
3/31/98 21,199 0.09% 22,123 0.19% 13,850
4/30/98 21,174 -0.45% 22,023 0.18% 13,875
Total 111.74% 120.23% 38.75%
Return
GRAPHIC MATERIAL (7)
This chart shows in bar format the comparison between Franklin Federal
Tax-Free Income Fund's Class II distribution rate of 4.86% and the taxable
equivalent rate of 8.05% on 4/30/98.
GRAPHIC MATERIAL (8)
This chart shows the dividend distributions for Franklin Federal Tax-Free
Income Fund's Class II from 5/1/97 to 4/30/98.
May 5.21 cents
June 5.21 cents
July 5.27 cents
August 5.27 cents
September 5.27 cents
October 5.19 cents
November 5.19 cents
December 5.19 cents
January 5.00 cents
February 5.00 cents
March 5.00 cents
April 5.12 cents
Total 61.92 cents
GRAPHIC MATERIAL (9)
The following line graph compares the performance of the Franklin Federal
Tax-Free Income Fund's Class II shares to that of the Lehman Brothers
Municipal Bond Index, and to the Consumer Price Index based on a $10,000
investment from 5/1/95 to 4/30/98.
Date Franklin Federal Lehman Brothers CPI
Tax-Free Income Municipal Bond
Fund-Class II Index
5/1/95 9,898 10,000
10,000
5/31/95 10,127 3.19% 10,319 0.20% 10,020
6/30/95 10,090 -0.87% 10,229 0.20% 10,040
7/31/95 10,163 0.95% 10,326 0.00% 10,040
8/31/95 10,254 1.27% 10,458 0.26% 10,066
9/30/95 10,303 0.63% 10,523 0.20% 10,086
10/31/95 10,430 1.45% 10,676 0.33% 10,120
11/30/95 10,574 1.66% 10,853 -0.07% 10,112
12/31/95 10,685 0.96% 10,957 -0.07% 10,105
1/31/96 10,725 0.76% 11,041 0.59% 10,165
2/29/96 10,677 -0.68% 10,966 0.32% 10,198
3/31/96 10,576 -1.28% 10,825 0.52% 10,251
4/30/96 10,557 -0.28% 10,795 0.39% 10,291
5/31/96 10,563 -0.04% 10,791 0.19% 10,310
6/30/96 10,667 1.09% 10,908 0.06% 10,316
7/31/96 10,743 0.91% 11,008 0.19% 10,336
8/31/96 10,745 -0.02% 11,005 0.19% 10,356
9/30/96 10,885 1.40% 11,159 0.32% 10,389
10/31/96 10,989 1.13% 11,286 0.32% 10,422
11/30/96 11,140 1.83% 11,492 0.19% 10,442
12/31/96 11,124 -0.42% 11,444 0.00% 10,442
1/31/97 11,146 0.19% 11,466 0.32% 10,475
2/28/97 11,233 0.92% 11,571 0.31% 10,508
3/31/97 11,134 -1.33% 11,417 0.25% 10,534
4/30/97 11,220 0.84% 11,513 0.12% 10,547
5/31/97 11,355 1.51% 11,687 -0.06% 10,540
6/30/97 11,461 1.07% 11,812 0.12% 10,553
7/31/97 11,722 2.77% 12,139 0.12% 10,565
8/31/97 11,648 -0.94% 12,025 0.19% 10,586
9/30/97 11,766 1.19% 12,168 0.25% 10,612
10/31/97 11,835 0.64% 12,246 0.25% 10,639
11/30/97 11,905 0.59% 12,318 -0.06% 10,632
12/31/97 12,044 1.46% 12,498 -0.12% 10,619
1/31/98 12,142 1.03% 12,627 0.19% 10,640
2/28/98 12,151 0.03% 12,631 0.19% 10,660
3/31/98 12,171 0.09% 12,642 0.19% 10,680
4/30/98 12,143 -0.45% 12,585 0.18% 10,699
Total Return 21.43% 25.85% 6.99%
EVERY SHAREHOLDER'S VOTE IS IMPORTANT
PLEASE SIGN, DATE AND RETURN YOUR
PROXY TODAY
Please detach at perforation before mailing.
PROXY PROXY
SPECIAL SHAREHOLDERS' MEETING OF
FRANKLIN INDIANA TAX-FREE INCOME FUND
JUNE 23, 1999
The undersigned hereby revokes all previous proxies for his shares and
appoints Rupert H. Johnson, Jr., Harmon E. Burns, and Deborah R. Gatzek, and
each of them, proxies of the undersigned with full power of substitution to
vote all shares of Franklin Indiana Tax-Free Income Fund (the "Indiana Fund")
that the undersigned is entitled to vote at the Indiana Fund's Special
Meeting to be held at 777 Mariners Island Boulevard, San Mateo, CA 94404 at
1:30 p.m., Pacific time on June 23, 1999, including any adjournment thereof,
upon such business as may properly be brought before the Meeting.
IMPORTANT: PLEASE SEND IN YOUR PROXY TODAY.
YOU ARE URGED TO DATE AND SIGN THIS PROXY AND RETURN IT PROMPTLY. THIS WILL
SAVE THE EXPENSE OF FOLLOW-UP LETTERS TO SHAREHOLDERS WHO HAVE NOT RESPONDED.
NOTE: Please sign exactly as your
name appears on the proxy. If
signing for estates, trusts or
corporations, title or capacity
should be stated. If shares are
held jointly, each holder must sign.
___________________________________
Signature
___________________________________
Signature
___________________________________
Date
(Please see reverse side)
EVERY SHAREHOLDER'S VOTE IS IMPORTANT
PLEASE SIGN, DATE AND RETURN YOUR
PROXY TODAY
Please detach at perforation before mailing.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES OF THE FRANKLIN
TAX-FREE TRUST, ON BEHALF OF ITS SERIES, FRANKLIN INDIANA TAX-FREE INCOME
FUND. IT WILL BE VOTED AS SPECIFIED. IF NO SPECIFICATION IS MADE, THIS
PROXY SHALL BE VOTED IN FAVOR OF PROPOSAL 1, REGARDING THE REORGANIZATION OF
THE FRANKLIN INDIANA TAX-FREE INCOME FUND PURSUANT TO THE AGREEMENT AND PLAN
OF REORGANIZATION WITH FRANKLIN FEDERAL TAX-FREE INCOME FUND. IF ANY OTHER
MATTERS PROPERLY COME BEFORE THE MEETING ABOUT WHICH THE PROXYHOLDERS WERE
NOT AWARE PRIOR TO THE TIME OF THE SOLICITATION, AUTHORIZATION IS GIVEN THE
PROXYHOLDERS TO VOTE IN ACCORDANCE WITH THE VIEWS OF MANAGEMENT ON SUCH
MATTERS. MANAGEMENT IS NOT AWARE OF ANY SUCH MATTERS.
THE BOARD OF TRUSTEES RECOMMENDS A VOTE FOR PROPOSAL 1.
1. To approve an Agreement and Plan of FOR AGAINST ABSTAIN
Reorganization by Franklin Tax-Free
Trust, on behalf of its series, Franklin [_] [_] [_]
Indiana Tax-Free Income Fund ("Indiana Fund")
and Franklin Federal Tax-Free Income Fund,
that provides for the acquisition of
substantially all of the assets of Indiana
Fund in exchange for shares of Franklin Federal
Tax-Free Income Fund-Class A, the distribution
of such shares to the shareholders of Indiana
Fund, and the dissolution of Indiana Fund
(the "Reorganization").
2. To grant the proxyholders the authority to GRANT WITHHOLD
vote upon any other business which may
legally come before the Special Meeting [_] [_]
or any adjournment thereof.
IMPORTANT: PLEASE SIGN AND MAIL IN YOUR PROXY...TODAY
PLEASE SIGN AND PROMPTLY RETURN IN THE ACCOMPANYING ENVELOPE. NO POSTAGE
REQUIRED IF MAILED IN THE U.S.
STATEMENT OF ADDITIONAL INFORMATION
FOR
FRANKLIN FEDERAL TAX-FREE INCOME FUND
DATED APRIL 22, 1999
Acquisition of the Assets of
FRANKLIN INDIANA TAX-FREE INCOME FUND
(a series of Franklin Tax-Free Trust)
By and in exchange for shares of
FRANKLIN FEDERAL TAX-FREE INCOME FUND
This Statement of Additional Information (SAI) relates specifically to
the proposed delivery of substantially all of the assets of the Franklin
Indiana Tax-Free Income Fund (the "Indiana Fund") for Class A shares of
Franklin Federal Tax-Free Income Fund.
This SAI consists of this Cover Page and the following documents. Each
of these documents is attached to and is legally considered to be a part of
this SAI:
1. Statement of Additional Information of Franklin Federal
Tax-Free Income Fund dated September 1, 1998, as supplemented
April 1, 1999.
2. Semi-Annual Report of Franklin Federal Tax-Free Income Fund
for the period ended October 31, 1998.
3. Annual Report of Franklin Tax-Free Trust (relating to the
Indiana Fund) for the fiscal year ended February 28, 1999.
This SAI is not a Prospectus; you should read this SAI in conjunction
with the Prospectus/Proxy Statement dated April 22, 1999, relating to the
above-referenced transaction. You can request a copy of the Prospectus/Proxy
Statement by calling 1-800/DIAL BEN(R) or by writing to Franklin Federal
Tax-Free Income Fund, 777 Mariners Island Boulevard, P.O. Box 7777, San
Mateo, CA 94403-7777.
o 116*SA1
- --------------------------------------------------------------------------------
SHARE CLASS REDESIGNATION
EFFECTIVE JANUARY 1, 1999
Class A - Formerly Class I
Class B - New Share Class
Class C - Formerly Class II
- --------------------------------------------------------------------------------
SUPPLEMENT DATED APRIL 1, 1999
TO THE STATEMENT OF ADDITIONAL INFORMATION OF
FRANKLIN FEDERAL TAX-FREE INCOME FUND
DATED SEPTEMBER 1, 1998
The Statement of Additional Information is amended as follows:
I. As of January 1, 1999, the fund offers three classes of shares: Class A,
Class B and Class C. Before January 1, 1999, Class A shares were designated
Class I and Class C shares were designated Class II. All references in the
Statement of Additional Information to Class I shares are replaced with Class A,
and all references to Class II shares are replaced with Class C.
II. The following is added to the "Officers and "Directors" section:
As of November 25, 1998, the officers and Board members, as a group, owned of
record and beneficially the following shares of the fund: approximately 68 Class
A shares, or less than 1% of the total outstanding Class A shares of the fund.
III. The first sentence in the section "Additional Information on Exchanging
Shares," found under "How Do I Buy, Sell and Exchange Shares?," is replaced with
the following:
If you request the exchange of the total value of your account, declared but
unpaid income dividends and capital gain distributions will be reinvested in the
fund and exchanged into the new fund at Net Asset Value when paid.
IV. The following is added to the section "Additional Information on Selling
Shares," found under "How Do I Buy, Sell and Exchange Shares?":
The contingent deferred sales charge will generally be waived for redemptions of
Class A shares by investors who purchased $1 million or more without an initial
sales charge if the Securities Dealer of record waived it commission in
connection with the purchase.
V. In the section "The Rule 12b-1 Plans," found under "The Fund's Underwriter,"
(a) the first sentence is replaced with the following:
Each class has a separate distribution or "Rule 12b-1" plan that was adopted
pursuant to Rule 12b-1 of the 1940 Act.
(b) the following paragraphs are added after the section "The Class I Plan":
THE CLASS B PLAN. Under the Class B plan, the fund pays Distributors up to 0.50%
per year of the class' average daily net assets, payable quarterly, to pay
Distributors or others for providing distribution and related services and
bearing certain expenses. All distribution expenses over this amount will be
borne by those who have incurred them. The fund may also pay a servicing fee of
up to 0.15% per year of the class' average daily net assets, payable quarterly.
This fee may be used to pay Securities Dealers or others for, among other
things, helping to establish and maintain customer accounts and records, helping
with requests to buy and sell shares, receiving and answering correspondence,
monitoring dividend payments from the fund on behalf of customers, and similar
servicing and account maintenance activities.
The expenses relating to the Class B plan are also used to pay Distributors for
advancing the commission costs to Securities Dealers with respect to the initial
sale of Class B shares. Further, the expenses relating to the Class B plan may
be used by Distributors to pay third party financing entities that have provided
financing to Distributors in connection with advancing commission costs to
Securities Dealers.
(c) and the section "The Class I and Class II Plans" is renamed "The Class A, B
and C Plans."
VI. Under "Miscellaneous Information,"
(a) the seventh paragraph is replaced with the following:
The fund offers three classes of shares: Franklin Federal Tax-Free Income Fund,
Franklin Federal Tax-Free Income Fund Series, Franklin Federal Tax-Free Income
Fund - Class A; Franklin Federal Tax-Free Income Fund, Franklin Federal Tax-Free
Income Fund Series, Franklin Federal Tax-Free Income Fund - Class B; and
Franklin Federal Tax-Free Income Fund, Franklin Federal Tax-Free Income Fund
Series, Franklin Federal Tax-Free Income Fund - Class C.
(b) and the following is added:
The Information Services & Technology division of Resources established a Year
2000 Project Team in 1996. This team has already begun making necessary software
changes to help the computer systems that service the fund and its shareholders
to be Year 2000 compliant. After completing these modifications, comprehensive
tests are conducted in one of Resources' U.S. test labs to verify their
effectiveness. Resources continues to seek reasonable assurances from all major
hardware, software or data-services suppliers that they will be Year 2000
compliant on a timely basis. Resources is also beginning to develop a
contingency plan, including identification of those mission critical systems for
which it is practical to develop a contingency plan. However, in an operation as
complex and geographically distributed as Resources' business, the alternatives
to use of normal systems, especially mission critical systems, or supplies of
electricity or long distance voice and data lines are limited.
VII. In the "Useful Terms and Definitions" section, the definitions of "Class I
and Class II" and "Offering Price" are replaced with the following:
CLASS A, CLASS B AND CLASS C - The fund offers three classes of shares,
designated "Class A," "Class B" and "Class C." The three classes have
proportionate interests in the fund's portfolio. They differ, however, primarily
in their sales charge structures and Rule 12b-1 plans.
OFFERING PRICE - The public offering price is based on the Net Asset Value per
share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 4.25% for Class A and 1% for Class C. There is no
front-end sales charge for Class B. We calculate the offering price to two
decimal places using standard rounding criteria.
Please keep this supplement for future reference.
FRANKLIN
FEDERAL TAX-FREE
INCOME FUND
STATEMENT OF
ADDITIONAL INFORMATION
SEPTEMBER 1, 1998
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/DIAL BEN(R)
TABLE OF CONTENTS
How Does the Fund
Invest Its Assets? ........................................... 2
Investment Restrictions ....................................... 5
Officers and Directors ........................................ 6
Investment Management
and Other Services ........................................... 10
How Does the Fund Buy
Securities for Its Portfolio? ................................ 11
How Do I Buy, Sell
and Exchange Shares? ......................................... 12
How Are Fund Shares Valued?.................................... 14
Additional Information on
Distributions and Taxes ...................................... 15
The Fund's Underwriter ........................................ 18
How Does the Fund
Measure Performance? ......................................... 19
Miscellaneous Information ..................................... 22
Financial Statements .......................................... 23
Useful Terms and Definitions .................................. 23
Appendix
Description of Ratings ....................................... 24
- --------------------------------------------------------------------------------
When reading this SAI, you will see certain terms beginning with capital
letters. This means the term is explained under "Useful Terms and Definitions."
- --------------------------------------------------------------------------------
The fund is a diversified, open-end management investment company. The
Prospectus, dated September 1, 1998, which we may amend from time to time,
contains the basic information you should know before investing in the fund.
For a free copy, call 1-800/DIAL BEN.
THIS SAI IS NOT A PROSPECTUS. IT CONTAINS INFORMATION IN ADDITION TO AND IN
MORE DETAIL THAN SET FORTH IN THE PROSPECTUS. THIS SAI IS INTENDED TO PROVIDE
YOU WITH ADDITIONAL INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF
THE FUND, AND SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS.
- --------------------------------------------------------------------------------
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
O ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
O ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK;
O ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
- --------------------------------------------------------------------------------
HOW DOES THE FUND INVEST ITS ASSETS?
WHAT IS THE FUND'S GOAL?
The investment goal of the fund is to provide investors with as high a level
of interest income exempt from federal income taxes as is consistent with
prudent investing, while seeking preservation of shareholders' capital. This
goal is fundamental, which means that it may not be changed without
shareholder approval.
The following gives more detailed information about the fund's investment
policies and the types of securities that it may buy. Please read this
information together with the section "How Does the Fund Invest Its Assets?"
in the Prospectus.
MORE INFORMATION ABOUT
THE KINDS OF SECURITIES THE FUND BUYS
The fund tries to achieve its investment goal by attempting to invest all of
its assets in tax-free municipal securities. The issuer's bond counsel
generally gives the issuer an opinion on the tax-exempt status of a municipal
security when the security is issued.
Below is a description of various types of municipal and other securities
that the fund may buy. Other types of municipal securities may become
available that are similar to those described below and in which the fund may
also invest, if consistent with its investment goal and policies.
TAX ANTICIPATION NOTES are issued to finance short-term working capital needs
of municipalities in anticipation of various seasonal tax revenues, which
will be used to pay the notes. They are usually general obligations of the
issuer, secured by the taxing power for the payment of principal and interest.
REVENUE ANTICIPATION NOTES are similar to tax anticipation notes except they
are issued in expectation of the receipt of other kinds of revenue, such as
federal revenues available under the Federal Revenue Sharing Program.
BOND ANTICIPATION NOTES are normally issued to provide interim financing
until long-term financing can be arranged. Proceeds from long-term bond
issues then provide the money for the repayment of the notes.
CONSTRUCTION LOAN NOTES are issued to provide construction financing for
specific projects. After successful completion and acceptance, many projects
receive permanent financing through the Federal Housing Administration under
the Federal National Mortgage Association or the Government National Mortgage
Association.
TAX-EXEMPT COMMERCIAL PAPER typically represents a short-term obligation (270
days or less) issued by a municipality to meet working capital needs.
MUNICIPAL BONDS meet longer-term capital needs and generally have maturities
from one to 30 years when issued. They have two principal classifications:
general obligation bonds and revenue bonds.
GENERAL OBLIGATION BONDS. Issuers of general obligation bonds include states,
counties, cities, towns and regional districts. The proceeds of these
obligations are used to fund a wide range of public projects, including
construction or improvement of schools, highways and roads. The basic
security behind general obligation bonds is the issuer's pledge of its full
faith, credit and taxing power for the payment of principal and interest. The
taxes that can be levied for the payment of debt service may be limited or
unlimited as to the rate or amount of special assessments.
REVENUE BONDS. The full faith, credit and taxing power of the issuer do not
secure revenue bonds. Instead, the principal security for a revenue bond is
generally the net revenue derived from a particular facility, group of
facilities, or, in some cases, the proceeds of a special excise tax or other
specific revenue source. Revenue bonds are issued to finance a wide variety
of capital projects, including: electric, gas, water and sewer systems;
highways, bridges and tunnels; port and airport facilities; colleges and
universities; and hospitals. The principal security behind these bonds may
vary. For example, housing finance authorities have a wide range of security,
including partially or fully insured mortgages, rent subsidized and/or
collateralized mortgages, and/or the net revenues from housing or other
public projects. Many bonds provide additional security in the form of a debt
service reserve fund that may be used to make principal and interest
payments. Some authorities have further security in the form of state
assurances (although without obligation) to make up deficiencies in the debt
service reserve fund.
TAX-EXEMPT INDUSTRIAL DEVELOPMENT REVENUE BONDS are issued by or on behalf of
public authorities to finance various privately operated facilities for
business, manufacturing, housing, sports and pollution control, as well as
public facilities such as airports, mass transit systems, ports and parking.
The payment of principal and interest is solely dependent on the ability of
the facility's user to meet its financial obligations and the pledge, if any,
of the facility or other property as security for payment.
VARIABLE OR FLOATING RATE SECURITIES. The fund may invest in variable or
floating rate securities, including variable rate demand notes, which have
interest rates that change either at specific intervals (variable rate), from
daily up to monthly, or whenever a benchmark rate changes (floating rate).
The interest rate adjustments are designed to help stabilize the security's
price. Variable or floating rate securities may include a demand feature,
which may be unconditional. The demand feature allows the holder to demand
prepayment of the principal amount before maturity, generally on no more than
30 days' notice. The holder receives the principal amount plus any accrued
interest either from the issuer or by drawing on a bank letter of credit, a
guarantee or insurance issued with respect to the security.
MUNICIPAL LEASE OBLIGATIONS. The fund may invest in municipal lease
obligations, including certificates of participation. The Board reviews the
fund's municipal lease obligations to assure that they are liquid investments
based on various factors reviewed by Advisers and monitored by the Board.
These factors include (a) the credit quality of the obligations and the
extent to which they are rated or, if unrated, comply with existing criteria
and procedures followed to ensure that they are comparable in quality to the
ratings required for the fund to invest, including an assessment of the
likelihood of the lease being canceled, taking into account how essential the
leased property is and the term of the lease compared to the useful life of
the leased property; (b) the size of the municipal securities market, both in
general and with respect to municipal lease obligations; and (c) the extent
to which the type of municipal lease obligations held by the fund trade on
the same basis and with the same degree of dealer participation as other
municipal securities of comparable credit rating or quality.
Since annual appropriations are required to make lease payments, municipal
lease obligations generally are not subject to constitutional limitations on
the issuance of debt and may allow an issuer to increase government
liabilities beyond constitutional debt limits. When faced with increasingly
tight budgets, local governments have more discretion to curtail lease
payments under a municipal lease obligation than they do to curtail payments
on other municipal securities. If not enough money is appropriated to make
the lease payments, the leased property may be repossessed as security for
holders of the municipal lease obligations. If this happens, there is no
assurance that the property's private sector or re-leasing value will be
enough to make all outstanding payments on the municipal lease obligations or
that the payments will continue to be tax-free.
While cancellation risk is inherent to municipal lease obligations, the fund
believes that this risk may be reduced, although not eliminated, by its
policies on the quality of securities in which it may invest. Keeping in mind
that the fund can invest in municipal lease obligations without percentage
limits, as of April 30, 1998, the fund held 6.58% of its net assets in
municipal lease obligations.
CALLABLE BONDS. The fund may invest in callable bonds, which allow the issuer
to repay some or all of the bonds ahead of schedule. If a bond is called, the
fund will receive the principal amount, the accrued interest, and a small
additional payment as a call premium. Advisers may sell a callable bond
before its call date, if it believes the bond is at its maximum premium
potential.
An issuer is more likely to call its bonds when interest rates are falling,
because the issuer can issue new bonds with lower interest payments. If a
bond is called, the fund may have to replace it with a lower-yielding
security. If the fund originally paid a premium for the bond because it had
appreciated in value from its original issue price, the fund also may not be
able to recover the full amount it paid for the bond. One way for the fund to
protect itself from call risk is to buy bonds with call protection. Call
protection is an assurance that the bond will not be called for a specific
time period, typically five to 10 years from when the bond is issued.
When pricing callable bonds, each bond is marked-to-market daily based on the
bond's call date. Thus, the call of some or all of the fund's callable bonds
may impact the fund's Net Asset Value. Based on a number of factors,
including certain portfolio management strategies used by Advisers, the fund
believes it has reduced the risk of an adverse impact on its Net Asset Value
from calls of callable bonds. In light of the fund's pricing policies and
certain amortization procedures required by the IRS, the fund does not expect
to suffer any material adverse impact related to the value at which it has
carried the bonds in connection with calls of bonds purchased at a premium.
As with any investment strategy, however, there is no guarantee that a call
may not have a more substantial impact than anticipated.
ESCROW-SECURED OR DEFEASED BONDS are created when an issuer refunds, before
maturity, an outstanding bond issue that is not immediately callable (or
pre-refunds), and sets aside funds for redemption of the bonds at a future
date. The issuer uses the proceeds from a new bond issue to buy high grade,
interest bearing debt securities, generally direct obligations of the U.S.
government. These securities are then deposited in an irrevocable escrow
account held by a trustee bank to secure all future payments of principal and
interest on the pre-refunded bond. Escrow-secured bonds often receive a
triple A or equivalent rating from Fitch, Moody's or S&P.
STRIPPED MUNICIPAL SECURITIES. Municipal securities may be sold in "stripped"
form. Stripped municipal securities represent separate ownership of principal
and interest payments on municipal securities.
ZERO-COUPON SECURITIES. The fund may invest in zero-coupon and delayed
interest securities. Zero-coupon securities make no periodic interest
payments, but are sold at a deep discount from their face value. The buyer
recognizes a rate of return determined by the gradual appreciation of the
security, which is redeemed at face value on a specified maturity date. The
discount varies depending on the time remaining until maturity, as well as
market interest rates, liquidity of the security, and the issuer's perceived
credit quality. The discount, in the absence of financial difficulties of the
issuer, typically decreases as the final maturity date approaches. If the
issuer defaults, the fund may not receive any return on its investment.
Because zero-coupon securities bear no interest and compound semiannually at
the rate fixed at the time of issuance, their value is generally more
volatile than the value of other fixed-income securities. Since zero-coupon
bondholders do not receive interest payments, zero-coupon securities fall
more dramatically than bonds paying interest on a current basis when interest
rates rise. When interest rates fall, zero-coupon securities rise more
rapidly in value, because the bonds reflect a fixed rate of return.
An investment in zero-coupon and delayed interest securities may cause the
fund to recognize income and make distributions to shareholders before it
receives any cash payments on its investment. To generate cash to satisfy
distribution requirements, the fund may have to sell portfolio securities
that it otherwise would have continued to hold or to use cash flows from
other sources such as the sale of fund shares.
CONVERTIBLE AND STEP COUPON BONDS. The fund may invest a portion of its
assets in convertible and step coupon bonds. Convertible bonds are
zero-coupon securities until a predetermined date, at which time they convert
to a specified coupon security. The coupon on step coupon bonds changes
periodically during the life of the security based on predetermined dates
chosen when the security is issued.
U.S. GOVERNMENT OBLIGATIONS are issued by the U.S. Treasury or by agencies
and instrumentalities of the U.S. government and are backed by the full faith
and credit of the U.S. government. They include Treasury bills, notes and
bonds.
COMMERCIAL PAPER is a promissory note issued by a corporation to finance its
short-term credit needs. The fund may invest in taxable commercial paper only
for temporary defensive purposes.
MORE INFORMATION ABOUT SOME OF THE FUND'S OTHER INVESTMENT STRATEGIES AND
PRACTICES
WHEN-ISSUED TRANSACTIONS. Municipal securities are frequently offered on a
"when-issued" basis. When so offered, the price, which is generally expressed
in yield terms, is fixed at the time the commitment to buy is made, but
delivery and payment take place at a later date. During the time between
purchase and settlement, no payment is made by the fund to the issuer and no
interest accrues to the fund. If the other party to the transaction fails to
deliver or pay for the security, the fund could miss a favorable price or
yield opportunity, or could experience a loss.
When the fund makes the commitment to buy a municipal security on a
when-issued basis, it records the transaction and reflects the value of the
security in the determination of its Net Asset Value. The fund believes that
its Net Asset Value or income will not be negatively affected by its purchase
of municipal securities on a when-issued basis. The fund will not engage in
when-issued transactions for investment leverage purposes.
Although the fund will generally buy municipal securities on a when-issued
basis with the intention of acquiring the securities, it may sell the
securities before the settlement date if it is considered advisable. When the
fund is the buyer, it will maintain cash or liquid securities, with an
aggregate value equal to the amount of its purchase commitments, in a
segregated account with its custodian bank until payment is made. If assets
of the fund are held in cash pending the settlement of a purchase of
securities, the fund will not earn income on those assets.
ILLIQUID INVESTMENTS. The fund may invest up to 10% of its net assets in
illiquid securities. Illiquid securities are generally securities that cannot
be sold within seven days in the normal course of business at approximately
the amount at which the fund has valued them.
DIVERSIFICATION. The fund is a diversified fund. As a fundamental policy, the
fund will not buy a security if, with respect to 75% of its total assets,
more than 5% would be in the securities of any single issuer. This limitation
does not apply to investments issued or guaranteed by the U.S. government or
its instrumentalities. For the purpose of determining diversification, each
political subdivision, agency, or instrumentality, each multi-state agency of
which a state is a member, and each public authority that issues private
activity bonds on behalf of a private entity, is considered a separate
issuer. Escrow-secured or defeased bonds are not generally considered an
obligation of the original municipality when determining diversification. For
securities backed only by the assets or revenues of a particular
instrumentality, facility or subdivision, the entity is considered the
issuer. If the creating government or other entity guarantees a security, the
guarantee is considered a separate security and is treated as an issue of the
government or other entity. A guarantee of a security is not considered a
security issued by the guarantor, however, if the value of all securities
issued or guaranteed by that guarantor, and owned by the fund, does not
exceed 10% of the fund's total assets.
The fund intends to meet certain diversification requirements for tax
purposes. These requirements are discussed under "Additional Information on
Distributions and Taxes."
The fund may invest more than 25% of its assets in municipal securities that
finance similar types of projects, such as hospitals, housing, industrial
development, transportation or pollution control. A change that affects one
project, such as proposed legislation on the financing of the project, a
shortage of the materials needed for the project, or a declining need for the
project, would likely affect all similar projects.
SECURITIES TRANSACTIONS. The frequency of portfolio transactions, usually
referred to as the portfolio turnover rate, varies from year to year,
depending on market conditions. While short-term trading increases portfolio
turnover and may increase costs, the execution costs for municipal securities
are substantially less than for equivalent dollar values of equity securities.
INVESTMENT RESTRICTIONS
The fund has adopted the following restrictions as fundamental policies.
These restrictions may not be changed without the approval of a majority of
the outstanding voting securities of the fund. Under the 1940 Act, this means
the approval of (i) more than 50% of the outstanding shares of the fund or
(ii) 67% or more of the shares of the fund present at a shareholder meeting
if more than 50% of the outstanding shares of the fund are represented at the
meeting in person or by proxy, whichever is less. The fund MAY NOT:
1. Borrow money or mortgage or pledge any of its assets, except that borrowings
for temporary or emergency purposes may be made in an amount up to 5% of the
total asset value.
2. Buy any securities on "margin" or sell any securities "short."
3. Lend any of its funds or other assets, except by the purchase of a portion of
an issue of publicly distributed bonds, debentures, notes or other debt
securities, or to the extent the entry into a repurchase agreement may be deemed
a loan. Although such loans are not presently intended, this prohibition will
not preclude the fund from loaning securities to broker-dealers or other
institutional investors if at least 102% cash collateral is pledged and
maintained by the borrower provided such security loans may not be made if, as a
result, the aggregate of such loans exceeds 10% of the value of the fund's total
assets at the time of the most recent loan.
4. Act as underwriter of securities issued by other persons except insofar as
the fund may be technically deemed an underwriter under the federal securities
laws in connection with the disposition of portfolio securities.
5. Purchase the securities of any issuer which would result in owning more than
10% of the voting securities of such issuer.
6. Purchase from or sell to its officers and directors, or any firm of which any
officer or director is a member, as principal, any securities, but may deal with
such persons or firms as brokers and pay a customary brokerage commission;
retain securities of any issuer if, to the knowledge of the fund, one or more of
its officers, directors or investment advisor, own beneficially more than 1/2 of
1% of the securities of such issuer and all such officers and directors together
own beneficially more than 5% of such securities.
7. Acquire, lease or hold real estate, except such as may be necessary or
advisable for the maintenance of its offices.
8. Invest in commodities and commodity contracts, "puts," "calls," "straddles,"
"spreads" or any combination thereof, or interests in oil, gas or other mineral
exploration or development programs. The fund may, however, write covered call
options listed for trading on a national securities exchange and purchase call
options to the extent necessary to cancel call options previously written. At
present there are no options listed for trading on a national securities
exchange covering the types of securities which are appropriate for investment
by the fund and, therefore, there are no option transactions available for the
fund. In addition, pursuant to the regulations under the Corporate Securities
Laws of the State of California, the fund would have to limit its writing of
call options to 25% of its net assets, unless it received an exemption from the
Commissioner of Corporations, should such option transactions become available.
9. Invest in companies for the purpose of exercising control or management.
10. Purchase securities of other investment companies, except in connection with
a merger, consolidation, acquisition or reorganization; except to the extent the
fund invests its uninvested daily cash balances in shares of Franklin Tax-Exempt
Money Fund and other tax-exempt money market funds in the Franklin Templeton
Group of Funds provided i) its purchases and redemptions of such money market
fund shares may not be subject to any purchase or redemption fees, ii) its
investments may not be subject to duplication of management fees, nor to any
charge related to the expense of distributing the fund's shares (as determined
under Rule 12b-1, as amended under the federal securities laws) and iii)
provided aggregate investments by the fund in any such money market fund do not
exceed (A) the greater of (i) 5% of the fund's total net assets or (ii) $2.5
million, or (B) more than 3% of the outstanding shares of any such money market
fund.
11. Invest more than 25% of assets in securities of any industry. For purposes
of this limitation, tax-exempt securities issued by governments or political
subdivisions of governments are not considered to be part of any industry.
If a bankruptcy or other extraordinary event occurs concerning a particular
security owned by the fund, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. In this case, the fund
intends to dispose of the investment as soon as practicable while maximizing the
return to shareholders.
If a percentage restriction is met at the time of investment, a later
increase or decrease in the percentage due to a change in the value or
liquidity of portfolio securities or the amount of assets will not be
considered a violation of any of the foregoing restrictions.
OFFICERS AND DIRECTORS
The Board has the responsibility for the overall management of the fund,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of the fund who are responsible for
administering the fund's day-to-day operations. The affiliations of the
officers and Board members and their principal occupations for the past five
years are shown below. Members of the Board who are considered "interested
persons" of the fund under the 1940 Act are indicated by an asterisk (*).
POSITIONS AND OFFICES
NAME, AGE AND ADDRESS WITH THE FUND PRINCIPAL OCCUPATION
DURING THE PAST FIVE YEARS
- --------------------------------------------------------------------------------
Frank H. Abbott, III (77) Director
1045 Sansome Street
San Francisco, CA 94111
President and Director, Abbott Corporation (an investment company); director
or trustee, as the case may be, of 27 of the investment companies in the
Franklin Templeton Group of Funds; and FORMERLY, Director, MotherLode Gold
Mines Consolidated (gold mining) and Vacu-Dry Co. (food processing).
Harris J. Ashton (66) Director
191 Clapboard Ridge Road
Greenwich, CT 06830
Director, RBC Holdings, Inc. (a bank holding company) and Bar-S Foods (a meat
packing company); director or trustee, as the case may be, of 49 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers).
* Harmon E. Burns (53) Vice President
777 Mariners Island Blvd. and Director
San Mateo, CA 94404
Executive Vice President and Director, Franklin Resources, Inc., Franklin
Templeton Distributors, Inc. and Franklin Templeton Services, Inc.; Executive
Vice President, Franklin Advisers, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; and officer and/or director or trustee, as the case
may be, of most of the other subsidiaries of Franklin Resources, Inc. and of
53 of the investment companies in the Franklin Templeton Group of Funds.
Robert F. Carlson (70) Director
2120 Lambeth Way
Carmichael, CA 95608
Member and past President, Board of Administration, California Public
Employees Retirement Systems (CALPERS); former member and past Chairman of
the Board, Sutter Community Hospitals, Sacramento, CA; former member,
Corporate Board, Blue Shield of California; former Chief Counsel, California
Department of Transportation; and director or trustee, as the case may be, of
nine of the investment companies in the Franklin Templeton Group of Funds.
S. Joseph Fortunato (66) Director
Park Avenue at Morris County
P.O. Box 1945
Morristown, NJ 07962-1945
Member of the law firm of Pitney, Hardin, Kipp & Szuch; director or trustee,
as the case may be, of 51 of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, Director, General Host Corporation
(nursery and craft centers).
* Charles B. Johnson (65) Chairman of
777 Mariners Island Blvd. the Board
San Mateo, CA 94404 and Director
President, Chief Executive Officer and Director, Franklin Resources, Inc.;
Chairman of the Board and Director, Franklin Advisers, Inc., Franklin
Advisory Services, Inc., Franklin Investment Advisory Services, Inc. and
Franklin Templeton Distributors, Inc.; Director, Franklin/Templeton Investor
Services, Inc. and Franklin Templeton Services, Inc.;
officer and/or director or trustee, as the case may be, of most of the other
subsidiaries of Franklin Resources, Inc. and of 50 of the investment
companies in the Franklin Templeton Group of Funds; and FORMERLY, Director,
General Host Corporation (nursery and craft centers).
* Rupert H. Johnson, Jr. (58) President
777 Mariners Island Blvd. and Director
San Mateo, CA 94404
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers,
Inc.; Senior Vice President and Director, Franklin Advisory Services, Inc.
and Franklin Investment Advisory Services, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; and officer and/or director or trustee, as the case
may be, of most of the other subsidiaries of Franklin Resources, Inc. and of
53 of the investment companies in the Franklin Templeton Group of Funds.
Frank W.T. LaHaye (69) Director
20833 Stevens Creek Blvd.
Suite 102
Cupertino, CA 95014
General Partner, Miller & LaHaye, which is the General Partner of Peregrine
Ventures II (venture capital firm); Chairman of the Board and Director,
Quarterdeck Corporation (software firm); Director, Digital Transmission
Systems, Inc. (wireless communications); director or trustee, as the case may
be, of 27 of the investment companies in the Franklin Templeton Group of
Funds; and FORMERLY, Director, Fischer Imaging Corporation (medical imaging
systems) and General Partner, Peregrine Associates, which was the General
Partner of Peregrine Ventures (venture capital firm).
Gordon S. Macklin (70) Director
8212 Burning Tree Road
Bethesda, MD 20817
Director, Fund American Enterprises Holdings, Inc., MCI Communications
Corporation, MedImmune, Inc. (biotechnology), Spacehab, Inc. (aerospace
services) and Real 3D (software); director or trustee, as the case may be, of
49 of the investment companies in the Franklin Templeton Group of Funds; and
FORMERLY, Chairman, White River Corporation (financial services) and
Hambrecht and Quist Group (investment banking), and President, National
Association of Securities Dealers, Inc.
Martin L. Flanagan (38) Vice President
777 Mariners Island Blvd. and Chief
San Mateo, CA 94404 Financial Officer
Senior Vice President and Chief Financial Officer, Franklin Resources, Inc.;
Executive Vice President and Director, Templeton Worldwide, Inc.; Executive
Vice President, Chief Operating Officer and Director, Templeton Investment
Counsel, Inc.; Executive Vice President and Chief Financial Officer, Franklin
Advisers, Inc.; Chief Financial Officer, Franklin Advisory Services, Inc. and
Franklin Investment Advisory Services, Inc.; President and Director, Franklin
Templeton Services, Inc.; Senior Vice President and Chief Financial Officer,
Franklin/Templeton Investor Services, Inc.; officer and/or director of some
of the other subsidiaries of Franklin Resources, Inc.; and officer and/or
director or trustee, as the case may be, of 53 of the investment companies in
the Franklin Templeton Group of Funds.
Deborah R. Gatzek (49) Vice President
777 Mariners Island Blvd. and Secretary
San Mateo, CA 94404
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior
Vice President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Vice
President, Franklin Advisory Services, Inc.; Vice President, Chief Legal
Officer and Chief Operating Officer, Franklin Investment Advisory Services,
Inc.; and officer of 53 of the investment companies in the Franklin Templeton
Group of Funds.
Thomas J. Kenny (35) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Executive Vice President, Franklin Advisers, Inc.; and officer of eight of
the investment companies in the Franklin Templeton Group of Funds.
Diomedes Loo-Tam (59) Treasurer and
777 Mariners Island Blvd. Principal
San Mateo, CA 94404 Accounting
Officer
Senior Vice President, Franklin Templeton Services, Inc.; and officer of 32
of the investment companies in the Franklin Templeton Group of Funds.
Edward V. McVey (61) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 28 of the investment
companies in the Franklin Templeton Group of Funds.
R. Martin Wiskemann (71) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Senior Vice President, Portfolio Manager and Director, Franklin Advisers,
Inc.; Senior Vice President, Franklin Management, Inc.; Vice President and
Director, ILA Financial Services, Inc.; and officer and/or director or
trustee, as the case may be, of 15 of the investment companies in the
Franklin Templeton Group of Funds.
The table above shows the officers and Board members who are affiliated with
Distributors and Advisers. As of June 1, 1998, nonaffiliated members of the
Board are paid $1,100 per month plus $1,050 per meeting attended. As shown
above, the nonaffiliated Board members also serve as directors or trustees of
other investment companies in the Franklin Templeton Group of Funds. They may
receive fees from these funds for their services. The fees payable to
nonaffiliated Board members by the fund are subject to reductions resulting
from fee caps limiting the amount of fees payable to Board members who serve
on other boards within the Franklin Templeton Group of Funds. The following
table provides the total fees paid to nonaffiliated Board members by the fund
and by other funds in the Franklin Templeton Group of Funds.
<TABLE>
<CAPTION>
NUMBER OF BOARDS
TOTAL FEES IN THE FRANKLIN
TOTAL FEES RECEIVED FROM THE TEMPLETON GROUP
RECEIVED FRANKLIN TEMPLETON OF FUNDS ON WHICH
NAME FROM THE FUND*** GROUP OF FUNDS**** EACH SERVES*****
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Frank H. Abbott, III ........................... $22,800 $165,937 27
Harris J. Ashton ................................ 21,850 344,642 49
Robert F. Carlson* .............................. 6,650 17,680 9
S. Joseph Fortunato ............................. 21,850 361,562 51
David W. Garbellano**............................ 7,600 91,317 N/A
Frank W.T. LaHaye ............................... 22,800 141,433 27
Gordon S. Macklin ............................... 21,850 337,292 49
</TABLE>
*Appointed January 15, 1998.
**Deceased, September 27, 1997.
***For the fiscal year ended April 30, 1998, during which time fees at the rate
of $950 per month plus $950 per meeting attended were in effect.
****For the calendar year ended December 31, 1997.
*****We base the number of boards on the number of registered investment
companies in the Franklin Templeton Group of Funds. This number does not include
the total number of series or funds within each investment company for which the
Board members are responsible. The Franklin Templeton Group of Funds currently
includes 54 registered investment companies, with approximately 170 U.S. based
funds or series.
Nonaffiliated members of the Board are reimbursed for expenses incurred in
connection with attending board meetings, paid pro rata by each fund in the
Franklin Templeton Group of Funds for which they serve as director or
trustee. No officer or Board member received any other compensation,
including pension or retirement benefits, directly or indirectly from the
fund or other funds in the Franklin Templeton Group of Funds. Certain
officers or Board members who are shareholders of Resources may be deemed to
receive indirect remuneration by virtue of their participation, if any, in
the fees paid to its subsidiaries.
As of June 2, 1998, the officers and Board members, as a group, owned of
record and beneficially the following shares of the fund: approximately 36
Class I shares, or less than 1% of the total outstanding Class I shares of
the fund. Many of the Board members also own shares in other funds in the
Franklin Templeton Group of Funds. Charles B. Johnson and Rupert H. Johnson,
Jr. are brothers.
INVESTMENT MANAGEMENT
AND OTHER SERVICES
INVESTMENT MANAGER AND SERVICES PROVIDED. The fund's investment manager is
Advisers. Advisers provides investment research and portfolio management
services, including the selection of securities for the fund to buy, hold or
sell and the selection of brokers through whom the fund's portfolio
transactions are executed. Advisers' extensive research activities include,
as appropriate, traveling to meet with issuers and to review project sites.
Advisers' activities are subject to the review and supervision of the Board
to whom Advisers renders periodic reports of the fund's investment
activities. Advisers and its officers, directors and employees are covered by
fidelity insurance for the protection of the fund.
Advisers and its affiliates act as investment manager to numerous other
investment companies and accounts. Advisers may give advice and take action
with respect to any of the other funds it manages, or for its own account,
that may differ from action taken by Advisers on behalf of the fund.
Similarly, with respect to the fund, Advisers is not obligated to recommend,
buy or sell, or to refrain from recommending, buying or selling any security
that Advisers and access persons, as defined by the 1940 Act, may buy or sell
for its or their own account or for the accounts of any other fund. Advisers
is not obligated to refrain from investing in securities held by the fund or
other funds that it manages. Of course, any transactions for the accounts of
Advisers and other access persons will be made in compliance with the fund's
Code of Ethics. Please see "Miscellaneous Information - Summary of Code of
Ethics."
MANAGEMENT FEES. Under its management agreement, the fund pays Advisers a
management fee equal to a monthly rate of 5/96 of 1% of the value of net
assets up to and including $100 million; 1/24 of 1% of the value of net
assets in excess of $100 million up to $250 million; 9/240 of 1% of the value
of net assets in excess of $250 million up to $10 billion; 11/300 of 1% of
the value of net assets in excess of $10 billion up to $12.5 billion; 7/200
of 1% of the value of net assets in excess of $12.5 billion up to $15
billion; 1/30 of 1% of the value of net assets in excess of $15 billion up to
$17.5 billion; 19/600 of 1% of the value of net assets in excess of $17.5
billion up to $20 billion; and 3/100 of 1% of the value of net assets in
excess of $20 billion. The fee is computed at the close of business on the
last business day of each month. Each class pays its proportionate share of
the management fee.
For the fiscal years ended April 30, 1998, 1997 and 1996, management fees
totaling $32,368,130, $31,921,470 and $32,164,702, respectively, were paid to
Advisers.
MANAGEMENT AGREEMENT. The management agreement is in effect until March 31,
1999. It may continue in effect for successive annual periods if its
continuance is specifically approved at least annually by a vote of the Board
or by a vote of the holders of a majority of the fund's outstanding voting
securities, and in either event by a majority vote of the Board members who
are not parties to the management agreement or interested persons of any such
party (other than as members of the Board), cast in person at a meeting
called for that purpose. The management agreement may be terminated without
penalty at any time by the Board or by a vote of the holders of a majority of
the fund's outstanding voting securities on 30 days' written notice to
Advisers, or by Advisers on 30 days' written notice to the fund, and will
automatically terminate in the event of its assignment, as defined in the
1940 Act.
ADMINISTRATIVE SERVICES. Under an agreement with Advisers, FT Services
provides certain administrative services and facilities for the fund. These
include preparing and maintaining books, records, and tax and financial
reports, and monitoring compliance with regulatory requirements. FT Services
is a wholly owned subsidiary of Resources.
Under its administration agreement, Advisers pays FT Services a monthly
administration fee equal to an annual rate of 0.15% of the fund's average
daily net assets up to $200 million, 0.135% of average daily net assets over
$200 million up to $700 million, 0.10% of average daily net assets over $700
million up to $1.2 billion, and 0.075% of average daily net assets over $1.2
billion. During the fiscal year ended April 30, 1998, and the period from
October 1, 1996 through April 30, 1997, administration fees totaling
$5,913,469 and $3,407,436, respectively, were paid to FT Services. The fee is
paid by Advisers. It is not a separate expense of the fund.
SHAREHOLDER SERVICING AGENT. Investor Services, a wholly owned subsidiary of
Resources, is the fund's shareholder servicing agent and acts as the fund's
transfer agent and dividend-paying agent. Investor Services is compensated on
the basis of a fixed fee per account. The fund may also reimburse Investor
Services for certain out-of-pocket expenses, which may include payments by
Investor Services to entities, including affiliated entities, that provide
sub-shareholder services, recordkeeping and/or transfer agency services to
beneficial owners of the fund. The amount of reimbursements for these
services per benefit plan participant fund account per year may not exceed
the per account fee payable by the fund to Investor Services in connection
with maintaining shareholder accounts.
CUSTODIAN. Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, New York 10286, acts as custodian of the securities and other assets of
the fund. The custodian does not participate in decisions relating to the
purchase and sale of portfolio securities.
AUDITOR. Coopers & Lybrand L.L.P., 333 Market Street, San Francisco,
California 94105, is the fund's independent auditor. During the fiscal year
ended April 30, 1998, the auditor's services consisted of rendering an
opinion on the financial statements of the fund included in the fund's
Annual Report to Shareholders for the fiscal year ended April 30, 1998.
HOW DOES THE FUND
BUY SECURITIES FOR ITS PORTFOLIO?
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Since most purchases by the fund are principal transactions at net prices,
the fund incurs little or no brokerage costs. The fund deals directly with
the selling or buying principal or market maker without incurring charges for
the services of a broker on its behalf, unless it is determined that a better
price or execution may be obtained by using the services of a broker.
Purchases of portfolio securities from underwriters will include a commission
or concession paid by the issuer to the underwriter, and purchases from
dealers will include a spread between the bid and ask prices. As a general
rule, the fund does not buy bonds in underwritings where it is given no
choice, or only limited choice, in the designation of dealers to receive the
commission. The fund seeks to obtain prompt execution of orders at the most
favorable net price. Transactions may be directed to dealers in return for
research and statistical information, as well as for special services
provided by the dealers in the execution of orders.
It is not possible to place a dollar value on the special executions or on
the research services Advisers receives from dealers effecting transactions
in portfolio securities. The allocation of transactions in order to obtain
additional research services permits Advisers to supplement its own research
and analysis activities and to receive the views and information of
individuals and research staffs of other securities firms. As long as it is
lawful and appropriate to do so, Advisers and its affiliates may use this
research and data in their investment advisory capacities with other clients.
If the fund's officers are satisfied that the best execution is obtained, the
sale of fund shares, as well as shares of other funds in the Franklin
Templeton Group of Funds, may also be considered a factor in the selection of
broker-dealers to execute the fund's portfolio transactions.
If purchases or sales of securities of the fund and one or more other
investment companies or clients supervised by Advisers are considered at or
about the same time, transactions in these securities will be allocated among
the several investment companies and clients in a manner deemed equitable to
all by Advisers, taking into account the respective sizes of the funds and
the amount of securities to be purchased or sold. In some cases this
procedure could have a detrimental effect on the price or volume of the
security so far as the fund is concerned. In other cases it is possible that
the ability to participate in volume transactions may improve execution and
reduce transaction costs to the fund.
During the fiscal years ended April 30, 1998, 1997 and 1996, the fund paid no
brokerage commissions.
As of April 30, 1998, the fund did not own securities of its regular
broker-dealers.
HOW DO I BUY, SELL AND EXCHANGE SHARES?
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ADDITIONAL INFORMATION ON BUYING SHARES
The fund continuously offers its shares through Securities Dealers who have
an agreement with Distributors. Securities Dealers may at times receive the
entire sales charge. A Securities Dealer who receives 90% or more of the
sales charge may be deemed an underwriter under the Securities Act of 1933,
as amended.
Banks and financial institutions that sell shares of the fund may be required
by state law to register as Securities Dealers. Financial institutions or
their affiliated brokers may receive an agency transaction fee in the
percentages indicated in the table under "How Do I Buy Shares? - Purchase
Price of Fund Shares" in the Prospectus.
When you buy shares, if you submit a check or a draft that is returned unpaid
to the fund we may impose a $10 charge against your account for each returned
item.
Under agreements with certain banks in Taiwan, Republic of China, the fund's
shares are available to these banks' trust accounts without a sales charge.
The banks may charge service fees to their customers who participate in the
trusts. A portion of these service fees may be paid to Distributors or one of
its affiliates to help defray expenses of maintaining a service office in
Taiwan, including expenses related to local literature fulfillment and
communication facilities.
Class I shares of the fund may be offered to investors in Taiwan through
securities advisory firms known locally as Securities Investment Consulting
Enterprises. In conformity with local business practices in Taiwan, Class I
shares may be offered with the following schedule of sales charges:
SALES
SIZE OF PURCHASE - U.S. DOLLARS CHARGE
- ----------------------------------------------------------
Under $30,000................................... 3%
$30,000 but less than $100,000.................. 2%
$100,000 but less than $400,000................. 1%
$400,000 or more................................ 0%
OTHER PAYMENTS TO SECURITIES DEALERS. Distributors may pay the following
commissions, out of its own resources, to Securities Dealers who initiate and
are responsible for purchases of Class I shares of $1 million or more: 0.75%
on sales of $1 million to $2 million, plus 0.60% on sales over $2 million to
$3 million, plus 0.50% on sales over $3 million to $50 million, plus 0.25% on
sales over $50 million to $100 million, plus 0.15% on sales over $100
million. These breakpoints are reset every 12 months for purposes of
additional purchases.
Distributors and/or its affiliates provide financial support to various
Securities Dealers that sell shares of the Franklin Templeton Group of Funds.
This support is based primarily on the amount of sales of fund shares. The
amount of support may be affected by: total sales; net sales; levels of
redemptions; the proportion of a Securities Dealer's sales and marketing
efforts in the Franklin Templeton Group of Funds; a Securities Dealer's
support of, and participation in, Distributors' marketing programs; a
Securities Dealer's compensation programs for its registered representatives;
and the extent of a Securities Dealer's marketing programs relating to the
Franklin Templeton Group of Funds. Financial support to Securities Dealers
may be made by payments from Distributors' resources, from Distributors'
retention of underwriting concessions and, in the case of funds that have
Rule 12b-1 plans, from payments to Distributors under such plans. In
addition, certain Securities Dealers may receive brokerage commissions
generated by fund portfolio transactions in accordance with the NASD's rules.
Distributors routinely sponsors due diligence meetings for registered
representatives during which they receive updates on various Franklin
Templeton Funds and are afforded the opportunity to speak with portfolio
managers. Invitation to these meetings is not conditioned on selling a
specific number of shares. Those who have shown an interest in the Franklin
Templeton Funds, however, are more likely to be considered. To the extent
permitted by their firm's policies and procedures, registered
representatives' expenses in attending these meetings may be covered by
Distributors.
LETTER OF INTENT. You may qualify for a reduced sales charge when you buy
Class I shares, as described in the Prospectus. At any time within 90 days
after the first investment that you want to qualify for a reduced sales
charge, you may file with the fund a signed shareholder application with the
Letter of Intent section completed. After the Letter is filed, each
additional investment will be entitled to the sales charge applicable to the
level of investment indicated on the Letter. Sales charge reductions based on
purchases in more than one Franklin Templeton Fund will be effective only
after notification to Distributors that the investment qualifies for a
discount. Your holdings in the Franklin Templeton Funds acquired more than 90
days before the Letter is filed will be counted towards completion of the
Letter, but they will not be entitled to a retroactive downward adjustment in
the sales charge. Any redemptions you make during the 13 month period will be
subtracted from the amount of the purchases for purposes of determining
whether the terms of the Letter have been completed. If the Letter is not
completed within the 13 month period, there will be an upward adjustment of
the sales charge, depending on the amount actually purchased (less
redemptions) during the period. If you execute a Letter before a change in
the sales charge structure of the fund, you may complete the Letter at the
lower of the new sales charge structure or the sales charge structure in
effect at the time the Letter was filed.
As mentioned in the Prospectus, five percent (5%) of the amount of the total
intended purchase will be reserved in Class I shares of the fund registered
in your name until you fulfill the Letter. If the amount of your total
purchases, less redemptions, equals the amount specified under the Letter,
the reserved shares will be deposited to an account in your name or delivered
to you or as you direct. If the amount of your total purchases, less
redemptions, exceeds the amount specified under the Letter and is an amount
that would qualify for a further quantity discount, a retroactive price
adjustment will be made by Distributors and the Securities Dealer through
whom purchases were made pursuant to the Letter (to reflect such further
quantity discount) on purchases made within 90 days before and on those made
after filing the Letter. The resulting difference in Offering Price will be
applied to the purchase of additional shares at the Offering Price applicable
to a single purchase or the dollar amount of the total purchases. If the
amount of your total purchases, less redemptions, is less than the amount
specified under the Letter, you will remit to Distributors an amount equal to
the difference in the dollar amount of sales charge actually paid and the
amount of sales charge that would have applied to the aggregate purchases if
the total of the purchases had been made at a single time. Upon remittance,
the reserved shares held for your account will be deposited to an account in
your name or delivered to you or as you direct. If within 20 days after
written request the difference in sales charge is not paid, the redemption of
an appropriate number of reserved shares to realize the difference will be
made. In the event of a total redemption of the account before fulfillment of
the Letter, the additional sales charge due will be deducted from the
proceeds of the redemption, and the balance will be forwarded to you.
REINVESTMENT DATE. Shares acquired through the reinvestment of dividends will
be purchased at the Net Asset Value determined on the business day following
the dividend record date (sometimes known as the "ex-dividend date"). The
processing date for the reinvestment of dividends may vary and does not
affect the amount or value of the shares acquired.
ADDITIONAL INFORMATION ON EXCHANGING SHARES
If you request the exchange of the total value of your account, declared but
unpaid income dividends and capital gain distributions will be exchanged into
the new fund and will be invested at Net Asset Value. Backup withholding and
information reporting may apply. Information regarding the possible tax
consequences of an exchange is included in the tax section in this SAI and in
the Prospectus.
If a substantial number of shareholders should, within a short period, sell
their shares of the fund under the exchange privilege, the fund might have to
sell portfolio securities it might otherwise hold and incur the additional
costs related to such transactions. On the other hand, increased use of the
exchange privilege may result in periodic large inflows of money. If this
occurs, it is the fund's general policy to initially invest this money in
short-term, tax-exempt municipal securities, unless it is believed that
attractive investment opportunities consistent with the fund's investment
goal exist immediately. This money will then be withdrawn from the
short-term, tax-exempt municipal securities and invested in portfolio
securities in as orderly a manner as is possible when attractive investment
opportunities arise.
The proceeds from the sale of shares of an investment company are generally
not available until the seventh day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange
until that seventh day. The sale of fund shares to complete an exchange will
be effected at Net Asset Value at the close of business on the day the
request for exchange is received in proper form. Please see "May I Exchange
Shares for Shares of Another Fund?" in the Prospectus.
ADDITIONAL INFORMATION ON SELLING SHARES
SYSTEMATIC WITHDRAWAL PLAN. There are no service charges for establishing or
maintaining a systematic withdrawal plan. Payments under the plan will be
made from the redemption of an equivalent amount of shares in your account,
generally on the 25th day of the month in which a payment is scheduled. If
the 25th falls on a weekend or holiday, we will process the redemption on the
next business day.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust
the shares in your account if payments exceed distributions received from the
fund. This is especially likely to occur if there is a market decline. If a
withdrawal amount exceeds the value of your account, your account will be
closed and the remaining balance in your account will be sent to you. Because
the amount withdrawn under the plan may be more than your actual yield or
income, part of the payment may be a return of your investment.
The fund may discontinue a systematic withdrawal plan by notifying you in
writing and will automatically discontinue a systematic withdrawal plan if
all shares in your account are withdrawn or if the fund receives notification
of the shareholder's death or incapacity.
THROUGH YOUR SECURITIES DEALER. If you sell shares through your Securities
Dealer, it is your dealer's responsibility to transmit the order to the fund
in a timely fashion. Any loss to you resulting from your dealer's failure to
do so must be settled between you and your Securities Dealer.
REDEMPTIONS IN KIND. The fund has committed itself to pay in cash (by check)
all requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the
value of the fund's net assets at the beginning of the 90-day period. This
commitment is irrevocable without the prior approval of the SEC. In the case
of redemption requests in excess of these amounts, the Board reserves the
right to make payments in whole or in part in securities or other assets of
the fund, in case of an emergency, or if the payment of such a redemption in
cash would be detrimental to the existing shareholders of the fund. In these
circumstances, the securities distributed would be valued at the price used
to compute the fund's net assets and you may incur brokerage fees in
converting the securities to cash. The fund does not intend to redeem
illiquid securities in kind. If this happens, however, you may not be able to
recover your investment in a timely manner.
GENERAL INFORMATION
If dividend checks are returned to the fund marked "unable to forward" by the
postal service, we will consider this a request by you to change your
dividend option to reinvest all distributions. The proceeds will be
reinvested in additional shares at Net Asset Value until we receive new
instructions.
Distribution or redemption checks sent to you do not earn interest or any
other income during the time the checks remain uncashed. Neither the fund nor
its affiliates will be liable for any loss caused by your failure to cash
such checks. The fund is not responsible for tracking down uncashed checks,
unless a check is returned as undeliverable.
In most cases, if mail is returned as undeliverable we are required to take
certain steps to try to find you free of charge. If these attempts are
unsuccessful, however, we may deduct the costs of any additional efforts to
find you from your account. These costs may include a percentage of the
account when a search company charges a percentage fee in exchange for its
location services.
All checks, drafts, wires and other payment mediums used to buy or sell
shares of the fund must be denominated in U.S. dollars. We may, in our sole
discretion, either (a) reject any order to buy or sell shares denominated in
any other currency or (b) honor the transaction or make adjustments to your
account for the transaction as of a date and with a foreign currency exchange
factor determined by the drawee bank.
SPECIAL SERVICES. Investor Services may pay certain financial institutions
that maintain omnibus accounts with the fund on behalf of numerous beneficial
owners for recordkeeping operations performed with respect to such owners.
For each beneficial owner in the omnibus account, the fund may reimburse
Investor Services an amount not to exceed the per account fee that the fund
normally pays Investor Services. These financial institutions may also charge
a fee for their services directly to their clients.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
HOW ARE FUND SHARES VALUED?
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We calculate the Net Asset Value per share as of the close of the NYSE,
normally 1:00 p.m. Pacific time, each day that the NYSE is open for trading.
As of the date of this SAI, the fund is informed that the NYSE observes the
following holidays: New Year's Day, Martin Luther King Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
For the purpose of determining the aggregate net assets of the fund, cash and
receivables are valued at their realizable amounts. Interest is recorded as
accrued. Over-the-counter portfolio securities are valued within the range of
the most recent quoted bid and ask prices. Portfolio securities that are
traded both in the over-the-counter market and on a stock exchange are valued
according to the broadest and most representative market as determined by
Advisers. Municipal securities generally trade in the over-the-counter market
rather than on a securities exchange. In the absence of a sale or reported
bid and ask prices, information with respect to bond and note transactions,
quotations from bond dealers, market transactions in comparable securities,
and various relationships between securities are used to determine the value
of municipal securities.
Generally, trading in U.S. government securities and money market instruments
is substantially completed each day at various times before the close of the
NYSE. The value of these securities used in computing the Net Asset Value of
each class is determined as of such times. Occasionally, events affecting the
values of these securities may occur between the times at which they are
determined and the close of the NYSE that will not be reflected in the
computation of the Net Asset Value. If events materially affecting the values
of these securities occur during this period, the securities will be valued
at their fair value as determined in good faith by the Board.
Other securities for which market quotations are readily available are valued
at the current market price, which may be obtained from a pricing service,
based on a variety of factors including recent trades, institutional size
trading in similar types of securities (considering yield, risk and maturity)
and/or developments related to specific issues. Securities and other assets
for which market prices are not readily available are valued at fair value as
determined following procedures approved by the Board. With the approval of
the Board, the fund may use a pricing service, bank or Securities Dealer to
perform any of the above described functions.
ADDITIONAL INFORMATION
ON DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
DISTRIBUTIONS OF NET INVESTMENT INCOME. By meeting certain requirements of
the Code, the fund has qualified and continues to qualify to pay
"exempt-interest dividends" to shareholders. These dividends are derived from
interest income exempt from regular federal income tax, and are not subject
to regular federal income tax when they are distributed. In addition, to the
extent that exempt-interest dividends are derived from interest on
obligations of a state or its political subdivisions, or from interest on
qualifying U.S. territorial obligations (including qualifying obligations of
Puerto Rico, the U.S. Virgin Islands or Guam), they will also be exempt from
that state's personal income taxes. A state generally does not grant tax-free
treatment to interest on state and municipal securities of other states.
At the end of each calendar year, the fund will provide you with the
percentage of any dividends paid that may qualify for tax-free treatment on
your personal income tax return. You should consult with your personal tax
advisor to determine the application of your state and local laws to these
distributions. Corporate shareholders should consult with their corporate tax
advisors about whether any of their distributions may be exempt from
corporate income or franchise taxes.
The fund may earn taxable income on any temporary investments, on the
discount from stripped obligations or their coupons, on income from
securities loans or other taxable transactions, on the excess of short-term
capital gains over long-term capital losses earned by the fund ("net
short-term capital gain"), or on ordinary income derived from the sale of
market discount bonds. Any distributions by the fund from such income will be
taxable to you as ordinary income, whether you take them in cash or
additional shares.
From time to time, the fund may buy a tax-exempt bond in the secondary market
for a price that is less than the principal amount of the bond. This discount
is called market discount if it exceeds a de minimis amount of discount under
the Code. For market discount bonds purchased after April 30, 1993, a portion
of the gain on sale or disposition (not to exceed the accrued portion of
market discount at the time of the sale) is treated as ordinary income rather
than capital gain. Any distribution by the fund of market discount income
will be taxable as ordinary income to you. The fund may elect in any fiscal
year not to distribute to you its taxable ordinary income and to pay a
federal income or excise tax on this income at the fund level. In any case,
the amount of market discount, if any, is expected to be small.
DISTRIBUTIONS OF CAPITAL GAINS. The fund may derive capital gains and losses
in connection with sales or other dispositions of its portfolio securities.
Distributions derived from the excess of net short-term capital gain over net
long-term capital loss will be taxable to you as ordinary income.
Distributions paid from long-term capital gains realized by the fund will be
taxable to you as long-term capital gain, regardless of how long you have
held your shares in the fund. Any net short-term or long-term capital gains
realized by the fund (net of any capital loss carryovers) generally will be
distributed once each year, and may be distributed more frequently, if
necessary, in order to reduce or eliminate federal excise or income taxes on
the fund.
Gains from securities sold by the fund that are held for more than one year
will be taxable at a maximum rate of 20% for individual investors in the 28%
or higher federal income tax brackets, and at a maximum rate of 10% for
individual investors in the 15% federal income tax bracket. Gains from
securities sold by the fund before January 1, 1998, are taxable at different
rates depending on the length of time the fund held such assets.
For "qualified 5-year gains," the maximum capital gains tax rate is 18% for
individuals in the 28% or higher federal income tax brackets and 8% for
individuals in the 15% federal income tax bracket. For individuals in the 15%
bracket, qualified 5-year gains are net gains on securities held for more
than 5 years that are sold after December 31, 2000. For individuals who are
subject to tax at higher rates, qualified 5-year gains are net gains on
securities that are purchased after December 31, 2000 and are held for more
than 5 years. Taxpayers subject to tax at the higher rates may also make an
election for shares held on January 1, 2001 to recognize gain on their shares
in order to qualify such shares as qualified 5-year property.
Additional information on reporting capital gain distributions on your
personal income tax returns is available in Franklin Templeton's Tax
Information Handbook. Please call Fund Information to request a copy.
Questions about your personal tax reporting should be addressed to your
personal tax advisor.
CERTAIN DISTRIBUTIONS PAID IN JANUARY. Distributions of taxable income, if
any, which are declared in October, November or December to shareholders of
record in such month, and paid to you in January of the following year, will
be treated for tax purposes as if they had been received by you on December
31 of the year in which they were declared. The fund will report this income
to you on your Form 1099-DIV for the year in which these distributions were
declared. You will receive a Form 1099-DIV only for calendar years in which
the fund has made a distribution to you of taxable ordinary income or capital
gain.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS. The fund will inform you of
the amount and character of your distributions at the time they are paid, and
will shortly after the close of each calendar year advise you of the tax status
for federal income tax purposes of such distributions, including the portion of
the distributions that on average comprise taxable income or interest income
that is a tax preference item under the alternative minimum tax. If you have not
held fund shares for a full year, you may have designated as taxable, tax-exempt
or as a tax preference a percentage of income that is not equal to the actual
amount of such income earned during the period of your investment in the fund.
TAXES
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY. The fund has elected
to be treated as a regulated investment company under Subchapter M of the
Code, has qualified as such for its most recent fiscal year, and intends to
so qualify during the current fiscal year. The Board reserves the right not
to maintain the qualification of the fund as a regulated investment company
if it determines such course of action to be beneficial to shareholders. In
such case, the fund will be subject to federal, and possibly state, corporate
taxes on its taxable income and gains, and distributions to you will be taxed
as ordinary dividend income to the extent of the fund's available earnings
and profits.
In order to qualify as a regulated investment company for tax purposes, the
fund must meet certain specific requirements, including:
o The fund must maintain a diversified portfolio of securities, wherein no
security (other than U.S. government securities and securities of other
regulated investment companies) can exceed 25% of the fund's total assets,
and, with respect to 50% of the fund's total assets, no investment (other
than cash and cash items, U.S. government securities and securities of
other regulated investment companies) can exceed 5% of the fund's total
assets or 10% of the outstanding voting securities of the issuer;
o The fund must derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loans, and gains from the
sale or disposition of stock, securities or foreign currencies, or other
income derived with respect to its business of investing in such stock,
securities, or currencies; and
o The fund must distribute to its shareholders at least 90% of its investment
company taxable income (i.e., net investment income plus net short-term
capital gains) and net tax-exempt income for each of its fiscal years.
EXCISE TAX DISTRIBUTION REQUIREMENTS. The Code requires the fund to
distribute at least 98% of its taxable ordinary income earned during the
calendar year and 98% of its capital gain net income earned during the twelve
month period ending October 31 (in addition to undistributed amounts from the
prior year) to you by December 31 of each year in order to avoid federal
excise taxes. The fund intends to declare and pay sufficient dividends in
December (or in January that are treated by you as received in December) but
does not guarantee and can give no assurances that its distributions will be
sufficient to eliminate all such taxes.
REDEMPTION OF FUND SHARES. Redemptions and exchanges of fund shares are
taxable transactions for federal and state income tax purposes. The tax law
requires that you recognize a gain or loss in an amount equal to the
difference between your tax basis and the amount you received in exchange for
your shares, subject to the rules described below. If you hold your shares as
a capital asset, the gain or loss that you realize will be capital gain or
loss, and will be long-term for federal income tax purposes if you have held
your shares for more than one year at the time of redemption or exchange. Any
loss incurred on the redemption or exchange of shares held for six months or
less will be disallowed to the extent of any exempt-interest dividends
distributed to you with respect to your shares in the fund and any remaining
loss will be treated as a long-term capital loss to the extent of any
long-term capital gains distributed to you by the fund on those shares.
All or a portion of any loss that you realize upon the redemption of your
fund shares will be disallowed to the extent that you buy other shares in the
fund (through reinvestment of dividends or otherwise) within 30 days before
or after your share redemption. Any loss disallowed under these rules will be
added to your tax basis in the new shares you buy.
DEFERRAL OF BASIS. All or a portion of the sales charge that you paid for
your shares in the fund will be excluded from your tax basis in any of the
shares sold within 90 days of their purchase (for the purpose of determining
gain or loss upon the sale of such shares) if you reinvest the sales proceeds
in the fund or in another of the Franklin Templeton Funds, and the sales
charge that would otherwise apply to your reinvestment is reduced or
eliminated. The portion of the sales charge excluded from your tax basis in
the shares sold will equal the amount that the sales charge is reduced on
your reinvestment. Any portion of the sales charge excluded from your tax
basis in the shares sold will be added to the tax basis of the shares you
acquire from your reinvestment.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS. Because the fund's income is
derived primarily from interest rather than dividends, no portion of its
distributions will generally be eligible for the corporate dividends-received
deduction. None of the dividends paid by the fund for the most recent fiscal
year qualified for such deduction, and it is anticipated that none of the
current year's dividends will so qualify.
TREATMENT OF PRIVATE ACTIVITY BOND INTEREST. The interest on bonds issued to
finance essential state and local government operations is generally
tax-exempt, and distributions paid from this interest income will generally
qualify as an exempt-interest dividend. Interest on certain non-essential or
"private activity bonds" (including those for housing and student loans)
issued after August 7, 1986, while still exempt from regular federal income
tax, constitutes a preference item for taxpayers in determining their
alternative minimum tax under the Code and under the income tax provisions of
several states. Private activity bond interest could subject you to or
increase your liability under federal and state alternative minimum taxes,
depending on your individual or corporate tax position.
Consistent with the fund's investment goal, the fund may acquire such private
activity bonds if, in Advisers' opinion, such bonds represent the most
attractive investment opportunity then available to the fund. Persons who are
defined in the Code as "substantial users" (or persons related to such users)
of facilities financed by private activity bonds should consult with their
tax advisors before buying shares in the fund.
INVESTMENTS IN ORIGINAL ISSUE DISCOUNT (OID) AND MARKET DISCOUNT BONDS. To
the extent the fund invests in zero coupon bonds, bonds issued or acquired at
a discount, delayed interest bonds, or bonds that provide for payment of
interest-in-kind (PIK), the fund may have to recognize income and make
distributions to you before its receipt of cash payments. Zero coupon and
delayed interest bonds are normally issued at a discount and are therefore
generally subject to tax reporting as OID obligations. The fund is required
to accrue as income a portion of the discount at which these securities were
issued, and to distribute such income each year (as ordinary dividends) in
order to maintain its qualification as a regulated investment company and to
avoid income reporting and excise taxes at the fund level. PIK bonds are
subject to similar tax rules concerning the amount, character and timing of
income required to be accrued by the fund. Bonds acquired in the secondary
market for a price less than their stated redemption price, or revised issue
price in the case of a bond having OID, are said to have been acquired with
market discount. For these bonds, the fund may elect to accrue market
discount on a current basis, in which case the fund will be required to
distribute any such accrued discount. If the fund does not elect to accrue
market discount into income currently, gain recognized on sale will be
recharacterized as ordinary income instead of capital gain to the extent of
any accumulated market discount on the obligation.
DEFAULTED OBLIGATIONS. The fund may be required to accrue income on defaulted
obligations and to distribute such income to you even though it is not
currently receiving interest or principal payments on such obligations. In
order to generate cash to satisfy these distribution requirements, the fund
may be required to sell portfolio securities that it otherwise would have
continued to hold or to use cash flows from other sources such as the sale of
fund shares.
THE FUND'S UNDERWRITER
Pursuant to an underwriting agreement, Distributors acts as principal
underwriter in a continuous public offering of the fund's shares. The
underwriting agreement will continue in effect for successive annual periods
if its continuance is specifically approved at least annually by a vote of
the Board or by a vote of the holders of a majority of the fund's outstanding
voting securities, and in either event by a majority vote of the Board
members who are not parties to the underwriting agreement or interested
persons of any such party (other than as members of the Board), cast in
person at a meeting called for that purpose. The underwriting agreement
terminates automatically in the event of its assignment and may be terminated
by either party on 90 days' written notice.
Distributors pays the expenses of the distribution of fund shares, including
advertising expenses and the costs of printing sales material and
prospectuses used to offer shares to the public. The fund pays the expenses
of preparing and printing amendments to its registration statements and
prospectuses (other than those necessitated by the activities of
Distributors) and of sending prospectuses to existing shareholders.
In connection with the offering of the fund's shares, aggregate underwriting
commissions for the fiscal years ended April 30, 1998, 1997 and 1996, were
$12,768,187, $12,215,933 and $17,594,884, respectively. After allowances to
dealers, Distributors retained $811,334, $785,459 and $1,143,252 in net
underwriting discounts and commissions and received $23,704, $30,800 and
$11,378 in connection with redemptions or repurchases of shares for the
respective years. Distributors may be entitled to reimbursement under the
Rule 12b-1 plan for each class, as discussed below. Except as noted,
Distributors received no other compensation from the fund for acting as
underwriter.
THE RULE 12B-1 PLANS
Class I and Class II have separate distribution plans or "Rule 12b-1 plans"
that were adopted pursuant to Rule 12b-1 of the 1940 Act.
THE CLASS I PLAN. Under the Class I plan, the fund may pay up to a maximum of
0.10% per year of Class I's average daily net assets, payable quarterly, for
expenses incurred in the promotion and distribution of Class I shares.
In implementing the Class I plan, the Board has determined that the annual
fees payable under the plan will be equal to the sum of: (i) the amount
obtained by multiplying 0.10% by the average daily net assets represented by
Class I shares of the fund that were acquired by investors on or after May 1,
1994, the effective date of the plan ("New Assets"), and (ii) the amount
obtained by multiplying 0.05% by the average daily net assets represented by
Class I shares of the fund that were acquired before May 1, 1994 ("Old
Assets"). These fees will be paid to the current Securities Dealer of record
on the account. In addition, until such time as the maximum payment of 0.10%
is reached on a yearly basis, up to an additional 0.01% will be paid to
Distributors under the plan so long as the Fund's assets exceed $4 billion,
or should the fund's assets fall below $4 billion, up to an additional 0.02%
could be paid to Distributors. The payments made to Distributors will be used
by Distributors to defray other marketing expenses that have been incurred in
accordance with the plan, such as advertising.
The fee is a Class I expense. This means that all Class I shareholders,
regardless of when they purchased their shares, will bear Rule 12b-1 expenses
at the same rate. The initial rate will be at least 0.06% (0.05% plus 0.01%)
of the average daily net assets of Class I and, as Class I shares are sold on
or after May 1, 1994, will increase over time. Thus, as the proportion of
Class I shares purchased on or after May 1, 1994, increases in relation to
outstanding Class I shares, the expenses attributable to payments under the
plan will also increase (but will not exceed 0.10% of average daily net
assets). While this is the currently anticipated calculation for fees payable
under the Class I plan, the plan permits the Board to allow the fund to pay a
full 0.10% on all assets at any time. The approval of the Board would be
required to change the calculation of the payments to be made under the Class
I plan.
THE CLASS II PLAN. Under the Class II plan, the fund pays Distributors up to
0.50% per year of Class II's average daily net assets, payable quarterly, for
distribution and related expenses. These fees may be used to compensate
Distributors or others for providing distribution and related services and
bearing certain Class II expenses. All distribution expenses over this amount
will be borne by those who have incurred them without reimbursement by the
fund.
Under the Class II plan, the fund also pays an additional 0.15% per year of
Class II's average daily net assets, payable quarterly, as a servicing fee.
THE CLASS I AND CLASS II PLANS. In addition to the payments that Distributors
or others are entitled to under each plan, each plan also provides that to
the extent the fund, Advisers or Distributors or other parties on behalf of
the fund, Advisers or Distributors make payments that are deemed to be for
the financing of any activity primarily intended to result in the sale of
shares of each class within the context of Rule 12b-1 under the 1940 Act,
then such payments shall be deemed to have been made pursuant to the plan.
The terms and provisions of each plan relating to required reports, term, and
approval are consistent with Rule 12b-1.
In no event shall the aggregate asset-based sales charges, which include
payments made under each plan, plus any other payments deemed to be made
pursuant to a plan, exceed the amount permitted to be paid under the rules of
the NASD.
To the extent fees are for distribution or marketing functions, as
distinguished from administrative servicing or agency transactions, certain
banks will not be entitled to participate in the plans as a result of
applicable federal law prohibiting certain banks from engaging in the
distribution of mutual fund shares. These banking institutions, however, are
permitted to receive fees under the plans for administrative servicing or for
agency transactions. If you are a customer of a bank that is prohibited from
providing these services, you would be permitted to remain a shareholder of
the fund, and alternate means for continuing the servicing would be sought.
In this event, changes in the services provided might occur and you might no
longer be able to avail yourself of any automatic investment or other
services then being provided by the bank. It is not expected that you would
suffer any adverse financial consequences as a result of any of these changes.
Each plan has been approved in accordance with the provisions of Rule 12b-1.
The plans are renewable annually by a vote of the Board, including a majority
vote of the Board members who are not interested persons of the fund and who
have no direct or indirect financial interest in the operation of the plans,
cast in person at a meeting called for that purpose. It is also required that
the selection and nomination of such Board members be done by the
non-interested members of the Board. The plans and any related agreement may
be terminated at any time, without penalty, by vote of a majority of the
non-interested Board members on not more than 60 days' written notice, by
Distributors on not more than 60 days' written notice, by any act that
constitutes an assignment of the management agreement with Advisers or by
vote of a majority of the outstanding shares of the class. Distributors or
any dealer or other firm may also terminate their respective distribution or
service agreement at any time upon written notice.
The plans and any related agreements may not be amended to increase
materially the amount to be spent for distribution expenses without approval
by a majority of the outstanding shares of the class, and all material
amendments to the plans or any related agreements shall be approved by a vote
of the non-interested members of the Board, cast in person at a meeting
called for the purpose of voting on any such amendment.
Distributors is required to report in writing to the Board at least quarterly
on the amounts and purpose of any payment made under the plans and any
related agreements, as well as to furnish the Board with such other
information as may reasonably be requested in order to enable the Board to
make an informed determination of whether the plans should be continued.
For the fiscal year ended April 30, 1998, Distributors had eligible
expenditures of $6,009,935 and $979,971 for advertising, printing, and
payments to underwriters and broker-dealers pursuant to the Class I and Class
II plans, respectively, of which the fund paid Distributors $5,085,757 and
$569,003 under the Class I and Class II plans.
HOW DOES THE FUND
MEASURE PERFORMANCE?
Performance quotations are subject to SEC rules. These rules require the use
of standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the fund be accompanied
by certain standardized performance information computed as required by the
SEC. Average annual total return and current yield quotations used by the
fund are based on the standardized methods of computing performance mandated
by the SEC. If a Rule 12b-1 plan is adopted, performance figures reflect fees
from the date of the plan's implementation. An explanation of these and other
methods used by the fund to compute or express performance follows.
Regardless of the method used, past performance does not guarantee future
results, and is an indication of the return to shareholders only for the
limited historical period used.
TOTAL RETURN
AVERAGE ANNUAL TOTAL RETURN. Average annual total return is determined by
finding the average annual rates of return over the periods indicated below
that would equate an initial hypothetical $1,000 investment to its ending
redeemable value. The calculation assumes the maximum front-end sales charge
is deducted from the initial $1,000 purchase, and income dividends and
capital gain distributions are reinvested at Net Asset Value. The quotation
assumes the account was completely redeemed at the end of each period and the
deduction of all applicable charges and fees. If a change is made to the
sales charge structure, historical performance information will be restated
to reflect the maximum front-end sales charge currently in effect.
The average annual total return for Class I for the one-, five- and ten-year
periods ended April 30, 1998, was 4.28%, 5.49% and 7.79%, respectively. The
average annual total return for Class II for the one-year period ended April
30, 1998, and for the period from inception (May 1, 1995) through April 30,
1998, was 6.15% and 6.69%, respectively.
These figures were calculated according to the SEC formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of each period at the end of each period
CUMULATIVE TOTAL RETURN. Like average annual total return, cumulative total
return assumes the maximum front-end sales charge is deducted from the
initial $1,000 purchase, and income dividends and capital gain distributions
are reinvested at Net Asset Value. Cumulative total return, however, is based
on the actual return for a specified period rather than on the average return
over the periods indicated above. The cumulative total return for Class I for
the one-, five- and ten-year periods ended April 30, 1998, was 4.28%, 30.63%
and 111.74%, respectively. The cumulative total return for Class II for the
one-year period ended April 30, 1998, and for the period from inception (May
1, 1995) through April 30, 1998, was 6.15% and 21.43%, respectively.
YIELD
CURRENT YIELD. Current yield of each class shows the income per share earned
by the fund. It is calculated by dividing the net investment income per share
of each class earned during a 30-day base period by the applicable maximum
Offering Price per share on the last day of the period and annualizing the
result. Expenses accrued for the period include any fees charged to all
shareholders of the class during the base period. The yield for each class
for the 30-day period ended April 30, 1998, was 4.39% for Class I and 3.95%
for Class II.
These figures were obtained using the following SEC formula:
6
Yield = 2 [(a-b + 1) - 1]
---
cd
where:
a = interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that
were entitled to receive dividends
d = the maximum Offering Price per share on the last day of the period
TAXABLE-EQUIVALENT YIELD. The fund may also quote a taxable-equivalent yield
for each class that shows the before-tax yield that would have to be earned
from a taxable investment to equal the yield for the class.
Taxable-equivalent yield is computed by dividing the portion of the class'
yield that is tax-exempt by one minus the highest applicable federal income
tax rate and adding the product to the portion of the class' yield that is
not tax-exempt, if any. The taxable-equivalent yield for each class for the
30-day period ended April 30, 1998, was 7.27% for Class I and 6.54% for Class
II.
As of April 30, 1998, the federal income tax rate upon which the
taxable-equivalent yield quotations are based was 39.6%. From time to time,
as any changes to the rate become effective, taxable-equivalent yield
quotations advertised by the fund will be updated to reflect these changes.
The fund expects updates may be necessary as tax rates are changed by the
federal government. The advantage of tax-free investments, like the fund,
will be enhanced by any tax rate increases. Therefore, the details of
specific tax increases may be used in sales material for the fund.
CURRENT DISTRIBUTION RATE
Current yield and taxable-equivalent yield, which are calculated according to
a formula prescribed by the SEC, are not indicative of the amounts which were
or will be paid to shareholders. Amounts paid to shareholders are reflected
in the quoted current distribution rate or taxable-equivalent distribution
rate. The current distribution rate is usually computed by annualizing the
dividends paid per share by a class during a certain period and dividing that
amount by the current maximum Offering Price. The current distribution rate
differs from the current yield computation because it may include
distributions to shareholders from sources other than interest, if any, and
is calculated over a different period of time. The current distribution rate
for each class for the 30-day period ended April 30, 1998, was 5.25% for
Class I and 4.86% for Class II.
A taxable-equivalent distribution rate shows the taxable distribution rate
equivalent to the class' current distribution rate. The advertised
taxable-equivalent distribution rate will reflect the most current federal
tax rate available to the fund. The taxable-equivalent distribution rate for
each class for the 30-day period ended April 30, 1998, was 8.69% for Class I
and 8.05% for Class II.
VOLATILITY
Occasionally statistics may be used to show the fund's volatility or risk.
Measures of volatility or risk are generally used to compare the fund's Net
Asset Value or performance to a market index. One measure of volatility is
beta. Beta is the volatility of a fund relative to the total market, as
represented by an index considered representative of the types of securities
in which the fund invests. A beta of more than 1.00 indicates volatility
greater than the market and a beta of less than 1.00 indicates volatility
less than the market. Another measure of volatility or risk is standard
deviation. Standard deviation is used to measure variability of Net Asset
Value or total return around an average over a specified period of time. The
idea is that greater volatility means greater risk undertaken in achieving
performance.
OTHER PERFORMANCE QUOTATIONS
The fund may also quote the performance of shares without a sales charge.
Sales literature and advertising may quote a current distribution rate,
yield, cumulative total return, average annual total return and other
measures of performance as described elsewhere in this SAI with the
substitution of Net Asset Value for the public Offering Price.
The fund may include in its advertising or sales material information
relating to investment goals and performance results of funds belonging to
the Franklin Templeton Group of Funds. Resources is the parent company of the
advisors and underwriter of the Franklin Templeton Group of Funds.
COMPARISONS
To help you better evaluate how an investment in the fund may satisfy your
investment goal, advertisements and other materials about the fund may
discuss certain measures of fund performance as reported by various financial
publications. Materials may also compare performance (as calculated above) to
performance as reported by other investments, indices, and averages. These
comparisons may include, but are not limited to, the following examples:
a) Salomon Brothers Broad Bond Index or its component indices - measures
yield, price and total return for Treasury, agency, corporate and mortgage
bonds.
b) Lehman Brothers Aggregate Bond Index or its component indices - measures
yield, price and total return for Treasury, agency, corporate, mortgage and
Yankee bonds.
c) IBC's Money Fund Report(R) - industry averages for 7-day annualized and
compounded yields of taxable, tax-free, and government money funds.
d) Lehman Brothers Municipal Bond Index or its component indices - measures
yield, price and total return for the municipal bond market.
e) Bond Buyer 20 Index - an index of municipal bond yields based upon yields
of 20 general obligation bonds maturing in 20 years.
f) Bond Buyer 40 Index - an index composed of the yield to maturity of 40
bonds. The index attempts to track the new-issue market as closely as
possible, so it changes bonds twice a month, adding all new bonds that meet
certain requirements and deleting an equivalent number according to their
secondary market trading activity. As a result, the average par call date,
average maturity date, and average coupon rate can and have changed over
time. The average maturity generally has been about 29-30 years.
g) Financial publications: THE WALL STREET JOURNAL, AND BUSINESS WEEK,
Financial World, Forbes, Fortune, and MONEY MAGAZINES - provide performance
statistics over specified time periods.
h) Salomon Brothers Composite High Yield Index or its component indices -
measures yield, price and total return for the Long-Term High-Yield Index,
Intermediate-Term High-Yield Index, and Long-Term Utility High-Yield Index.
i) Historical data supplied by the research departments of CS First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch,
Lehman Brothers and Bloomberg, L.P.
j) Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect
Morningstar's assessment of the historical risk-adjusted performance of a
fund over specified time periods relative to other funds within its category.
k) Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income Fund
Performance Analysis - measure total return and average current yield for the
mutual fund industry and rank individual mutual fund performance over
specified time periods, assuming reinvestment of all distributions, exclusive
of any applicable sales charges.
From time to time, advertisements or information for the fund may include a
discussion of certain attributes or benefits to be derived from an investment
in the fund. The advertisements or information may include symbols,
headlines, or other material that highlights or summarizes the information
discussed in more detail in the communication.
Advertisements or sales material issued by the fund may also discuss or be
based upon information in a recent issue of the Special Report on Tax Freedom
Day published by the Tax Foundation, a Washington, D.C. based nonprofit
research and public education organization. The report illustrates, among
other things, the annual amount of time the average taxpayer works to satisfy
his or her tax obligations to the federal, state and local taxing authorities.
Advertisements or information may also compare the fund's performance to the
return on CDs or other investments. You should be aware, however, that an
investment in the fund involves the risk of fluctuation of principal value, a
risk generally not present in an investment in a CD issued by a bank. For
example, as the general level of interest rates rise, the value of the fund's
fixed-income investments, as well as the value of its shares that are based
upon the value of such portfolio investments, can be expected to decrease.
Conversely, when interest rates decrease, the value of the fund's shares can
be expected to increase. CDs are frequently insured by an agency of the U.S.
government. An investment in the fund is not insured by any federal, state or
private entity.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not
be identical to the formula used by the fund to calculate its figures. In
addition, there can be no assurance that the fund will continue its
performance as compared to these other averages.
MISCELLANEOUS INFORMATION
The fund may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis in order to
have a projected amount available in the future to fund a child's college
education. (Projected college cost estimates are based upon current costs
published by the College Board.) The Franklin Retirement Planning Guide leads
you through the steps to start a retirement savings program. Of course, an
investment in the fund cannot guarantee that these goals will be met.
The fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin, one of the
oldest mutual fund organizations, has managed mutual funds for over 50 years
and now services more than 3 million shareholder accounts. In 1992, Franklin,
a leader in managing fixed-income mutual funds and an innovator in creating
domestic equity funds, joined forces with Templeton, a pioneer in
international investing. The Mutual Series team, known for its value-driven
approach to domestic equity investing, became part of the organization four
years later. Together, the Franklin Templeton Group has over $236 billion in
assets under management for more than 6 million U.S. based mutual fund
shareholder and other accounts. The Franklin Templeton Group of Funds offers
119 U.S. based open-end investment companies to the public. The fund may
identify itself by its NASDAQ symbol or CUSIP number.
Franklin is a leader in the tax-free mutual fund industry and manages more
than $49 billion in municipal bond assets for over three quarters of a
million investors. According to Research and Ratings Review, Franklin had one
of the largest staffs of municipal securities analysts in the industry, as of
March 31, 1997.
Under current tax laws, municipal securities remain one of the few
investments offering the potential for tax-free income. In 1998, taxes could
cost almost $47 on every $100 earned from a fully taxable investment (based
on the maximum combined 39.6% federal tax rate and the highest state tax rate
of 12% for 1998). Franklin tax-free funds, however, offer tax relief through
a professionally managed portfolio of tax-free securities selected based on
their yield, quality and maturity. An investment in a Franklin tax-free fund
can provide you with the potential to earn income free of federal taxes and,
depending on the fund, state and local taxes as well, while supporting state
and local public projects. Franklin tax-free funds may also provide tax-free
compounding, when dividends are reinvested. An investment in Franklin's
tax-free funds can grow more rapidly than similar taxable investments.
Municipal securities are generally considered to be creditworthy, second in
quality only to securities issued or guaranteed by the U.S. government and
its agencies. The market price of such securities, however, may fluctuate.
This fluctuation will have a direct impact on the Net Asset Value of an
investment in the fund.
Currently, there are more mutual funds than there are stocks listed on the
NYSE. While many of them have similar investment goals, no two are exactly
alike. As noted in the Prospectus, shares of the fund are generally sold
through Securities Dealers. Investment representatives of such Securities
Dealers are experienced professionals who can offer advice on the type of
investment suitable to your unique goals and needs, as well as the types of
risks associated with such investment.
The fund offers two classes of shares: Franklin Federal Tax-Free Income Fund,
Franklin Federal Tax-Free Income Fund Series, Franklin Federal Tax-Free
Income Fund - Class I and Franklin Federal Tax-Free Income Fund, Franklin
Federal Tax-Free Income Fund Series, Franklin Federal Tax-Free Income Fund -
Class II.
From time to time, the number of fund shares held in the "street name"
accounts of various Securities Dealers for the benefit of their clients or in
centralized securities depositories may exceed 5% of the total shares
outstanding. To the best knowledge of the fund, no other person holds
beneficially or of record more than 5% of the outstanding shares of any class.
In the event of disputes involving multiple claims of ownership or authority
to control your account, the fund has the right (but has no obligation) to:
(a) freeze the account and require the written agreement of all persons
deemed by the fund to have a potential property interest in the account,
before executing instructions regarding the account; (b) interplead disputed
funds or accounts with a court of competent jurisdiction; or (c) surrender
ownership of all or a portion of the account to the IRS in response to a
Notice of Levy.
SUMMARY OF CODE OF ETHICS. Employees of the Franklin Templeton Group who are
access persons under the 1940 Act are permitted to engage in personal
securities transactions subject to the following general restrictions and
procedures: (i) the trade must receive advance clearance from a compliance
officer and must be completed by the close of the business day following the
day clearance is granted; (ii) copies of all brokerage confirmations and
statements must be sent to a compliance officer; (iii) all brokerage accounts
must be disclosed on an annual basis; and (iv) access persons involved in
preparing and making investment decisions must, in addition to (i), (ii) and
(iii) above, file annual reports of their securities holdings each January
and inform the compliance officer (or other designated personnel) if they own
a security that is being considered for a fund or other client transaction or
if they are recommending a security in which they have an ownership interest
for purchase or sale by a fund or other client.
FINANCIAL STATEMENTS
The audited financial statements contained in the Annual Report to
Shareholders of the fund, for the fiscal year ended April 30, 1998, including
the auditor's report, are incorporated herein by reference.
USEFUL TERMS AND DEFINITIONS
1940 ACT - Investment Company Act of 1940, as amended
ADVISERS - Franklin Advisers, Inc., the fund's investment manager
BOARD - The Board of Directors of the fund
CD - Certificate of deposit
CLASS I AND CLASS II - The fund offers two classes of shares, designated
"Class I" and "Class II." The two classes have proportionate interests in the
fund's portfolio. They differ, however, primarily in their sales charge
structures and Rule 12b-1 plans.
CODE - Internal Revenue Code of 1986, as amended
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the fund's principal
underwriter
FITCH - Fitch Investors Service, Inc.
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Templeton Capital Accumulator Fund, Inc., and Templeton Variable
Products Series Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies
in the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
MOODY'S - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by
the number of shares outstanding.
NYSE - New York Stock Exchange
OFFERING PRICE - The public offering price is based on the Net Asset Value
per share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 4.25% for Class I and 1% for Class II. We calculate
the offering price to two decimal places using standard rounding criteria.
PROSPECTUS - The prospectus for the fund dated September 1, 1998, which we
may amend from time to time
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
WE/OUR/US - Unless a different meaning is indicated by the context, these
terms refer to the fund and/or Investor Services, Distributors, or other
wholly owned subsidiaries of Resources.
APPENDIX
DESCRIPTION OF RATINGS
MUNICIPAL BOND RATINGS
MOODY'S
Aaa: Municipal bonds rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally
stable margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa: Municipal bonds rated Aa are judged to be high quality by all standards.
Together with the Aaa group, they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large, fluctuation of protective elements may be of
greater amplitude, or there may be other elements present that make the
long-term risks appear somewhat larger.
A: Municipal bonds rated A possess many favorable investment attributes and
are considered upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
that suggest a susceptibility to impairment sometime in the future.
Baa: Municipal bonds rated Baa are considered medium-grade obligations. They
are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any
great length of time. These bonds lack outstanding investment characteristics
and, in fact, have speculative characteristics as well.
Ba: Municipal bonds rated Ba are judged to have predominantly speculative
elements and their future cannot be considered well assured. Often the
protection of interest and principal payments may be very moderate and,
thereby, not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B: Municipal bonds rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Municipal bonds rated Caa are of poor standing. These issues may be in
default or there may be present elements of danger with respect to principal
or interest.
Con.(-): Municipal bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally.
These are bonds secured by (a) earnings of projects under construction, (b)
earnings of projects unseasoned in operation experience, (c) rentals that
begin when facilities are completed, or (d) payments to which some other
limiting condition attaches. Parenthetical rating denotes probable credit
stature upon the completion of construction or the elimination of the basis
of the condition.
S&P
AAA: Municipal bonds rated AAA are the highest-grade obligations. They
possess the ultimate degree of protection as to principal and interest. In
the market, they move with interest rates and, hence, provide the maximum
safety on all counts.
AA: Municipal bonds rated AA also qualify as high-grade obligations, and in
the majority of instances differ from AAA issues only in a small degree.
Here, too, prices move with the long-term money market.
A: Municipal bonds rated A are regarded as upper medium-grade. They have
considerable investment strength but are not entirely free from adverse
effects of changes in economic and trade conditions. Interest and principal
are regarded as safe. They predominantly reflect money rates in their market
behavior but also, to some extent, economic conditions.
BBB: Municipal bonds rated BBB are regarded as having an adequate capacity to
pay principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds
in this category than for bonds in the A category.
BB, B, CCC, CC: Municipal bonds rated BB, B, CCC and CC are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity
to pay interest and repay principal in accordance with the terms of the
obligations. BB indicates the lowest degree of speculation and CC the highest
degree of speculation. While these bonds will likely have some quality and
protective characteristics, they are outweighed by large uncertainties or
major risk exposures to adverse conditions.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
FITCH
AAA: Municipal bonds rated AAA are considered to be investment grade and of
the highest credit quality. The obligor has an exceptionally strong ability
to pay interest and repay principal that is unlikely to be affected by
reasonably foreseeable events.
AA: Municipal bonds rated AA are considered to be investment grade and of
very high credit quality. The obligor's ability to pay interest and repay
principal is very strong although not quite as strong as bonds rated AAA and
not significantly vulnerable to foreseeable future developments.
A: Municipal bonds rated A are considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB: Municipal bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the ratings
of these bonds will fall below investment grade is higher than for bonds with
higher ratings.
BB: Municipal bonds rated BB are considered speculative. The obligor's
ability to pay interest and repay principal may be affected over time by
adverse economic changes. Business and financial alternatives can be
identified, however, that could assist the obligor in satisfying its debt
service
requirements.
B: Municipal bonds rated B are considered highly speculative. While bonds in
this class are currently meeting debt service requirements, the probability
of continued timely payment of principal and interest reflects the obligor's
limited margin of safety and the need for reasonable business and economic
activity throughout the life of the issue.
CCC: Municipal bonds rated CCC have certain identifiable characteristics
which, if not remedied, may lead to default. The ability to meet obligations
requires an advantageous business and economic environment.
Plus (+) or minus (-) signs are used with a rating symbol to indicate the
relative position of a credit within the rating category. Plus or minus signs
are not used with the AAA category.
MUNICIPAL NOTE RATINGS
MOODY'S
Moody's ratings for state, municipal and other short-term obligations will be
designated Moody's Investment Grade ("MIG"). This distinction is in
recognition of the differences between short-term credit risk and long-term
risk. Factors affecting the liquidity of the borrower are uppermost in
importance in short-term borrowing; factors of the first importance in
long-term borrowing risk are of lesser importance in the short run. Symbols
used will be as follows:
MIG 1: Notes are of the best quality enjoying strong protection from
established cash flows of funds for their servicing or from established and
broad-based access to the market for refinancing, or both.
MIG 2: Notes are of high quality, with margins of protection ample, although
not so large as in the preceding group.
MIG 3: Notes are of favorable quality, with all security elements accounted
for, but lacking the undeniable strength of the preceding grades. Market
access for refinancing, in particular, is likely to be less well established.
MIG 4: Notes are of adequate quality, carrying specific risk but having
protection and not distinctly or predominantly speculative.
S&P
Until June 29, 1984, S&P used the same rating symbols for notes and bonds.
After June 29, 1984, for new municipal note issues due in three years or
less, the ratings below will usually be assigned. Notes maturing beyond three
years will most likely receive a bond rating of the type recited above.
SP-1: Issues carrying this designation have a very strong or strong capacity
to pay principal and interest. Issues determined to possess overwhelming
safety characteristics will be given a "plus" (+) designation.
SP-2: Issues carrying this designation have a satisfactory capacity to pay
principal and interest.
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's commercial paper ratings, which are also applicable to municipal
paper investments permitted to be made by the fund, are opinions of the
ability of issuers to repay punctually their promissory obligations not
having an original maturity in excess of nine months. Moody's employs the
following designations, all judged to be investment grade, to indicate the
relative repayment capacity of rated issuers:
P-1 (PRIME-1): Superior capacity for repayment.
P-2 (PRIME-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment
is very strong. A "plus" (+) designation indicates an even stronger
likelihood of timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
The relative degree of safety, however, is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher designations.
FITCH
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, CDs, medium-term notes, and municipal and investment notes.
The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
F-1+: Exceptionally strong credit quality. Regarded as having the strongest
degree of assurance for timely payment.
F-1: Very strong credit quality. Reflect an assurance of timely payment only
slightly less in degree than issues rated F-1+.
F-2: Good credit quality. A satisfactory degree of assurance for timely
payment, but the margin of safety is not as great as for issues assigned F-1+
and F-1 ratings.
F-3: Fair credit quality. Have characteristics suggesting that the degree of
assurance for timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment grade.
F-5: Weak credit quality. Have characteristics suggesting a minimal degree of
assurance for timely payment and are vulnerable to near-term adverse changes
in financial and economic conditions.
D: Default. Actual or imminent payment default.
LOC: The symbol LOC indicates that the rating is based on a letter of credit
issued by a commercial bank.
Semi
Annual Report
October 31, 1998
Franklin Federal
Tax-Free Income Fund
Thank you for investing with Franklin Templeton. We encourage our investors to
maintain a long-term perspective and remember that all securities markets move
both up and down, as do mutual fund share prices. We appreciate your past
support and look forward to serving your investment needs in the years ahead.
(PICTURE OMITTED)
Charles B. Johnson (right),
Chairman
Franklin Federal
Tax-Free Income Fund
Thomas J. Kenny (left),
Director
Franklin Municipal
Bond Department
Contents
Shareholder Letter ............. 1
Special Feature:
Franklin's Municipal
Bond Department ................. 5
Manager's Discussion ........... 8
Performance Summaries
Class I ...................... 11
Class II ...................... 13
Financial Highlights &
Statement of Investments ........ 15
Financial Statements 48
Notes to
Financial Statements 51
Shareholder Letter
Dear Shareholder:
It's a pleasure to bring you Franklin Federal Tax-Free Income Fund's semiannual
report for the period ended October 31, 1998.
During the six-month reporting period, the Asian financial crisis spread to
other emerging markets around the world, which began to negatively affect U.S.
corporate earnings. After a six-year-long expansion, the U.S. economy started to
slow. The gross domestic product (GDP) for first quarter 1998 posted a robust
5.5% annualized rate, followed by a more moderate, 1.8% annualized rate for the
second quarter; the third quarter GDP was annualized at 3.9%. The modest growth
reflected weak Asian demand for goods and a business inventory buildup. A higher
U.S. trade deficit resulted, as Asian countries tried exporting their way out of
their economic turmoil. For the first six months of this year, America's trade
deficit was running at an annualized rate of $158 billion, far surpassing last
year's imbalance of $110 billion. Clearly, the American consumer continues to
drive our economy through relatively strong purchases of retail goods, durable
goods, and new and existing homes. Looking forward, the consumer may well
dictate the U.S. economy's direction.
During the reporting period, the yield on the benchmark 30-year U.S. Treasury
bond continued its downward trend and hit record lows. The 30-year Treasury
began the reporting period yielding 5.95% on April 30, 1998, and ended the
period yielding 5.15% on October 31, 1998. On October 5, 1998, the 30-year
Treasury yield fell to 4.70%, its all-time low. Falling yields reflected the
30-year Treasury bond's popularity among investors fleeing deteriorating foreign
stock markets. Bond price and yield move in an inverse relationship, so the
rising price of the 30-year Treasury led to a corresponding yield decline.
Responding to the global financial problems, the Federal Reserve Board (the Fed)
gradually eased monetary policy in September and October. The Fed's monetary
policy panel, the Federal Open Market Committee, twice cut the federal funds
target rate by 0.25%, to 5.00%, hoping to stimulate growth. The Fed's move
attempted to provide liquidity to the financial system, and make it easier for
major corporations to obtain favorable lending from banks. The tempered economic
activities combined with a period of benign inflation precipitated the low
interest-rate environment.
Issuers of municipal bonds took advantage of low interest rates during the
six-month period by refinancing outstanding, higher interest-rate debt.
Additionally, many municipalities experienced solid fiscal conditions due to the
strong economy. In fact, credit rating upgrades exceeded downgrades by a
four-to-one ratio. Borrowing for new projects increased, such that the supply of
new municipal bond issues in 1998 could approach record levels. Demand did not
keep pace with the increased supply, causing municipal bonds to underperform
compared with their taxable counterparts. At the end of the reporting period,
the yield on 30-year, AAA-rated, insured municipal bonds stood at 94% of the
yield on a 30-year Treasury bond, which in our opinion, creates an attractive
investment opportunity in the municipal bond market. For those investors in the
39.6% tax bracket, the taxable equivalent yield on an average municipal bond was
7.95% versus 5.15% for the 30-year Treasury bond.*
*Source: Bloomberg, October 31, 1998.
Our investment philosophy remains disciplined and focused, as we strive to offer
our shareholders high, current tax-free income and relatively low-price
volatility. The outlook for the municipal bond market should remain positive,
given the stable U.S. economy, low inflation environment, budget surplus, strong
dollar, and the economic and market uncertainty facing many of the world's
regions.
Municipal bond funds continue to be an attractive investment for those investors
seeking tax-free income as well as providing an opportunity to diversify risk in
their portfolio. We encourage you to discuss your financial goals with an
investment representative. He or she can address concerns about volatility and
help you diversify your investments and stay focused on the long term. Mutual
funds offer a level of diversification that is almost impossible for individual
investors to achieve on their own. As always, we appreciate your support,
welcome your questions and comments and look forward to serving your investment
needs in the years ahead.
Sincerely,
/s/ Charles B. Johnson
Charles B. Johnson
Chairman
Franklin Federal Tax-Free Income Fund
/s/ Thomas J. Kenny
Thomas J. Kenny
Director
Franklin Municipal Bond Department
Franklin's Municipal
Bond Department
The Municipal Bond Department Today
Franklin is currently the nation's largest
tax-free fund manager. With a team of 11 portfolio managers and 22 research
analysts, we manage more than $50 billion of municipal assets in 43 funds for
over 886,000 tax-free fund shareholder accounts.
Our Investment Philosophy
The investment objective of Franklin's tax-free funds
is to provide a high level of current, tax-free income while preserving
shareholders' capital. Following a disciplined investment approach, we conduct a
stringent credit analysis to search for what we believe to be undervalued
situations, and generally purchase current coupon bonds at prices we consider
favorable. We also acknowledge that our investors in general are risk-averse;
therefore, we do not invest in exotic derivatives, nor leverage or hedge our
portfolios, which would increase the funds' volatility.
Furthermore, Franklin positions its funds with a long-term investment horizon.
We purchase a major portion of our municipal bonds in the new-issue market and
incorporate a buy-and-hold strategy, attempting to reduce portfolio turnover and
thus, avoid capital gain distributions. We expect our funds to distribute a
relatively high level of tax-free income, and attempt to maximize risk-adjusted
total return performance.
Research and Analysis
Franklin has one of the industry's largest research departments. Along with the
portfolio managers, the research department's main mission is to identify the
best municipal buying opportunities.
Our analysts specialize in their individual fields and focus on investment
sectors, not geographic regions. With the use of proprietary databases, our
analysts can provide fast and reliable analysis to portfolio managers about any
bond issue being considered. Each year analysts visit a number of sites to get a
perspective of our financed projects. They meet with management teams and
municipal officials to discuss newly found potential opportunities and problems.
Our municipal bond team often takes on the role similar to that played by
investment bankers. Many of our competitors routinely turn away from issues that
may be unattractive on the surface; at Franklin, we pride ourselves in proposing
changes to these issues, and work to make them acceptable to our criteria. These
situations often provide us with excellent investment return.
The ability and willingness to work with issuers and our reputation for talented
analysts also make us a preferred client to receive the "first call" on issues
many brokerage houses underwrite. Lastly, our research analysts have made
significant efforts to improve municipal markets. With their involvement and
leadership, they have been working with attorney and issuer groups and industry
regulators to strengthen the municipal bond industry.
(PICTURE OMITTED)
Franklin Municipal Bond Team
Manager's Discussion
Your Fund's Goal: Franklin Federal Tax-Free Income Fund seeks to provide high,
current income exempt from regular federal income tax through a nationally
diversified portfolio consisting of municipal securities.1
GRAPHIC MATERIAL 1 OMITTED - SEE APPENDIX AT END OF DOCUMENT
For the first three quarters of 1998, the municipal bond market experienced near
record supply. As mentioned in our previous report, municipal bond insurance
covered over 50% of new issues. Benefiting from increased competition among
insurers and many municipalities' improved financial strength, municipal bond
insurance became relatively inexpensive and provided issuers improved
marketability. Many state and local governments experienced record revenues, as
well as budget surpluses, which enabled them to borrow for infrastructure
financing. As of third quarter 1998, over $220 billion of new issues came to
market, a 40% increase over 1997.
This supply weighed heavily on the municipal bond market. Although demand
remained steady in this market, it was not sufficient to meet the increased
supply, causing municipal bonds to underperform compared with their taxable
counterparts. At the same time, global market weakness caused many investors to
seek the safe haven of U.S. Treasuries, pushing their prices higher and hence,
yields lower. By the end of the reporting period, there was little difference
between long-term municipal yields and Treasury yields, as the chart on page 10
shows. On May 1, 1998, the beginning of the six-month reporting period, the Bond
Buyer Municipal 40 Index was yielding 5.37%, and the 30-year Treasury yield was
5.94%. The index ended the reporting period yielding 5.13%, while the 30-year
Treasury yield stood at 5.15%. Such a slim margin between municipal bond yields
and Treasury yields created an attractive taxable equivalent rate for the fund.
1. These dividends are generally subject to state and local income taxes, if
any. For investors subject to federal or state alternative minimum tax, a small
portion of this income may be subject to such tax. Distributions of capital
gains and of ordinary income from accrued market discount, if any, are generally
taxable.
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 17 of
this report.
The large supply in the municipal bond market provided Franklin Federal Tax-Free
Income Fund the flexibility to diversify its assets. Although New York and
California are generally the largest issuers of municipal bonds, we seek to
maintain a portfolio diversified among the states. During the reporting period,
the number of portfolio positions increased from 930 to 983 and included
investments in all 50 states. As opportunities arose, we added to our holdings
in Texas, Illinois, Wisconsin and Colorado. Taking advantage of ample supply in
the insured sector, we boosted the amount of insured securities to 23.5%, from
21.8%, over the six-month reporting period.
New York issues remain our largest single-state sector, at 17.1% of total
long-term investments. New York state and New York City recorded 1998
fiscal-year budget surpluses. The improved fiscal performance contributed to New
York City's municipal securities' credit rating upgrade. As of October 31, 1998,
all three national credit rating agencies now give A ratings for New York City's
obligations.
GRAPHIC MATERIAL 2 OMITTED - SEE APPENDIX AT END OF DOCUMENT
GRAPHIC MATERIAL 3 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Going forward, our outlook for Franklin Federal Tax-Free Income Fund is
positive. We believe municipal bond supply should remain robust, and we expect
relatively strong demand due to the attractiveness of municipal bonds versus
other fixed-income investments. The fund should continue to produce a steady
source of tax-free income for investors.
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of October 31, 1998, the end of the reporting period. However,
market and economic conditions are changing constantly, which can be expected to
affect our strategies and the fund's portfolio composition. Although historical
performance is no guarantee of future results, these insights may help you
understand our investment and management philosophy.
Performance Summary
Class I
Franklin Federal Tax-Free Income Fund - Class I share price, as measured by net
asset value, increased 17 cents, from $12.25 on April 30, 1998, to $12.42 on
October 31, 1998. During the six-month reporting period, shareholders received
income distributions totaling 33.6 cents ($0.336) per share. Distributions will
vary based on the earnings of the fund's portfolio, and past distributions are
not predictive of future trends.
Based on an annualization of October's monthly per-share dividend of 5.6 cents
($0.056) and the maximum offering price of $12.97 on October 31, 1998, your
fund's distribution rate was 5.18%. This tax-free rate is generally higher than
the after-tax return on a comparable taxable investment. For example, an
investor in the maximum federal income tax bracket would need to earn 8.58% from
a taxable investment to match the fund's tax-free distribution rate.
GRAPHIC MATERIAL 4 OMITTED - SEE APPENDIX AT END OF DOCUMENT
GRAPHIC MATERIAL 5 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Performance
Class I
Periods ended 10/31/98
Since
Inception
1-Year 5-Year 10-Year (10/7/83)
- ----------------------------------------------------------------------------
Cumulative Total Return1 7.20% 34.88% 112.50% 271.73%
Average Annual Total Return2 2.67% 5.26% 7.36% 8.79%
Distribution Rate3 5.18%
Taxable Equivalent Distribution Rate4 8.58%
30-Day Standardized Yield5 4.03%
Taxable Equivalent Yield4 6.67%
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the current, maximum 4.25%
initial sales charge. Prior to July 1, 1994, fund shares were offered at a lower
initial sales charge with dividends reinvested at the offering price; thus
actual total returns would differ.
3. Distribution rate is based on an annualization of October's 5.6 cent per
share monthly dividend and the maximum offering price of $12.97 on October 31,
1998.
4. Taxable equivalent distribution rate and yield assume the 1998 maximum
federal income tax rate of 39.6%.
5. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended October 31, 1998.
Effective May 1, 1994, the fund eliminated the sales charge on reinvested
dividends and implemented a Rule 12b-1 plan, which affects subsequent
performance. All total return calculations assume reinvestment of dividends and
capital gains at net asset value. Since markets can go down as well as up,
investment return and principal value will fluctuate with market conditions, and
you may have a gain or loss when you sell your shares.
Class II
Franklin Federal Tax-Free Income Fund - Class II share price, as measured by net
asset value, increased 18 cents, from $12.24 on April 30, 1998, to $12.42 on
October 31, 1998. During the six-month reporting period, shareholders received
income distributions totaling 30.04 cents ($0.3004) per share. Distributions
will vary based on the earnings of the fund's portfolio, and past distributions
are not predictive of future trends.
Based on an annualization of October's monthly per-share dividend of 5.01 cents
($0.0501) and the maximum offering price of $12.55 on October 31, 1998, your
fund's distribution rate was 4.79%. This tax-free rate is generally higher than
the after-tax return on a comparable taxable investment. For example, an
investor in the maximum federal income tax bracket would need to earn 7.93% from
a taxable investment to match the fund's tax-free distribution rate.
GRAPHIC MATERIAL 6 OMITTED - SEE APPENDIX AT END OF DOCUMENT
GRAPHIC MATERIAL 7 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Performance
Class II
Periods ended 10/31/98
Since
Inception
1-Year 3-Year (5/1/95)
- --------------------------------------------------------------------------
Cumulative Total Return1 6.67% 21.05% 27.55%
Average Annual Total Return2 4.64% 6.22% 6.88%
Distribution Rate3 4.79%
Taxable Equivalent Distribution Rate4 7.93%
30-Day Standardized Yield5 3.61%
Taxable Equivalent Yield4 5.98%
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the 1.0% initial sales
charge and the 1.0% contingent deferred sales charge, as applicable.
3. Distribution rate is based on an annualization of October's 5.01 cent per
share monthly dividend and the maximum offering price of $12.55 on October 31,
1998.
4. Taxable equivalent distribution rate and yield assume the 1998 maximum
federal income tax rate of 39.6%.
5. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended October 31, 1998.
All total return calculations assume reinvestment of dividends and capital gains
at net asset value. Since markets can go down as well as up, investment return
and principal value will fluctuate with market conditions, and you may have a
gain or loss when you sell your shares.
Past performance is not predictive of future results.
<TABLE>
<CAPTION>
FRANKLIN FEDERAL TAX-FREE INCOME FUND
Financial Highlights
Class I
------------------------------------------------------------------
Six Months Ended
October 31, 1998 Year Ended April 30,
--------------------------------------------------
(unaudited) 1998 1997 1996 1995 1994
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance
(for a share outstanding throughout the period)
Net asset value, beginning of period ......... $12.25 $11.90 $11.83 $11.73 $11.81 $12.24
------------------------------------------------------------------
Income from investment operations:
Net investment income ....................... .34 .69 .71 .74 .75 .77
Net realized and unrealized gains (losses) .. .17 .35 .07 .10 (.05) (.41)
------------------------------------------------------------------
Total from investment operations ............. .51 1.04 .78 .84 .70 .36
Less distributions from net investment income (.34) (.69) (.71) (.74) (.78) (.79)
------------------------------------------------------------------
Net asset value, end of period ............... $12.42 $12.25 $11.90 $11.83 $11.73 $11.81
==================================================================
Total Return* ................................ 4.19% 8.92% 6.81% 7.33% 6.21% 2.58%
Ratios/Supplemental Data
Net assets, end of period (000's) ............ $7,133,824 $7,022,961 $6,905,488 $7,012,601 $6,886,941 $6,804,262
Ratios to average net assets:
Expenses .................................... .58%** .59% .58% .57% .59% .52%
Net investment income ....................... 5.46%** 5.70% 6.00% 6.20% 6.47% 6.27%
Portfolio turnover rate ...................... 6.54% 14.54% 16.43% 25.10% 19.88% 24.59%
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized. Prior to May 1, 1994, dividends from net
investment income were reinvested at the offering price.
**Annualized.
<TABLE>
<CAPTION>
Class II
-------------------------------------------------------------
Six Months Ended
October 31, 1998 Year Ended April 30,
-------------------------------------
(unaudited) 1998 1997 1996***
-------------------------------------------------------------
Per Share Operating Performance
(for a share outstanding throughout the period)
<S> <C> <C> <C> <C>
Net asset value, beginning of period ................ $12.24 $11.90 $11.82 $11.73
-------------------------------------------------------------
Income from investment operations:
Net investment income .............................. .30 .63 .66 .68
Net realized and unrealized gains .................. .18 .33 .06 .09
-------------------------------------------------------------
Total from investment operations .................... .48 .96 .72 .77
Less distributions from net investment income ....... (.30) (.62) (.64) (.68)
-------------------------------------------------------------
Net asset value, end of period ...................... $12.42 $12.24 $11.90 $11.82
=============================================================
Total Return* ....................................... 3.97% 8.22% 6.28% 6.68%
Ratios/Supplemental Data
Net assets, end of period (000's) ................... $176,317 $135,195 $71,944 $34,110
Ratios to average net assets:
Expenses ........................................... 1.16%** 1.17% 1.16% 1.15%
Net investment income .............................. 4.88%** 5.12% 5.42% 5.68%
Portfolio turnover rate ............................. 6.54% 14.54% 16.43% 25.10%
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
**Annualized.
***The Fund paid a dividend to shareholders of record on the beginning of
business, May 1, 1995 in the amount of $0.062 per share. The net asset value at
the beginning of period includes this dividend.
<TABLE>
<CAPTION>
FRANKLIN FEDERAL TAX-FREE INCOME FUND
Statement of Investments, October 31, 1998 (unaudited)
PRINCIPAL
AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
aLong Term Investments 97.7%
Bonds 95.5%
Alabama 1.3%
<S> <C> <C>
Alabama HFA, SFMR, Collateralized Home Mortgage, Series D-2, 5.75%, 10/01/23 ..................... $ 5,400,000 $ 5,571,936
Alabama Water Pollution Control Authority, Revolving Fund Loan, Series B, Pre-Refunded, 7.75%, 8/15/12 5,925,000 6,389,402
Anniston Regional Medical Center Board, Series A, AMBAC Insured, 5.125%, 6/01/28 ................. 7,000,000 7,002,730
Citronelle IDB, PCR, Stauffer Chemical Project, Guaranteed by Imperial Chemical, Plc., Series 1982, 8.00%,
12/01/12 ......................................................................................... 1,000,000 1,073,370
Courtland IDB, PCR, Champion International Corp. Project, Refunding, 6.15%, 6/01/19 .............. 5,000,000 5,310,800
Courtland IDBR, Champion International Corp., Refunding, Series A, 7.20%, 12/01/13 ............... 12,000,000 13,212,600
Fairfield IDB, Environmental Improvement Revenue, USX Corp. Projects, Refunding, 5.45%, 9/01/14 .. 1,445,000 1,469,319
Jefferson County Sewer Revenue, Warrants,
Refunding, Series A, FGIC Insured, 5.625%, 2/01/22 ............................................... 4,000,000 4,280,200
Series D, FGIC Insured, 5.75%, 2/01/22 ........................................................... 15,995,000 17,330,742
Series D, FGIC Insured, 5.75%, 2/01/27 ........................................................... 19,715,000 21,361,400
Mc Intosh IDB, Environmental Improvement Revenue, CIBA Specialty, Refunding, Series C, 5.375%, 6/01/28 5,000,000 5,062,150
Montgomery Medical Clinic Board, Health Care Facilities Revenue, Jackson Hospital and Clinic, Refunding,
AMBAC Insured, 6.00%, 3/01/26 .................................................................... 5,385,000 5,894,367
-----------
93,959,016
-----------
Alaska 1.9%
Alaska Industrial Development and Export Authority, Revolving Fund, Series A, 7.95%, 4/01/10 ..... 1,775,000 1,888,369
Alaska State HFC,
Collateralized Home Mortgage, Series A-1, 6.75%, 12/01/32 ........................................ 3,400,000 3,609,134
Mortgage, Refunding, Series A, MBIA Insured, 6.00%, 12/01/15 ..................................... 4,290,000 4,546,070
Refunding, Series A, MBIA Insured, 5.875%, 12/01/24 .............................................. 17,875,000 18,711,908
Refunding, Series A, MBIA Insured, 5.875%, 12/01/30 .............................................. 11,600,000 12,092,072
Refunding, Series A, MBIA Insured, 6.10%, 12/01/37 ............................................... 34,000,000 35,952,960
Series A, Pre-Refunded, 6.60%, 12/01/23 .......................................................... 8,000,000 8,903,120
Veterans Mortgage Program, MBIA Insured, 6.75%, 12/01/25 ......................................... 20,530,000 22,039,776
Anchorage Parking Authority Revenue, 5th Avenue Garage Lease Project, Refunding,
6.50%, 12/01/02 .................................................................................. 3,360,000 3,616,570
6.75%, 12/01/08 .................................................................................. 3,500,000 3,783,045
Valdez Marine Terminal Revenue, BP Pipelines, Inc. Project, Refunding, Series A, 5.85%, 8/01/25 .. 25,000,000 25,955,000
-----------
141,098,024
-----------
Arizona .4%
Maricopa County IDA, Health Facilities Revenue, Mayo Clinic Hospital, 5.25%, 11/15/37 ............ 20,000,000 20,241,400
Phoenix Civic Improvement Corporation Airport Revenue, Senior Lien, Series B, FSA Insured, 5.00%, 8,500,000 8,462,175
-----------
7/01/25 28,703,575
-----------
Arkansas 1.4%
Arkansas State Development Financing Authority, Driver's License Revenue, State Police Headquarters,
Wireless Data, FGIC Insured, 5.40%, 6/01/18 ...................................................... 4,000,000 4,166,920
Desha County Residential Housing Facilities Board, SFMR, Refunding, 7.50%, 4/01/11 ............... 1,940,000 2,066,236
Independence County Public Health and Education Facilities Board, Capital Revenue, White River Control Project,
Refunding & Improvement, Pre-Refunded, 8.00%, 6/01/09 ............................................ 3,115,000 3,265,174
Jefferson County PCR,
Arkansas Power and Light Co. Project, Refunding, 6.30%, 6/01/18 .................................. 1,465,000 1,587,049
Entergy Arkansas Inc. Project, Refunding, 5.60%, 10/01/17 ........................................ 5,000,000 5,082,000
Little River County Revenue, Georgia-Pacific Corporate Project, Refunding, 5.60%, 10/01/26 ....... 13,000,000 13,041,340
Arkansas (cont.)
Pope County PCR, Power and Light Co. Project, Refunding, 6.30%,
12/01/16 ......................................................................................... $ 2,600,000 $ 2,813,954
11/01/20 ......................................................................................... 60,000,000 62,688,600
Pulaski County,
Health Facilities Board Revenue Catholic Health Initiatives, Series A, 5.00%, 12/01/28 ........... 1,500,000 1,461,240
Public Facilities Board, MFR, Refunding, Series A, GNMA Insured, 5.45%, 12/20/18 ................. 1,000,000 1,012,630
University of Central Arkansas,
Academic Facilities Revenue, Series B, AMBAC Insured, 5.875%, 4/01/16 ............................ 250,000 275,203
Academic Facilities Revenue, Series C, AMBAC Insured, 6.00%, 4/01/21 ............................. 1,000,000 1,108,620
Athletic Facilities Revenue, Series C, AMBAC Insured, 6.00%, 4/01/21 ............................. 1,000,000 1,108,620
Athletic Facilities Revenue, Series C, AMBAC Insured, 6.125%, 4/01/26 ............................ 825,000 911,130
Housing System Revenue, Refunding, Series A, AMBAC Insured, 6.00%, 4/01/21 ....................... 1,000,000 1,108,620
-----------
101,697,336
-----------
California 4.9%
Alhambra COP, Clubhouse Facility Project, 11.25%
1/01/08 .......................................................................................... 410,000 418,688
1/01/09 .......................................................................................... 455,000 464,564
1/01/10 .......................................................................................... 500,000 510,470
Burbank RDA, Tax Allocation, Refunding, Series A, 6.25%, 12/01/24 ................................ 5,325,000 5,740,084
California Health Facilities, Financing Authority Revenue, St. Francis Medical Center, Refunding, Series H, AMBAC
Insured, 6.30%, 10/01/15 ......................................................................... 2,800,000 3,182,256
California State Educational Facilities Authority Revenue,
National University, Connie Lee Insured, 6.00%, 5/01/09 .......................................... 3,580,000 3,996,891
Pooled College and University Projects, Series B, 6.00%, 12/01/20 ................................ 6,025,000 6,482,719
California State GO,
6.00%, 5/01/18 ................................................................................... 535,000 590,587
5.90%, 4/01/23 ................................................................................... 1,200,000 1,300,740
FGIC Insured, 6.00%, 5/01/20 ..................................................................... 850,000 936,547
FGIC Insured, Pre-Refunded, 6.00%, 5/01/20 ....................................................... 11,650,000 13,099,027
Series 1994, 5.90%, 5/01/08 ...................................................................... 3,070,000 3,436,773
Veterans Bonds, Series BC, 6.00%, 2/01/10 ........................................................ 1,000,000 1,015,780
Veterans Bonds, Series BD, BE, and BF, 6.55%, 2/01/25 ............................................ 14,700,000 14,941,668
California State Public Works Board, Lease Revenue, Various University of California Projects, Series A, 6.375%,
10/01/14 ......................................................................................... 4,000,000 4,592,880
10/01/19 ......................................................................................... 2,000,000 2,296,440
California Statewide Communities Development Authority Revenue, COP, Sutter Health Obligation Group,
MBIA Insured, 6.00%, 8/15/25 ..................................................................... 14,750,000 16,329,873
Chino USD, COP, Refunding, FSA Insured, 5.90%, 9/01/15 ........................................... 8,250,000 9,094,800
Coalinga Public Finance Authority Revenue, Series B, 6.25%, 9/15/07 .............................. 1,020,000 1,044,378
Commerce, Refuse to Energy Authority Revenue, Refunding, Series 1994, 8.75%, 7/01/10 ............. 1,000,000 1,184,950
Foothill/Eastern Transportation Corridor Agency, Toll Road Revenue, Senior Lien, Series A, 6.50%, 59,240,000 66,583,983
1/01/32
Forty-Niner Shops, Inc., Auxiliary Organization, California State Long Beach Project, 6.875%,
4/01/07 .......................................................................................... 1,090,000 1,222,795
4/01/12 .......................................................................................... 1,565,000 1,755,664
Los Angeles County Metropolitan Transportation Authority, Sales Tax Revenue, Proposition C, Refunding,
Second Series A, AMBAC Insured, 5.00%, 7/01/23 ................................................... 10,000,000 9,971,200
California (cont.)
Los Angeles CRDA, Housing Revenue, Refunding, Series A, AMBAC Insured, 6.55%, 1/01/27 ............ $ 3,180,000 $ 3,451,731
Los Angeles Department of Water and Power, Electric Plant Revenue, Refunding, MBIA Insured, 6.00%, 3,000,000 3,203,880
2/01/28
Los Angeles Regional Airport Improvements Corp., Lease Revenue,
Facilities Sub-Lease, International Airport, Refunding, 6.35%, 11/01/25 .......................... 18,500,000 20,263,605
United Airlines, Inc. Project, Refunding, 6.875%, 11/15/12 ....................................... 8,400,000 9,245,292
Pomona Public Financing Authority Revenue, Series Q, MBIA Insured, 5.90%, 12/01/25 ............... 4,000,000 4,379,000
Sacramento County Airport Systems Revenue, Sub-Series D, MBIA Insured, 6.00%, 7/01/16 ............ 6,480,000 7,285,464
San Bernardino County COP, Medical Center Financing Project, Series A, MBIA Insured, 5.875%, 8/01/26 33,315,000 36,322,012
San Francisco City and County RDA Revenue,
George Moscone Convention Center, Lease Revenue, 6.75%, 7/01/24 .................................. 7,075,000 8,102,007
Tax Allocation Redevelopment Project, 6.50%, 8/01/22 ............................................. 12,680,000 14,700,812
San Francisco City and County Sewer Revenue, Series A, FGIC Insured, 5.90%, 10/01/20 ............. 10,380,000 11,247,041
San Joaquin Hills Transportation Corridor Agency, Toll Road Revenue,
5.00%, 1/01/33 ................................................................................... 5,000,000 4,840,650
Pre-Refunded, 7.00%, 1/01/30 ..................................................................... 16,785,000 19,188,948
University of California Revenues,
Hospital - U.C. Medical Center, AMBAC Insured, 5.75%, 7/01/24 .................................... 25,000,000 27,080,250
Research Facilities, Series B, Pre-Refunded, 6.55%, 9/01/24 ...................................... 11,780,000 13,419,658
Windsor RDA Revenue, Tax Allocation, Windsor Project, 7.00%, 9/01/24 ............................. 2,405,000 2,661,998
-----------
355,586,105
-----------
Colorado 4.8%
Colorado Health Facilities Authority Revenue,
Catholic Health Initiatives, Series A, 5.00%, 12/01/28 ........................................... 3,035,000 2,956,576
Kaiser Permanente, Series A, 5.35%, 11/01/16 ..................................................... 13,250,000 13,398,003
Series B, 5.35%, 8/01/15 ......................................................................... 20,200,000 20,763,580
Colorado HFA, GO, Series A, 7.50%, 5/01/29 ....................................................... 1,595,000 1,675,611
Colorado Post-Secondary Educational Facilities Authority Revenue, University of Denver Project,
Refunding & Improvement, MBIA Insured, 5.375%, 3/01/18 ........................................... 6,000,000 6,256,500
Colorado Springs Utilities Revenue, System Improvement, Series A, Subordinate Lien., 5.00%, 11/15/27 20,000,000 19,818,000
Denver City and County Airport Revenue,
Series A, 8.875%, 11/15/12 ....................................................................... 12,130,000 13,836,934
Series A, 7.50%, 11/15/23 ........................................................................ 13,590,000 15,572,237
Series A, 8.50%, 11/15/23 ........................................................................ 72,960,000 79,924,032
Series A, 8.00%, 11/15/25 ........................................................................ 20,305,000 22,048,184
Series A, 8.00%, 11/15/25 ........................................................................ 1,480,000 1,626,076
Series A, Pre-Refunded, 7.50%, 11/15/12 .......................................................... 11,200,000 12,950,224
Series A, Pre-Refunded, 8.875%, 11/15/12 ......................................................... 4,515,000 5,252,661
Series A, Pre-Refunded, 7.50%, 11/15/23 .......................................................... 2,930,000 3,512,045
Series A, Pre-Refunded, 8.50%, 11/15/23 .......................................................... 6,985,000 7,771,930
Series A, Pre-Refunded, 7.25%, 11/15/25 .......................................................... 16,465,000 18,918,779
Series A, Pre-Refunded, 7.25%, 11/15/25 .......................................................... 8,060,000 9,261,182
Series A, Pre-Refunded, 8.00%, 11/15/25 .......................................................... 2,020,000 2,227,979
Series A, Pre-Refunded, 8.00%, 11/15/25 .......................................................... 520,000 582,743
Series B, 7.25%, 11/15/23 ........................................................................ 2,120,000 2,344,911
Series B, Pre-Refunded, 7.25%, 11/15/23 .......................................................... 530,000 605,764
Series D, 7.75%, 11/15/21 ........................................................................ 8,950,000 9,913,647
Colorado (cont.)
Denver City and County Airport Revenue, (cont.)
Series D, 7.00%, 11/15/25 ........................................................................ $ 7,835,000 $ 8,352,032
Series D, Pre-Refunded, 7.75%, 11/15/21 .......................................................... 2,510,000 2,839,889
Denver City and County Special Facilities, Airport Revenue, United Airlines, Inc. Project, 47,980,000 51,855,345
Series A, 6.875%, 10/01/32
Littleton MFR, Rental Housing, Riverpointe Project I, Series 1985, 8.00%, 12/01/22 ............... 16,105,000 16,486,689
-----------
350,751,553
-----------
Connecticut
Meriden Housing Authority MFR, Connecticut Baptist Housing Project, GNMA Insured, 5.80%, 8/20/39 . 2,870,000 2,975,645
-----------
Delaware
Delaware State EDA Revenue, Water Development, Wilmington, Refunding, Series B, 6.45%, 12/01/07 .. 1,160,000 1,340,995
Delaware State Housing Authority, MFMR, Refunding, Series D, 6.75%, 7/01/06 ...................... 2,000,000 2,217,580
-----------
3,558,575
-----------
Florida 2.0%
Bay County Resource Recovery Revenue, Refunding,
Series A, MBIA Insured, 6.50%, 7/01/07 ........................................................... 2,100,000 2,332,239
Series B, MBIA Insured, 6.50%, 7/01/07 ........................................................... 11,020,000 12,238,702
Broward County Resource Recovery Revenue, Broward Waste Energy Co., L.P., North Project, Series 1984, 7.95%,
12/01/08 ......................................................................................... 40,950,000 43,675,223
Callaway/Bay County Waste Water Systems Revenue, Series A, FGIC Insured, 6.00%, 9/01/26 .......... 1,000,000 1,108,560
Florida State Board Of Education, Capital Outlay, Public Education, Refunding, Series 1992, 6.40%, 22,475,000 24,347,842
6/01/19
Florida State Department of Transportation,
Right of Way Acquisition and Bridge, 5.375%, 7/01/26 ............................................. 10,000,000 10,317,000
Turnpike Revenue, Series A, Pre-Refunded, 7.75%, 7/01/09 ......................................... 7,125,000 7,485,739
Lakeland Retirement Community, First Mortgage Revenue, Carpenters Home Estate Project, 9.50%, 9/01/06 3,330,000 3,330,000
Manatee County IDR, Manatee Hospital and Health Systems, Inc., Pre-Refunded, 9.25%, 3/01/21 ...... 6,500,000 7,423,260
Manatee County School Board COP, MBIA Insured, Pre-Refunded, 6.125%, 7/01/16 ..................... 5,000,000 5,768,450
bSouth Miami Florida Health Facilities Authority Hospital Revenue, Baptist Health System Obligation Group,
MBIA Insured, 5.00%, 11/15/28 .................................................................... 7,000,000 6,924,680
St. Augustine Water and Sewer Revenue, Refunding, Series A, MBIA Insured, 6.20%,
10/01/00 ......................................................................................... 840,000 884,024
10/01/01 ......................................................................................... 890,000 956,634
10/01/02 ......................................................................................... 940,000 1,028,322
10/01/03 ......................................................................................... 1,005,000 1,117,741
10/01/04 ......................................................................................... 1,065,000 1,199,084
10/01/05 ......................................................................................... 1,130,000 1,286,019
10/01/06 ......................................................................................... 1,200,000 1,381,692
10/01/07 ......................................................................................... 1,275,000 1,463,024
10/01/08 ......................................................................................... 1,355,000 1,539,822
10/01/12 ......................................................................................... 6,300,000 7,114,653
Sunrise Utilities System Revenue, Refunding, AMBAC Insured, 5.20%, 10/01/22 ...................... 2,000,000 2,052,520
-----------
144,975,230
-----------
Georgia 2.3%
Burke County Development Authority, PCR, Georgia Power Co., Plant Vogle Project,
Series 1984-1, MBIA Insured, 6.60%, 7/01/24 ...................................................... 105,000,000 108,851,400
Series 1984-7, MBIA Insured, 6.625%, 10/01/24 .................................................... 8,025,000 8,371,439
Georgia (cont.)
Fulton County Development Authority, Special Facilities Revenue, Delta Airlines, Inc. Project,
5.45%, 5/01/23 ................................................................................... $ 3,000,000 $ 2,956,110
Refunding, 6.85%, 11/01/07 ....................................................................... 3,400,000 3,701,546
Refunding, 6.95%, 11/01/12 ....................................................................... 5,500,000 5,994,945
Gainsville and Hall County Hospital Authority Revenue Anticipation Certificates, Northeast
Georgia Healthcare Project, Refunding, MBIA Insured, 6.00%, 10/01/25 ............................. 7,975,000 8,725,607
Georgia Municipal Electric Authority Power Revenue,
Series B, 6.375%, 1/01/16 ........................................................................ 14,000,000 14,979,720
Series EE, 6.40%, 1/01/23 ........................................................................ 6,325,000 7,034,792
Georgia State HFA Revenue, Homeownership Opportunity Program, Series C, 6.60%, 12/01/23 .......... 3,635,000 3,875,746
Monroe County Development Authority, PCR, Georgia Power Co., AMBAC Insured, 6.25%, 7/01/19 ....... 4,300,000 4,477,074
-----------
168,968,379
-----------
Hawaii 1.2%
Hawaii State Airports System Revenue,
FGIC Insured, 7.00%, 7/01/20 ..................................................................... 1,000,000 1,095,810
Second Series, 7.00%, 7/01/07 .................................................................... 12,000,000 13,066,680
Second Series, 6.90%, 7/01/12 .................................................................... 500,000 599,795
Second Series, 7.00%, 7/01/18 .................................................................... 2,830,000 3,046,580
Hawaii State Department of Budget and Finance,
Special Purposes Mortgage Revenue, Hawaii Electric Light Co. Project, 7.20%, 12/01/14 ............. 200,000 210,560
Special Purposes Mortgage Revenue, Hawaii Electric Light Co. Project, Series A, 7.35%, 1/01/20 ... 1,000,000 1,051,540
Special Purposes Mortgage Revenue, Hawaii Electric Light Co. Project, Series A, MBIA Insured, 5.65%,
10/01/27 ......................................................................................... 20,000,000 21,794,400
Special Purposes Mortgage Revenue, Kaiser Hospital, 6.25%, 3/01/21 ............................... 900,000 948,510
Special Purposes Mortgage Revenue, Kapiolani Health Care System, Refunding, 6.00%, 7/01/19 ....... 2,600,000 2,762,500
Special Purposes Mortgage Revenue, Wahiawa General Hospital Project, 7.50%, 7/01/12 .............. 1,000,000 1,090,800
Special Purposes Revenue, 6.00%, 7/01/11 ......................................................... 1,000,000 1,094,710
Special Purposes Revenue, 6.20%, 7/01/16 ......................................................... 2,000,000 2,177,060
Special Purposes Revenue, 6.25%, 7/01/21 ......................................................... 6,250,000 6,818,813
Special Purposes Revenue, The Queens Health System, Refunding, Series A, 5.75%, 7/01/26 .......... 5,800,000 6,115,926
Special Purposes Revenue, The Queens Health System, Series B, MBIA Insured, 5.25%, 7/01/23 ....... 5,000,000 5,153,700
Special Purposes Revenue, The Queens Health System, Series B, MBIA Insured, 5.00%, 7/01/28 ....... 3,250,000 3,272,653
Hawaii State SFMR,
HFC, Series A, 7.00%, 7/01/11 .................................................................... 230,000 245,332
HFC, Series A, 7.10%, 7/01/24 .................................................................... 3,350,000 3,573,747
HFC, Series B, 6.90%, 7/01/16 .................................................................... 245,000 261,964
HFC, Series B, 7.00%, 7/01/31 .................................................................... 8,055,000 8,618,608
Housing and Development Corp., Purchase Revenue, Series A, 5.75%, 7/01/30 ........................ 2,500,000 2,580,225
-----------
85,579,913
-----------
Idaho .1%
Idaho Housing Agency,
Refunding, Series D-1, 6.45%, 7/01/19 ............................................................ 2,190,000 2,347,461
SFMR, Senior Bond, Series B-1, FGIC Insured, 7.85%, 7/01/09 ...................................... 745,000 768,155
SFMR, Senior Bond, Series B-1, FGIC Insured, 7.90%, 1/01/21 ...................................... 1,120,000 1,151,786
Power County PCR, FMC Corp. Project, Refunding, 5.625%, 10/01/14 ................................. 2,200,000 2,280,696
-----------
6,548,098
-----------
Illinois 7.2%
Bryant PCR, Central Illinois Light Co. Project, Refunding,
Series A, 6.50%, 2/01/18 ......................................................................... $ 7,200,000 $ 7,738,056
Series C, 6.50%, 1/01/10 ......................................................................... 5,000,000 5,418,450
Chicago Board of Education, Chicago School Reform,
MBIA Insured, 6.00%, 12/01/16 .................................................................... 9,700,000 10,720,537
MBIA Insured, 6.00%, 12/01/26 .................................................................... 7,600,000 8,334,692
Series A, AMBAC Insured, 5.25%, 12/01/27 ......................................................... 10,000,000 10,125,300
Series A, AMBAC Insured, 5.25%, 12/01/30 ......................................................... 8,830,000 8,925,717
Chicago COP, AMBAC Insured, 7.75%, 7/15/11 ....................................................... 20,000,000 24,318,000
Chicago Gas Supply Revenue, The Peoples Gas Light, Refunding, Series A, 6.10%, 6/01/25 ........... 12,000,000 12,911,880
Chicago GO, Lakefront Millennium Parking Facilities, 5.125%, 1/01/28 ............................. 26,345,000 26,126,337
Chicago SFMR, Collateralized, Series A, 7.25%, 9/01/28 ........................................... 3,800,000 4,316,458
Chicago Wastewater Transmission Revenue, Refunding, FGIC Insured, 5.125%, 1/01/25 ................ 5,000,000 5,008,700
Chicago-O'Hare International Airport Revenue, Special Facilities, United Airlines, Inc. Project,
8.45%, 5/01/07 ................................................................................... 4,300,000 4,620,264
8.50%, 5/01/18 ................................................................................... 12,305,000 13,228,367
8.20%, 12/01/24 .................................................................................. 11,720,000 14,083,572
Series A, 8.40%, 5/01/18 ......................................................................... 450,000 471,528
Series C, 8.20%, 5/01/18 ......................................................................... 27,600,000 28,893,888
Cook County,
Capital Improvement, Refunding, FGIC Insured, 5.90%, 12/01/14 .................................... 10,000,000 10,998,700
Orland Park School District No. 135, Refunding, FGIC Insured, 5.875%, 11/15/22 ................... 10,000,000 11,312,800
Refunding, Series A, MBIA Insured, 5.625%, 11/15/22 .............................................. 20,000,000 21,042,000
Tinley Park School District No.140, Refunding, Series A, AMBAC Insured, 6.00%, 12/01/15 .......... 8,750,000 9,727,025
Illinois Development Finance Authority, PCR,
Central Illinois Public Service Co., Refunding, Series A, 6.375%, 1/01/28 ........................ 15,200,000 16,223,720
Commonwealth Edison Co. Project, Series 1991, 7.25%, 6/01/11 ..................................... 7,500,000 8,089,575
Illinois Power Co. Project, Refunding, Series A, 7.375%, 7/01/21 ................................. 26,550,000 30,827,205
Illinois Development Finance Authority Revenue, Provena Health, Series A, MBIA Insured, 5.50%, 5/15/21 13,240,000 13,732,263
Illinois Educational Facilities Authority Revenues, Midwestern University, Series B, MBIA-IBC Insured,
5.50%, 5/15/28 ................................................................................... 6,250,000 6,487,875
Illinois HDA,
Homeowner Mortgage, Series A-1, 6.85%, 8/01/17 ................................................... 4,245,000 4,646,832
MF Program, Lawndale Redevelopment Project, 7.10%, 12/01/34 ...................................... 20,000,000 22,026,800
MF Program, Refunding, Series A, 7.10%, 7/01/26 .................................................. 12,915,000 13,980,746
MF Program, Series 1, 6.625%, 9/01/12 ............................................................ 12,000,000 12,850,680
MF Program, Series 1, 6.75%, 9/01/21 ............................................................. 7,550,000 8,057,662
MF Program, Series C, 7.35%, 7/01/11 ............................................................. 2,265,000 2,378,975
RMR, Series B, 7.25%, 8/01/17 .................................................................... 7,065,000 7,478,091
Illinois Health Facilities Authority Revenue,
Edwards Hospital Project, Refunding, Pre-Refunded, 7.00%, 2/15/22 ................................ 2,000,000 2,234,140
Hospital Sisters Services Incorporated, Series A, MBIA Insured, 5.00%, 6/01/18 ................... 10,000,000 9,791,800
Loyola University Health System, Refunding, Series A, MBIA Insured, 5.625%, 7/01/18 .............. 9,195,000 9,774,193
Methodist Medical Center, Refunding, MBIA Insured, 5.25%, 11/15/21 ............................... 2,885,000 2,938,171
Northwestern Medical Facility Foundation, Refunding, MBIA Insured, 5.125%, 11/15/28 .............. 7,500,000 7,471,350
Servantcor, Refunding, Series A, Pre-Refunded, 7.875%, 8/15/19 ................................... 1,000,000 1,056,400
Servantcor, Refunding, Series B, Pre-Refunded, 7.875%, 8/15/19 ................................... 3,000,000 3,169,200
Illinois (cont.)
Illinois Health Facilities Authority Revenue, (cont.)
South Suburban Hospital, ETM, 7.00%, 2/15/18 ..................................................... $ 4,200,000 $ 5,186,496
South Suburban Hospital, Pre-Refunded, 7.00%, 2/15/18 ............................................ 2,800,000 3,127,796
Victory Health Services, Series A, 5.75%, 8/15/27 ................................................ 8,015,000 8,249,759
Westlake Community Hospital, Refunding, 7.875%, 1/01/13 .......................................... 6,200,000 6,356,054
Illinois State COP Department of Central Management, 6.875%, 7/01/07 ............................. 2,600,000 2,896,842
Illinois State Dedicated Tax Revenue, Pre-Refunded, Civic Center, Series A,
6.00%, 12/15/15 .................................................................................. 2,105,000 2,176,886
AMBAC Insured, 6.00%, 12/15/15 ................................................................... 845,000 886,768
Metropolitan Pier and Exposition Authority,
Dedicated State Tax Revenue, McCormick Place Expansion Project, Series A, 6.50%, 6/15/22 ......... 5,000 5,472
Dedicated State Tax Revenue, McCormick Place Expansion Project, Series A, 6.50%, 6/15/27 ......... 555,000 606,626
Dedicated State Tax Revenue, McCormick Place Expansion Project, Series A, FGIC Insured, 6.50%, 6/15/07 5,000 5,594
Hospitality Facilities Revenue, McCormick Place Convention Center, 5.75%, 7/01/06 ................ 1,645,000 1,764,740
Hospitality Facilities Revenue, McCormick Place Convention Center, 6.25%, 7/01/17 ................ 9,500,000 10,332,865
Hospitality Facilities Revenue, McCormick Place Convention Center, 7.00%, 7/01/26 ................ 12,000,000 14,983,080
Onterie Center HFC, Mortgage Revenue, Refunding, Series A, MBIA Insured, 7.05%, 7/01/27 .......... 4,350,000 4,661,069
Regional Transportation Authority, Series A, AMBAC Insured, 6.125%, 6/01/22 ...................... 3,970,000 4,208,915
Southwestern Illinois Development Authority,
Anderson Hospital Project, Series A, 7.00%, 8/15/22 .............................................. 6,200,000 6,688,932
IDR, Spectrulite Consortium, Inc. Project, 6.20%, 2/01/05 ........................................ 1,825,000 1,978,629
IDR, Spectrulite Consortium, Inc. Project, 6.625%, 2/01/10 ....................................... 3,050,000 3,317,943
Private Activity Revenue, Glenmark Recovery, 8.50%, 8/01/10 ...................................... 2,815,000 3,054,388
Solid Waste Disposal Revenue, LaCede Steel Co., 8.375%, 8/01/08 .................................. 4,695,000 5,127,973
Solid Waste Disposal Revenue, LaCede Steel Co., 8.50%, 8/01/20 ................................... 5,390,000 5,896,337
Upper River Valley Development Authority, Environmental Facilities Revenue, General Electric Co. Project,
5.45%, 2/01/23 ................................................................................... 3,600,000 3,694,104
Will County Exempt Facilities Revenue, Mobil Oil Refining Corp. Project, 6.00%, 2/01/27 .......... 7,130,000 7,516,945
-----------
524,262,162
-----------
Indiana 1.2%
Carmel Industrial RDA, County Option, Income Tax Lease, Rent Revenue, MBIA Insured, 5.25%, 1/01/18 1,090,000 1,114,787
East Chicago Industrial Solid Waste Disposal Revenue, USG Corp. Project, 5.50%, 9/01/28 .......... 5,250,000 5,144,055
Hammond Industrial Sewer and Solid Waste Disposal Revenue, American Maize-Products Co., Project A, 8.00%,
12/01/24 ......................................................................................... 17,000,000 20,012,230
Hammond PCR, Stauffer Chemical Project, Guaranteed by Imperial Chemical, Series 1982, 8.00%, 11/01/12 2,355,000 2,520,345
Indiana Bond Bank, Special Program, Series A, 8.375%, 2/01/18 .................................... 560,000 568,445
Indiana Health Facility Financing Authority, Hospital Revenue, Hancock Memorial Hospital Project, Series 1990,
Pre-Refunded, 8.30%, 8/15/20 ..................................................................... 3,500,000 3,849,860
Indiana State Educational Facilities Authority Revenue, Manchester College Project, 6.85%, 10/01/18 3,240,000 3,438,288
Indiana State Housing Financing Authority, SFMR, Refunding, Series A,
6.75%, 1/01/10 ................................................................................... 2,940,000 3,135,451
6.80%, 1/01/17 ................................................................................... 12,835,000 13,691,736
Indianapolis Local Public Improvement,
Refunding, Series D, 6.50%, 2/01/22 .............................................................. 4,625,000 4,635,591
Series D, 6.75%, 2/01/20 ......................................................................... 13,075,000 14,527,633
Jasper County EDR, Georgia Pacific Corp. Project, 5.625%, 12/01/27 ............................... 2,500,000 2,521,425
Indiana (cont.)
Monroe County, MFR Housing, Country View, Series A, GNMA Insured, 5.75%, 4/01/33 ................. $ 2,000,000 $ 2,026,600
Muncies Edit Building Corp., First Mortgage, Series A, AMBAC Insured, 6.60%, 12/01/17 ............ 2,000,000 2,229,880
Sullivan PCR, Indiana-Michigan Power Co. Project, Refunding, Series C, 5.95%, 5/01/09 ............ 6,000,000 6,352,740
-----------
85,769,066
-----------
Iowa .2%
Iowa Financing Authority, SFMR, Series F, 5.70%, 1/01/27 ......................................... 10,780,000 11,126,793
-----------
Kansas .1%
Kansas State Development Financial Authority Revenue, Sisters of Charity Leavenworth, MBIA Insured, 5.125%,
12/01/18 ......................................................................................... 2,000,000 2,035,060
Newton Hospital Revenue, Newton Healthcare Corp., Refunding, Series A,
5.70%, 11/15/18 .................................................................................. 1,575,000 1,592,955
5.75%, 11/15/24 .................................................................................. 1,500,000 1,513,620
-----------
5,141,635
-----------
Kentucky 2.0%
Ashland PCR, Ashland Oil, Inc. Project, Refunding, 6.65%, 8/01/09 ................................ 3,900,000 4,217,772
Henderson County Solid Waste Disposal Revenue, MacMillan Bloedel Project, 7.00%, 3/01/25 ......... 10,000,000 10,900,500
Jefferson County MFHR, Watterson Park Apartments Project, Series A, 6.35%, 11/15/11 .............. 4,870,000 5,176,859
Kenton County Airport Board Revenue, Special Facilities, Delta Airlines, Inc.,
7.80%, 12/01/15 .................................................................................. 20,000,000 21,091,400
Project A, 7.50%, 2/01/20 ........................................................................ 10,000,000 10,943,600
Project A, 7.125%, 2/01/21 ....................................................................... 9,330,000 10,089,182
Project B, 7.25%, 2/01/22 ........................................................................ 3,350,000 3,650,797
Kentucky Economic Development Financing Authority, Hospital Systems Revenue, Appalachian Regional Facility,
Refunding & Improvement,
5.80%, 10/01/12 .................................................................................. 1,000,000 1,044,080
5.85%, 10/01/17 .................................................................................. 5,615,000 5,837,522
Kentucky Housing Corp. Revenue,
Series A, 6.70%, 7/01/17 ......................................................................... 485,000 515,613
Series B, 6.625%, 7/01/14 ........................................................................ 4,910,000 5,196,008
Kentucky State Development Financing Authority, Hospital Revenue, Claire Medical Center Project, Pre-Refunded,
7.125%, 9/01/21 .................................................................................. 700,000 776,321
Mount Sterling Lease Revenue, Kentucky League Cities, Series A,
6.10%, 3/01/08 ................................................................................... 20,375,000 22,078,554
6.20%, 3/01/18 ................................................................................... 11,765,000 12,702,553
Pendleton County, Multi-County Lease Revenue, Kentucky Association of Counties Leasing Trust, Series A, 6.50%,
3/01/19 .......................................................................................... 27,160,000 29,685,608
-----------
143,906,369
-----------
Louisiana 2.1%
Bastrop PCR, International Paper Co. Project, Refunding, 6.90%, 3/01/07 .......................... 2,000,000 2,174,540
Calcasieu Parish IDB, PCR, Gulf States Utilities Co. Project, Refunding, 6.75%, 10/01/12 ......... 14,285,000 15,313,806
Calcasieu Parish Memorial Hospital Service District Revenue, Lake Charles Parish Memorial Hospital Project,
Series A, FSA Insured,
6.375%, 12/01/12 ................................................................................. 4,310,000 5,022,745
6.50%, 12/01/18 .................................................................................. 5,530,000 6,541,879
Louisiana (cont.)
Calcasieu Parish Public Transportation Authority Mortgage Revenue, Refunding,
6.65%, 12/01/21 .................................................................................. $ 3,145,000 $ 3,435,441
Series A, 7.75%, 6/01/12 ......................................................................... 2,675,000 2,843,980
Series B, 6.375%, 11/01/02 ....................................................................... 255,000 270,285
Series B, 6.875%, 11/01/12 ....................................................................... 600,000 641,550
De Soto Parish Environmental Improvement Revenue, International Paper Co. Project, Series A, 7.70%, 2,500,000 2,898,500
11/01/18
East Baton Rouge Mortgage Financing Authority, SFM,
MBS, Series A, 6.80%, 10/01/28 ................................................................... 6,055,000 6,519,055
Series C, 7.00%, 4/01/32 ......................................................................... 2,130,000 2,268,131
Series D, 7.10%, 4/01/32 ......................................................................... 2,850,000 3,024,335
Hammond Tangipahoa Home Mortgage Authority Revenue, University Facilities Incorporate Project, MBIA Insured,
5.50%, 7/15/27 ................................................................................... 3,250,000 3,350,490
Jefferson Parish Hospital, Service District No. 001, Hospital Revenue, West Jefferson Medical Center, Series A,
FSA Insured, 5.00%, 1/01/21 ...................................................................... 1,500,000 1,456,665
Lafayette Public Trust Financing Authority SFMR, Refunding, Series A, 8.50%, 11/15/12 ............ 1,253,961 1,304,132
Louisiana HFA Mortgage Revenue,
Refunding, 7.375%, 9/01/13 ....................................................................... 1,120,000 1,173,368
SF, Refunding, Series B-2, 5.75%, 12/01/28 ....................................................... 2,890,000 2,979,937
Louisiana Office Facility Corp., Capital Facility Bonds, Statewide Lease, 7.75%, 12/01/10 ........ 3,400,000 3,752,954
Louisiana Public Facilities Authority Revenue,
Alton Ochsner Medical Foundation Project, Refunding, Series B, MBIA Insured, 6.50%, 5/15/22 ...... 3,500,000 3,811,115
Xavier University of Louisiana Project, Refunding, MBIA Insured, 5.25%, 9/01/27 .................. 3,000,000 3,061,890
New Orleans GO, Refunding, AMBAC Insured,
6.125%, 10/01/16 ................................................................................. 10,275,000 11,216,909
6.20%, 10/01/21 .................................................................................. 8,050,000 8,803,319
Pointe Coupee Parish PCR, Gulf States Utilities Co. Project, Refunding, 6.70%, 3/01/13 ........... 2,200,000 2,365,902
Quachita Parish Hospital Service District No. 1 Revenue, Glenwood Regional Medical Center, Pre-Refunded,
7.50%, 7/01/21 ................................................................................... 4,000,000 4,448,360
Terrebonne Parish Hospital Service District No. 1, Hospital Revenue, Terrebonne General Medical Center Project,
Refunding, 5.375%, 4/01/23 ....................................................................... 2,500,000 2,578,450
West Feliciana Parish PCR, Gulf Systems Utilities Co. Project,
7.70%, 12/01/14 .................................................................................. 2,000,000 2,230,420
7.00%, 11/01/15 .................................................................................. 3,050,000 3,371,531
Refunding, 8.00%, 12/01/24 ....................................................................... 41,050,000 43,384,103
-----------
150,243,792
-----------
Maine .9%
Bucksport Solid Waste Disposal Revenue, Champion International Corp. Project, 6.25%, 5/01/10 ..... 5,000,000 5,290,650
Maine Financial Authority, Solid Waste Recycling Facilities Revenue, Great Northern Paper Co., Bowater Project,
7.75%, 10/01/22 .................................................................................. 29,300,000 32,709,348
Maine Health and Higher Educational Facilities Authority Revenue, Series B, FSA Insured,
7.00%, 7/01/24 ................................................................................... 20,000 23,230
Pre-Refunded, 7.00%, 7/01/24 ..................................................................... 2,425,000 2,835,456
Maine State Housing Authority, Mortgage Purchase,
Series A-5, 6.20%, 11/15/16 ...................................................................... 2,500,000 2,628,425
Series C, 6.55%, 11/15/12 ........................................................................ 3,700,000 3,935,690
Series C, 6.65%, 11/15/24 ........................................................................ 3,500,000 3,716,580
Maine (cont.)
Maine State Housing Authority, Mortgage Purchase, (cont.)
Series D, 6.45%, 11/15/07 ........................................................................ $ 3,540,000 $ 3,726,664
Series D, 6.70%, 11/15/15 ........................................................................ 5,800,000 6,304,890
Rumford PCR, Boise Cascade Corp. Project, Refunding, 6.625%, 7/01/20 ............................. 4,800,000 5,257,104
-----------
66,428,037
-----------
Maryland 1.7%
Gaithersburg Hospital Facilities Revenue, Shady Grove Hospital, Refunding and Improvement,
Series A, Pre-Refunded, 8.25%, 9/01/21 ........................................................... 43,225,000 49,356,466
Series C, Pre-Refunded, 6.00%, 9/01/21 ........................................................... 10,110,000 11,134,851
Maryland State Community Development Administration, Department of Housing and Community Development,
MFHR, Series G, Mortgage Insured, 6.55%, 5/15/19 ................................................. 5,475,000 5,803,664
SF, 7.25%, 4/01/27 ............................................................................... 965,000 1,014,784
Maryland State Health & Higher Educational Facilities Authority Revenue,
Anne Arundel Medical Center, FSA Insured, 5.125%, 7/01/33 ........................................ 8,000,000 8,101,120
Johns Hopkins Medicine, MBIA Insured, 5.00%, 7/01/19 ............................................. 3,000,000 3,014,580
Montgomery County Housing Opportunity Community, SFMR, Refunding, Series B, 6.625%, 7/01/28 ...... 6,500,000 6,865,300
Takoma Park Hospital Facilities Revenue, Washington Adventist Hospital,
Refunding, Series A, Sub-Series 1, 8.25%, 9/01/21 ................................................ 20,125,000 22,356,661
Refunding, Series A, Sub-Series 1, 8.25%, 9/01/21 ................................................ 10,930,000 12,480,421
Series A, Sub-Series 2, 8.25%, 9/01/21 ........................................................... 5,000,000 5,701,950
-----------
125,829,797
-----------
Massachusetts 2.5%
Agawam Resource Recovery Revenue, Springfield Resource Recovery Project, Series 1986, 8.50%, 12/01/08 10,340,000 10,471,732
Massachusetts Health and Educational Facilities Authority Revenue, Notre Dame Health Care Center, Series A,
7.875%, 10/01/22 ................................................................................. 2,310,000 2,497,480
Massachusetts State Consolidated Loan, Series A, 7.50%, 6/01/04 .................................. 7,500,000 8,676,975
Massachusetts State GO, Refunding, Series B, 6.50%, 8/01/08 ...................................... 5,900,000 6,990,851
Massachusetts State Health and Educational Facilities Authority Revenue,
Framingham Union Hospital, Series B, Pre-Refunded, 8.50%, 7/01/20 ................................ 9,020,000 9,910,094
Melrose-Wakefield Hospital, ETM, Refunding, Series B, 6.35%, 7/01/06 ............................. 1,100,000 1,254,979
Sisters Providence Health System, Series A, Pre-Refunded, 6.50%, 11/15/08 ........................ 1,000,000 1,138,510
Sisters Providence Health System, Series A, Pre-Refunded, 6.625%, 11/15/22 ....................... 12,050,000 13,799,299
Massachusetts State HFA,
HDA, Series D, FGIC Insured, 6.875%, 11/15/21 .................................................... 5,250,000 5,658,398
Housing Projects, Refunding, Series A, 6.30%, 10/01/13 ........................................... 25,635,000 27,286,919
Housing Projects, Refunding, Series A, 6.375%, 4/01/21 ........................................... 24,750,000 26,417,408
Massachusetts State HFA Revenue, SF, Series 41,
6.30%, 12/01/14 .................................................................................. 6,250,000 6,706,750
6.35%, 6/01/17 ................................................................................... 5,750,000 6,141,000
Massachusetts State Housing Facilities Authority,
Series C, FGIC Insured, 6.90%, 11/15/21 .......................................................... 9,715,000 10,624,130
Series D, FGIC Insured, 6.80%, 11/15/12 .......................................................... 250,000 271,050
Massachusetts State Industrial Finance Agency, Health Care Facilities Revenue,
Jewish Geriatric Services, Inc., Series B,
5.375%, 5/15/17 .................................................................................. $ 1,965,000 $ 2,011,787
7.00%, 4/01/22 ................................................................................... 5,000,000 5,531,000
Massachusetts (cont.)
Massachusetts State Industrial Finance Agency Revenue, D. Youville Senior Care,
5.65%, 10/01/17 .................................................................................. $ 2,295,000 $ 2,374,246
5.70%, 10/01/27 .................................................................................. 7,375,000 7,628,995
Massachusetts State Port Authority Revenue, Special Facilities, Bosfuel Project, MBIA Insured, 5.75%, 11,750,000 12,351,365
7/01/39
Plymouth County COP, Series A,
7.00%, 4/01/12 ................................................................................... 10,000,000 11,100,100
5.50%, 5/15/27 ................................................................................... 5,000,000 5,149,000
-----------
183,992,068
-----------
Michigan 2.0%
Battle Creek Tax Increment Finance Authority, Pre-Refunded, 7.40%, 5/01/16 ....................... 2,000,000 2,369,920
Belding Area Schools GO,
FGIC Insured, 6.10%, 5/01/26 ..................................................................... 810,000 895,820
Pre-Refunded, FGIC Insured, 6.10%, 5/01/26 ....................................................... 2,995,000 3,420,949
Detroit GO,
Refunding, Series B, 6.375%, 4/01/06 ............................................................. 7,265,000 8,117,620
Refunding, Series B, 6.25%, 4/01/09 .............................................................. 625,000 687,413
Self-Insurance, Series A, 5.70%, 5/01/02 ......................................................... 2,250,000 2,366,753
Series A, Pre-Refunded, 6.70%, 4/01/10 ........................................................... 4,550,000 5,287,510
Detroit Sewage Disposal Revenue, Series A, MBIA Insured, 5.50%, 7/01/20 .......................... 29,200,000 30,635,180
Detroit/Wayne County Stadium Authority, FGIC Insured, 5.25%, 2/01/27 ............................. 4,235,000 4,315,296
Kalamazoo EDC Revenue, Limited Obligation, Friendship Village, Refunding, Series A, 6.25%, 5/15/27 2,000,000 2,105,580
Kalamazoo Hospital Finance Authority, Hospital Facility Revenue, Bronson Methodist Hospital, Refunding,
MBIA Insured, 5.50%, 5/15/28 ..................................................................... 4,180,000 4,357,692
Michigan State Building Authority Revenue, Series II, 6.25%, 10/01/20 ............................ 15,650,000 16,729,537
Michigan State HDA,
Rental Housing Revenue, Refunding, Series A, 6.60%, 4/01/12 ...................................... 5,000,000 5,407,500
SFMR, Series A, 6.45%, 12/01/14 .................................................................. 2,000,000 2,140,540
SFMR, Series A, 6.875%, 6/01/23 .................................................................. 2,200,000 2,338,248
Michigan State HFA Revenue,
Henry Ford Health, Refunding,Series A, 5.25%, 11/15/25 ........................................... 4,000,000 4,029,760
Hospital Genesys Regional Medical, Refunding, Series A, 5.50%, 10/01/18 .......................... 4,500,000 4,542,750
Hospital Genesys Regional Medical, Refunding, Series A, 5.50%, 10/01/27 .......................... 5,000,000 5,025,400
Presbyterian Villages Obligation Group, 5.30%, 1/01/99 ........................................... 200,000 200,286
Presbyterian Villages Obligation Group, 5.40%, 1/01/00 ........................................... 310,000 313,233
Presbyterian Villages Obligation Group, 5.70%, 1/01/01 ........................................... 310,000 316,526
Presbyterian Villages Obligation Group, 5.80%, 1/01/02 ........................................... 355,000 365,682
Presbyterian Villages Obligation Group, 5.90%, 1/01/03 ........................................... 325,000 337,565
Presbyterian Villages Obligation Group, 6.00%, 1/01/04 ........................................... 390,000 408,233
Presbyterian Villages Obligation Group, 6.375%, 1/01/15 .......................................... 275,000 296,175
Presbyterian Villages Obligation Group, 6.40%, 1/01/15 ........................................... 1,000,000 1,070,670
Presbyterian Villages Obligation Group, 6.50%, 1/01/25 ........................................... 3,500,000 3,746,260
Michigan State Hospital Finance Authority Revenue,
Oakwood Obligation Group, Refunding, Series A, FSA Insured, 5.125%, 8/15/25 ...................... 2,000,000 1,995,500
Oakwood Obligation Group, Refunding, Series A, FSA Insured, 5.00%, 8/15/31 ....................... 3,180,000 3,085,045
St. John's Hospital and Medical Center, AMBAC Insured, 5.25%, 5/15/26 ............................ 22,860,000 23,201,986
Michigan (cont.)
Michigan State Housing Development Authority, Limited Obligation Revenue Bonds, 6.625%, 9/15/19 .. $ 2,500,000 $ 2,685,475
-----------
142,796,104
-----------
Minnesota 2.0%
Agricultural and EDR, Health Care System, Fairview Hospital, Refunding, Series A, MBIA Insured, 25,810,000 28,325,185
5.75%, 11/15/26
Cloquet PCR, Potlach Corp. Projects, Refunding, 5.90%, 10/01/26 .................................. 9,100,000 9,682,127
Dakota County Housing, RDA, Limited Annual Appropriation Tax and Revenue, Development Housing Facilities Project,
7.25%, 1/01/99 ................................................................................... 600,000 601,326
7.25%, 1/01/00 ................................................................................... 645,000 654,901
7.25%, 1/01/01 ................................................................................... 695,000 712,264
7.50%, 1/01/06 ................................................................................... 3,930,000 4,067,825
8.00%, 1/01/07 ................................................................................... 2,140,000 2,186,695
International Falls PCR, Boise Cascade Corp. Project, Refunding, 5.65%, 12/01/22 ................. 3,500,000 3,472,525
Minneapolis CDA and St. Paul Housing RDA, Homeownership Mortgage Revenue, Joint Housing Program,
FGIC Insured, 9.875%, 12/01/15 ................................................................... 5,000 5,005
Minnesota State HFA, SFM, Series D-1,
6.45%, 7/01/11 ................................................................................... 3,415,000 3,644,864
6.50%, 1/01/17 ................................................................................... 1,355,000 1,441,883
Minnesota State Higher Educational Facilities Authority Revenue, University Saint Thomas, Series Four-P,
5.375%, 4/01/18 .................................................................................. 525,000 535,658
5.40%, 4/01/23 ................................................................................... 580,000 590,678
Minnetonka MFHR, Ridgepointe II Project, Refunding, Series A, 5.95%, 10/20/33 .................... 11,075,000 11,026,159
Red Wing Housing, RDA, Jordan Tower II Project, 7.00%, 1/01/19 ................................... 1,500,000 1,632,885
Rochester Health Care Facilities Revenue, Mayo Foundation, Series A, 5.50%, 11/15/27 ............. 29,000,000 30,517,280
Roseville MFHR, Rosepointe I Project, Refunding, Series A, 5.95%, 10/20/33 ....................... 8,695,000 8,656,655
St. Louis Park EDA, Tax Increment Revenue, Refunding, FGIC Insured, Pre-Refunded, 8.40%, 9/01/09 . 6,000,000 6,866,280
St. Paul Port Authority,
Energy Park, Tax Increment Revenue, Refunding, Pre-Refunded, 8.00%, 12/01/07 ..................... 3,500,000 3,582,950
IDR, Bandana Square, Series C, 7.70%, 12/01/00 ................................................... 230,000 229,397
IDR, Bandana Square, Series C, 7.70%, 12/01/01 ................................................... 255,000 253,559
IDR, Bandana Square, Series C, 7.70%, 12/01/02 ................................................... 270,000 269,390
IDR, Bandana Square, Series C, 7.70%, 12/01/07 ................................................... 1,690,000 1,512,229
IDR, Bandana Square, Series C, 7.80%, 12/01/12 ................................................... 3,465,000 2,964,793
IDR, Brown and Bigelow Co., Series 1979-2, 7.50%, 10/01/99 ....................................... 480,000 480,490
IDR, Brown and Bigelow Co., Series 1979-2, 7.50%, 10/01/00 ....................................... 515,000 516,118
IDR, Brown and Bigelow Co., Series 1979-2, 7.50%, 10/01/01 ....................................... 550,000 551,788
IDR, Brown and Bigelow Co., Series 1979-2, 7.50%, 10/01/02 ....................................... 595,000 597,523
IDR, Brown and Bigelow Co., Series 1979-2, 7.50%, 10/01/03 ....................................... 640,000 643,309
IDR, Brown and Bigelow Co., Series 1979-2, 7.50%, 10/01/04 ....................................... 685,000 689,137
IDR, Brown and Bigelow Co., Series 1979-2, 7.50%, 10/01/05 ....................................... 740,000 747,777
IDR, Brown and Bigelow Co., Series 1979-2, 7.50%, 10/01/06 ....................................... 795,000 803,355
IDR, Brown and Bigelow Co., Series 1979-2, 7.50%, 10/01/07 ....................................... 855,000 863,986
IDR, Brown and Bigelow Co., Series 1979-2, 7.50%, 10/01/08 ....................................... 915,000 924,617
IDR, Brown and Bigelow Co., Series 1979-2, 7.50%, 10/01/09 ....................................... 670,000 677,042
IDR, Common Bond Fund, Fort Road Medical Center, Refunding, Series C, 7.95%, 9/01/01 ............. 140,000 139,090
IDR, Common Bond Fund, Fort Road Medical Center, Refunding, Series C, 7.95%, 9/01/02 ............. 155,000 154,481
IDR, Common Bond Fund, Fort Road Medical Center, Refunding, Series C, 7.95%, 9/01/10 ............. 1,705,000 1,497,382
Minnesota (cont.)
St. Paul Port Authority, (cont.)
IDR, Common Bond Fund, Ideal Security Hardware Corp., Refunding, Series F, 8.00%, 12/01/01 ....... $ 105,000 $ 104,381
IDR, Common Bond Fund, Ideal Security Hardware Corp., Refunding, Series F, 8.00%, 12/01/02 ....... 115,000 114,702
IDR, Common Bond Fund, Ideal Security Hardware Corp., Refunding, Series F, 8.00%, 12/01/12 ....... 1,790,000 1,558,768
Washington County Housing RDA,
Housing Development Revenue, Orleans Apartments, Project A, 8.25%, 7/01/21 ....................... 3,000,000 3,071,640
Housing Development Revenue, Raymie Johnson Apartments, Pre-Refunded, 7.70%, 12/01/19 ............ 5,210,000 5,911,527
Pooled Housing and Redevelopment, 7.20%, 1/01/22 ................................................. 5,885,000 6,311,604
-----------
149,791,230
-----------
Mississippi 1.2%
Claiborne County PCR, Systems Energy Resources, Inc., Refunding,
7.30%, 5/01/25 ................................................................................... 5,700,000 6,000,504
6.20%, 2/01/26 ................................................................................... 36,500,000 37,729,685
bMississippi Business Finance Corporation PCR, Systems Energy Resources Inc. Project, 5.875%, 4/01/22 40,000,000 39,999,600
Mississippi Home Corp., SFR, Refunding, Senior Series A, FGIC Insured, 9.25%, 3/01/12 ............ 1,260,000 1,340,451
Mississippi State Educational Facilities Authority Revenue, Private Nonprofit Institutions of Higher Learning,
Tougaloo College Project, Series A, 6.50%, 6/01/18 ............................................... 2,335,000 2,436,106
-----------
87,506,346
-----------
Missouri .3%
Hazelwood IDA, MFHR, Lakes Apartments Project, Refunding, Series A, 6.10%, 9/20/26 ............... 3,000,000 3,158,910
Missouri State Health and Educational Facilities Authority Revenue, Series B, MBIA Insured, 6.25%, 5,000,000 5,407,550
2/15/12
St. Louis Parking Facilities Revenue, Pre-Refunded, 6.625%, 12/15/21 ............................. 6,000,000 6,766,920
Taney County IDA, Hospital Revenue, The Skaggs Community Hospital Association, 5.40%, 5/15/28 .... 4,000,000 4,027,240
West Plains IDA, Hospital Revenue, Ozarks Medical Center Project, Series A, Pre-Refunded, 8.625%, 3,510,000 3,855,665
9/15/20
-----------
23,216,285
-----------
Montana .8%
Forsyth County PCR,
Puget Sound Power and Light Co. Project, AMBAC Insured, 6.80%, 3/01/22 ........................... 10,000,000 10,952,800
The Montana Power Co. Colstrip Project, Refunding, Series A, 6.125%, 5/01/23 ..................... 3,250,000 3,459,690
The Montana Power Co., Refunding, Series B, AMBAC Insured, 5.90%, 12/01/23 ....................... 4,225,000 4,586,111
The Montana Power Co., Refunding, Series B, MBIA Insured, 5.90%, 12/01/23 ........................ 20,385,000 22,127,306
Montana State Health Facilities Authority Revenue,
Montana Developmental Center Project, 6.40%, 6/01/19 ............................................. 2,000,000 2,173,200
Sisters of Charity Leavenworth, MBIA Insured, 5.125%, 12/01/18 ................................... 5,000,000 5,067,050
Montana State Housing Board, SF Program, Refunding,
Series A, 6.50%, 12/01/22 ........................................................................ 2,835,000 2,992,116
Series B-1, 6.25%, 12/01/21 ...................................................................... 6,720,000 7,145,040
-----------
58,503,313
-----------
Nebraska .2%
Lancaster County Hospital Authority No. 1, Hospital Revenue, Bryan Memorial Project, Series B, MBIA Insured,
5.375%, 6/01/22 .................................................................................. 6,500,000 6,746,740
Nebraska Investment Financial Authority, 7.00%, 11/01/09 ......................................... 5,580,000 5,689,089
-----------
12,435,829
-----------
Nevada 3.1%
Churchill County Health Care Facilities Revenue, Western Health Network, Series A, MBIA Insured, $ 2,000,000 $ 2,203,840
6.25%, 1/01/14
Clark County HFC, MFHR, FHA Insured, 7.75%, 7/01/23 .............................................. 5,065,000 5,243,744
Clark County IDR,
Nevada Power Co. Project, Refunding, Series B, 5.90%, 10/01/30 ................................... 15,000,000 15,318,900
Nevada Power Co. Project, Refunding, Series C, 7.20%, 10/01/22 ................................... 12,500,000 13,807,000
Nevada Power Co. Project, Series A, 5.90%, 11/01/32 .............................................. 2,600,000 2,663,102
Southwest Gas Corp., Series A, 7.30%, 9/01/27 .................................................... 18,080,000 20,002,627
Southwest Gas Corp., Series A, 6.50%, 12/01/33 ................................................... 10,000,000 10,862,500
Southwest Gas Corp., Series B, 7.50%, 9/01/32 .................................................... 62,470,000 69,312,964
Humboldt County PCR, Sierra Pacific Power Co., Refunding, Series A, AMBAC Insured, 6.30%, 7/01/22 4,500,000 4,862,430
Nevada Housing Division,
Issue C-2, Refunding, 6.75%, 10/01/26 ............................................................ 8,190,000 8,765,020
Multi-Unit Housing Revenue, Issue B, 6.55%, 10/01/25 ............................................. 5,405,000 5,876,424
SF Program, Issue A, FI/GML, 8.30%, 10/01/19 ..................................................... 2,655,000 2,894,959
SF Program, Issue A-2, FI/GML, 8.375%, 10/01/19 .................................................. 2,045,000 2,243,651
SF Program, Program A-1, Refunding, 6.25%, 10/01/26 .............................................. 3,870,000 4,102,355
Nevada State Colorado River, Series 1994, Pre-Refunded, 6.50%, 7/01/24 ........................... 15,915,000 18,081,350
Nevada State Municipal Bond Bank Project No. 40-41-A, ETM, 6.375%, 12/01/17 ...................... 10,275,000 11,348,840
Reno RDA, Tax Allocation,
Downtown Redevelopment Project, Series C, Pre-Refunded, 7.75%, 9/01/05 ........................... 2,695,000 2,943,668
Downtown Redevelopment Project, Series D, 7.625%, 9/01/16 ........................................ 4,255,000 4,737,134
Downtown Redevelopment Project, Series D, Pre-Refunded, 7.625%, 9/01/16 .......................... 4,035,000 4,492,206
Refunding, Series A, 6.20%, 6/01/18 .............................................................. 3,000,000 3,141,210
Washoe County Gas and Water Facilities Revenue, Refunding, AMBAC Insured, 6.30%, 12/01/14 ........ 5,000,000 5,448,900
Washoe County Hospital Facility Revenue, Washoe Medical Center, Inc. Project, Series A, AMBAC Insured,
6.25%, 6/01/13 ................................................................................... 9,295,000 10,380,470
-----------
228,733,294
-----------
New Hampshire 1.6%
Nashua Housing Authority, MFR, Clocktower Project, Refunding, FGIC Insured, 6.25%, 6/20/33 ....... 6,154,000 6,556,964
New Hampshire Higher Education and Health Facilities Authority Revenue,
Kendal at Hanover Project, Pre-Refunded, 8.00%, 10/01/19 ......................................... 9,250,000 9,836,728
New Hampshire Catholic Charities, 5.80%, 8/01/22 ................................................. 1,000,000 1,013,460
Rivier College, 5.60%, 1/01/28 ................................................................... 4,590,000 4,608,544
St. Joseph Hospital, 7.50%, 1/01/16 .............................................................. 2,300,000 2,464,749
The Hitchcock Clinic, MBIA Insured, 6.00%, 7/01/27 ............................................... 4,275,000 4,694,549
New Hampshire State HFA,
MFHR, Series 1, 7.10%, 1/01/14 ................................................................... 4,920,000 5,208,214
SFMR, Series E, 6.75%, 7/01/19 ................................................................... 5,675,000 6,128,262
SFMR, Series E, 6.80%, 7/01/25 ................................................................... 4,245,000 4,583,411
New Hampshire State IDA, Pollution Control Public Service Co.,
Project A, 7.65%, 5/01/21 ........................................................................ 6,870,000 7,299,787
Project B, 7.50%, 5/01/21 ........................................................................ 50,690,000 53,808,449
Project C, 7.65%, 5/01/21 ........................................................................ 7,450,000 7,916,072
-----------
114,119,189
-----------
New Jersey .4%
Mercer County Improvement Authority, Solid Waste, Refunding, 5.75%, 9/15/16 ...................... $ 2,500,000 $ 2,701,275
New Jersey Health Care Facilities, Financing Authority Revenue,
Cathedral Health Services, Pre-Refunded, 7.25%, 2/15/21 .......................................... 3,975,000 4,362,920
Cathedral Health Services, Refunding, MBIA Insured, 5.25%, 8/01/21 ............................... 7,865,000 8,162,218
Hackensack University Medical Center, Refunding, Series B, MBIA Insured, 5.20%, 1/01/28 .......... 7,000,000 7,149,100
Zurbrugg Memorial Hospital, Series C, 8.50%, 7/01/12 ............................................. 4,150,000 4,123,772
-----------
26,499,285
-----------
New Mexico .8%
Farmington PCR, Public Service Co. of New Mexico, Refunding, Series A, AMBAC Insured, 6.375%, 12/15/22 10,435,000 11,413,907
Lordsburg PCR, Phelps Dodge Corp. Project, Refunding, 6.50%, 4/01/13 ............................. 17,000,000 18,538,670
New Mexico State Mortgage Financial Authority, SFM, Refunding, Series A, 6.85%, 7/01/10 .......... 11,265,000 11,977,286
University of New Mexico Revenue, Series 1989, Pre-Refunded, 7.90%, 6/01/19 ...................... 17,000,000 17,799,850
-----------
59,729,713
-----------
New York 17.1%
Long Island Power Authority, Electric Systems Revenue, General Series A,
5.25%, 12/01/26 .................................................................................. 8,095,000 8,157,574
5.50%, 12/01/29 .................................................................................. 20,165,000 20,816,330
MTA Revenue,
Commuter Facilities, Series A, 5.25%, 7/01/28 .................................................... 5,000,000 5,078,150
Commuter Facilities, Series A, FGIC Insured, 6.00%, 7/01/16 ...................................... 8,950,000 9,987,753
Commuter Facilities, Series A, FGIC Insured, 6.00%, 7/01/21 ...................................... 9,225,000 10,567,422
Commuter Facilities, Series A, FGIC Insured, 6.10%, 7/01/26 ...................................... 11,050,000 12,730,263
Commuter Facilities, Series C-1, FGIC Insured, 5.375%, 7/01/27 ................................... 10,000,000 10,356,400
Dedicated Tax Fund, Series A, MBIA Insured, 5.25%, 4/01/26 ....................................... 11,125,000 11,357,068
Transit Facilities, Refunding, Series M, 6.00%, 7/01/14 .......................................... 18,210,000 19,463,941
Transit Facilities, Series A, FSA Insured, 6.00%, 7/01/16 ........................................ 3,630,000 4,043,348
Transit Facilities, Series A, FSA Insured, 6.10%, 7/01/21 ........................................ 6,260,000 7,211,896
Transit Facilities, Series C-1, 5.625%, 7/01/27 .................................................. 10,800,000 11,362,680
Transit Facilities, Service Contract, Refunding, Series 8, 5.375%, 7/01/21 ....................... 15,000,000 15,409,350
New Rochelle IDA, Civic Facilities Revenue, College of New Rochelle Project, 6.625%, 7/01/12 ..... 1,245,000 1,330,395
New York City GO,
ETM, Series B, 8.00%, 6/01/01 .................................................................... 3,000,000 3,325,620
ETM, Series D, 8.00%, 8/01/99 .................................................................... 1,805,000 1,870,576
ETM, Series D, 7.30%, 2/01/01 .................................................................... 4,620,000 4,984,610
Group B, Series D, 8.25%, 8/01/11 ................................................................ 15,000 16,811
Group B, Series D, 8.25%, 8/01/12 ................................................................ 30,000 33,622
Refunding, Series B, 6.20%, 8/15/06 .............................................................. 1,500,000 1,684,740
Refunding, Series E, 6.00%, 8/01/26 .............................................................. 2,765,000 2,992,864
Refunding, Series F, 6.00%, 8/01/13 .............................................................. 14,000,000 15,343,860
Refunding, Series F, 5.25%, 8/01/15 .............................................................. 20,580,000 20,981,310
Refunding, Series H, 6.25%, 8/01/15 .............................................................. 13,035,000 14,535,589
Refunding, Series H, 6.125%, 8/01/25 ............................................................. 65,785,000 72,031,944
Refunding, Series J, 6.00%, 8/01/21 .............................................................. 28,260,000 30,736,706
Series A, 6.125%, 8/01/06 ........................................................................ 14,500,000 16,065,420
Series A, 6.20%, 8/01/07 ......................................................................... 21,030,000 23,494,295
New York (cont.)
New York City GO, (cont.)
Series A, 6.25%, 8/01/08 ......................................................................... $ 4,390,000 $ 4,879,792
Series A, 7.75%, 8/15/13 ......................................................................... 105,000 116,460
Series A, 7.75%, 8/15/14 ......................................................................... 120,000 132,964
Series A, 6.25%, 8/01/16 ......................................................................... 3,280,000 3,539,415
Series A, 7.75%, 8/15/17 ......................................................................... 15,000 16,629
Series A, Pre-Refunded, 6.20%, 8/01/07 ........................................................... 780,000 878,662
Series A, Pre-Refunded, 8.00%, 3/15/12 ........................................................... 1,000,000 1,075,760
Series A, Pre-Refunded, 8.00%, 3/15/13 ........................................................... 1,850,000 1,990,156
Series A, Pre-Refunded, 7.75%, 8/15/13 ........................................................... 4,705,000 5,280,751
Series A, Pre-Refunded, 8.00%, 3/15/14 ........................................................... 13,400,000 14,415,184
Series A, Pre-Refunded, 7.75%, 8/15/14 ........................................................... 125,000 140,296
Series A, Pre-Refunded, 8.00%, 3/15/15 ........................................................... 1,115,000 1,199,472
Series A, Pre-Refunded, 8.00%, 3/15/16 ........................................................... 3,000,000 3,227,280
Series A, Pre-Refunded, 6.25%, 8/01/16 ........................................................... 1,720,000 1,891,140
Series A, Pre-Refunded, 8.00%, 3/15/17 ........................................................... 11,660,000 12,543,362
Series A, Pre-Refunded, 7.75%, 8/15/17 ........................................................... 3,270,000 3,670,150
Series A, Pre-Refunded, 8.00%, 8/15/20 ........................................................... 5,000 5,645
Series B, 8.25%, 6/01/02 ......................................................................... 205,000 230,174
Series B, 7.50%, 2/01/04 ......................................................................... 10,000,000 11,182,000
Series B, 8.25%, 6/01/05 ......................................................................... 1,000,000 1,226,660
Series B, 6.30%, 8/15/08 ......................................................................... 22,360,000 25,103,796
Series B, 6.125%, 8/01/09 ........................................................................ 11,510,000 12,629,002
Series B, 6.375%, 8/15/10 ........................................................................ 17,170,000 19,244,479
Series B, 7.50%, 10/01/11 ........................................................................ 75,000 78,593
Series B, 7.50%, 10/01/12 ........................................................................ 125,000 130,931
Series B, 6.75%, 10/01/15 ........................................................................ 25,000 27,574
Series B, 6.75%, 10/01/17 ........................................................................ 10,000 11,122
Series B, 7.00%, 2/01/19 ......................................................................... 14,440,000 15,823,063
Series B, 6.00%, 8/15/26 ......................................................................... 1,670,000 1,808,092
Series B, Pre-Refunded, 8.25%, 6/01/02 ........................................................... 4,295,000 4,846,220
Series B, Pre-Refunded, 6.30%, 8/15/08 ........................................................... 4,515,000 5,160,600
Series B, Pre-Refunded, 6.375%, 8/15/10 .......................................................... 4,570,000 5,243,618
Series B, Pre-Refunded, 7.50%, 10/01/11 .......................................................... 6,925,000 7,306,221
Series B, Pre-Refunded, 7.50%, 10/01/12 .......................................................... 10,860,000 11,457,843
Series B, Pre-Refunded, 6.75%, 10/01/15 .......................................................... 25,000 28,026
Series B, Pre-Refunded, 6.75%, 10/01/17 .......................................................... 1,290,000 1,448,657
Series B, Pre-Refunded, 7.00%, 2/01/19 ........................................................... 560,000 623,381
Series B, Pre-Refunded, 6.00%, 8/15/26 ........................................................... 330,000 376,180
Series B, Sub-Series B-1, Pre-Refunded, 7.00%, 8/15/16 ........................................... 3,000,000 3,500,910
Series B-1, Pre-Refunded, 7.30%, 8/15/11 ......................................................... 8,000,000 9,436,160
Series C, Pre-Refunded, 7.25%, 8/15/24 ........................................................... 3,540,000 3,878,707
Series C, Sub-Series C-1, 7.00%, 8/01/17 ......................................................... 25,000 27,729
Series C, Sub-Series C-1, 7.00%, 8/01/18 ......................................................... 680,000 753,467
Series C, Sub-Series C-1, Pre-Refunded, 7.00%, 8/01/17 ........................................... 1,905,000 2,147,545
Series C, Sub-Series C-1, Pre-Refunded, 7.00%, 8/01/18 ........................................... 1,025,000 1,155,503
Series D, 8.00%, 8/01/99 ......................................................................... 195,000 201,997
New York (cont.)
New York City GO, (cont.)
Series D, 7.30%, 2/01/01 ......................................................................... $ 380,000 $ 408,629
Series D, 7.50%, 2/01/16 ......................................................................... 40,000 44,469
Series D, 8.00%, 8/01/16 ......................................................................... 5,000 5,566
Series D, 6.00%, 2/15/25 ......................................................................... 28,255,000 30,250,368
Series D, 6.00%, 2/15/25 ......................................................................... 3,045,000 3,403,792
Series D, Pre-Refunded, 8.25%, 8/01/11 ........................................................... 145,000 164,413
Series D, Pre-Refunded, 8.25%, 8/01/12 ........................................................... 11,095,000 12,580,399
Series D, Pre-Refunded, 8.25%, 8/01/13 ........................................................... 7,750,000 8,787,570
Series D, Pre-Refunded, 8.25%, 8/01/14 ........................................................... 4,340,000 4,914,920
Series D, Pre-Refunded, 7.625%, 2/01/15 .......................................................... 9,000,000 10,203,750
Series D, Pre-Refunded, 7.50%, 2/01/16 ........................................................... 4,960,000 5,604,602
Series D, Pre-Refunded, 8.00%, 8/01/16 ........................................................... 45,000 50,733
Series D, Pre-Refunded, 7.50%, 2/01/17 ........................................................... 12,000,000 13,559,520
Series D, Pre-Refunded, 8.00%, 8/01/17 ........................................................... 100,000 112,741
Series D, Pre-Refunded, 8.00%, 8/01/18 ........................................................... 50,000 56,371
Series D, Pre-Refunded, 8.00%, 8/01/19 ........................................................... 30,000 33,822
Series D, Pre-Refunded, 8.00%, 8/15/21 ........................................................... 15,000 16,934
Series E, 5.75%, 2/15/09 ......................................................................... 5,295,000 5,702,291
Series E, 6.50%, 12/01/12 ........................................................................ 135,000 136,280
Series E, Pre-Refunded, 5.75%, 2/15/09 ........................................................... 3,205,000 3,513,577
Series E, Pre-Refunded, 6.00%, 8/01/26 ........................................................... 235,000 267,761
Series F, 8.20%, 11/15/04 ........................................................................ 195,000 220,988
Series F, 6.50%, 2/15/07 ......................................................................... 1,545,000 1,749,342
Series F, 6.60%, 2/15/10 ......................................................................... 3,740,000 4,232,969
Series F, Pre-Refunded, 8.20%, 11/15/04 .......................................................... 5,140,000 5,882,216
Series F, Pre-Refunded, 6.50%, 2/15/07 ........................................................... 6,505,000 7,450,567
Series F, Pre-Refunded, 6.50%, 2/15/08 ........................................................... 7,540,000 8,636,014
Series F, Pre-Refunded, 6.60%, 2/15/10 ........................................................... 12,260,000 14,109,544
Series F, Pre-Refunded, 8.25%, 11/15/15 .......................................................... 2,000,000 2,291,640
Series F, Pre-Refunded, 8.25%, 11/15/17 .......................................................... 2,500,000 2,864,550
Series G, 6.00%, 10/15/26 ........................................................................ 175,000 200,907
Series G, Pre-Refunded, 6.00%, 10/15/26 .......................................................... 15,160,000 16,488,622
Series H, 7.10%, 2/01/12 ......................................................................... 330,000 363,337
Series H, 7.20%, 2/01/14 ......................................................................... 1,040,000 1,146,850
Series H, 7.00%, 2/01/16 ......................................................................... 340,000 372,892
Series H, Pre-Refunded, 7.10%, 2/01/12 ........................................................... 2,670,000 2,980,281
Series H, Pre-Refunded, 7.20%, 2/01/14 ........................................................... 8,960,000 10,028,301
Series H, Pre-Refunded, 7.00%, 2/01/16 ........................................................... 3,660,000 4,074,239
Series H-1, 6.125%, 8/01/11 ...................................................................... 4,900,000 5,376,378
Series H-1, Pre-Refunded, 6.125%, 8/01/09 ........................................................ 240,000 269,441
Series H-1, Pre-Refunded, 6.125%, 8/01/11 ........................................................ 100,000 112,267
Series I, 6.25%, 4/15/13 ......................................................................... 28,520,000 31,828,035
Series I, 6.25%, 4/15/27 ......................................................................... 4,250,000 4,680,398
Series I, Pre-Refunded, 6.25%, 4/15/13 ........................................................... 8,090,000 9,378,494
Series I, Pre-Refunded, 6.25%, 4/15/27 ........................................................... 2,750,000 3,187,993
New York (cont.)
New York City Health and Hospital Authority Local Government Revenue, Series A,
6.00%, 2/15/07 ................................................................................... $ 5,010,000 $ 5,335,550
6.30%, 2/15/20 ................................................................................... 18,235,000 19,294,089
New York City IDA, IDR, Brooklyn Navy Yard Cogeneration Partners,
5.65%, 10/01/28 .................................................................................. 5,000,000 5,077,700
5.75%, 10/01/36 .................................................................................. 5,750,000 5,884,148
New York City Municipal Water Finance Authority, Water and Sewer System Revenue,
Series A, 7.10%, 6/15/12 ......................................................................... 2,455,000 2,668,560
Series A, 7.00%, 6/15/15 ......................................................................... 4,980,000 5,391,896
Series B, 5.875%, 6/15/26 ........................................................................ 6,500,000 7,012,070
Series B, 5.75%, 6/15/29 ......................................................................... 15,000,000 16,098,150
Series B, MBIA Insured, 5.75%, 6/15/26 ........................................................... 3,000,000 3,228,540
New York State Dormitory Authority Lease Revenue, State University Dormitory Facilities, 5.50%, 7/01/27 8,915,000 9,328,656
New York State Dormitory Authority Revenue,
City University General Resources, Series 2, MBIA Insured, 6.25%, 7/01/19 ........................ 4,000,000 4,537,200
City University System Consolidation, Series 1, 5.375%, 7/01/24 .................................. 23,000,000 23,709,320
City University System Consolidation, Third Issue-1, 5.25%, 7/01/25 .............................. 10,000,000 10,209,300
City University System, Third Generation Resources, Refunding, Series 2, 6.00%, 7/01/26 .......... 5,500,000 5,994,890
City University System, Third Generation Resources, Refunding, Series 2, Pre-Refunded, 6.00%, 7/01/26 14,150,000 16,158,593
City University System, Third Generation Resources, Series 2, 6.00%, 7/01/20 ..................... 16,860,000 18,331,709
Mental Health Services Facilities, Series A, 6.00%, 8/15/17 ...................................... 18,000,000 19,768,140
Mental Health Services Facilities, Series A, 5.75%, 2/15/27 ...................................... 5,000,000 5,394,100
Our Lady Nursing Home, FHA Insured, 5.90%, 8/01/20 ............................................... 6,750,000 7,185,173
Saint Barnabas Hospital, 5.35%, 8/01/17 .......................................................... 5,500,000 5,642,285
Second Hospital, Interfaith Medical Center, Series D, 5.30%, 2/15/19 ............................. 5,000,000 5,050,350
Second Hospital, Interfaith Medical Center, Series D, 5.40%, 2/15/28 ............................. 8,000,000 8,086,880
State University Educational Facilities, 5.125%, 5/15/21 5,000,000 5,018,100
State University Educational Facilities, Pre-Refunded, 6.00%, 5/15/18 ............................ 5,000,000 5,701,250
State University Educational Facilities, Refunding, Series B, 7.375%, 5/15/14 .................... 4,240,000 4,541,337
State University Educational Facilities, Refunding, Series B, 7.00%, 5/15/16 ..................... 2,000,000 2,128,920
New York State Energy Research and Development Authority, Electric Facilities Revenue,
Consolidated Edison Co., Refunding, Series A, 6.10%, 8/15/20 ..................................... 8,500,000 9,208,730
Long Island Light, Series A, 7.15%, 6/01/20 ...................................................... 17,500,000 19,178,600
Long Island Light, Series A, 7.15%, 2/01/22 ...................................................... 1,500,000 1,643,880
New York State HFA,
Health Facilities, New York City, Refunding, Series A, 5.90%, 5/01/05 ............................ 14,070,000 15,250,473
Housing Project Mortgage, Refunding, Series A, FSA Insured, 6.10%, 11/01/15 ...................... 5,475,000 5,882,888
Housing Project Mortgage, Refunding, Series A, FSA Insured, 6.125%, 11/01/20 ..................... 4,230,000 4,536,548
Service Contract Revenue, Refunding, Series C, 5.875%, 9/15/14 ................................... 4,675,000 4,989,861
Service Contract Revenue, Refunding, Series C, 6.125%, 3/15/20 ................................... 25,500,000 27,364,815
Service Contract Revenue, Refunding, Series C, 5.50%, 9/15/22 .................................... 17,505,000 18,255,614
Service Contract Revenue, Series A, 6.375%, 9/15/14 .............................................. 25,000 27,803
Service Contract Revenue, Series A, 6.375%, 9/15/16 .............................................. 3,785,000 4,194,916
Service Contract Revenue, Series A, Pre-Refunded, 6.375%, 9/15/14 ................................ 3,130,000 3,582,316
Service Contract Revenue, Series A, Pre-Refunded, 6.50%, 3/15/25 ................................. 10,000,000 11,672,300
New York State Medical Care Facilities, Financial Agency Revenue,
Hospital and Nursing Home, FSA Mortgage Insured, 6.50%, 2/15/34 .................................. 6,945,000 7,617,971
New York (cont.)
New York State Medical Care Facilities, Financial Agency Revenue, (cont.)
Hospital and Nursing Home, Refunding, FSA Mortgage Insured, 6.40%, 8/15/14 ....................... $ 10,665,000 $ 11,764,135
Hospital Mortgage, Series A, AMBAC Insured, Pre-Refunded, 6.50%, 8/15/29 ......................... 7,600,000 8,786,968
The Hospital for Special Surgery, Series A, 6.375%, 8/15/24 ...................................... 12,500,000 14,251,375
New York State Tollway Authority,
General Revenue, Series D, 5.375%, 1/01/27 ....................................................... 5,000,000 5,119,550
Service Contract Revenue, Local Highway and Bridge, 6.25%, 4/01/14 ............................... 11,600,000 13,242,096
Service Contract Revenue, Local Highway and Bridge, 5.75%, 4/01/16 ............................... 13,200,000 13,924,944
New York State Urban Development Corp., Correctional Capital Facilities, Series 5, 6.10%, 1/01/12 7,685,000 8,544,183
New York State Urban Development Corp. Revenue, Youth Facilities, 6.00%, 4/01/17 ................. 11,720,000 12,840,315
Warren and Washington Counties IDA Revenue, Adirondack Resource Recovery Project, Refunding, Series A,
7.90%, 12/15/07 .................................................................................. 4,490,000 4,651,550
-----------
1,247,115,415
-------------
North Carolina 2.7%
Charlotte-Mecklenberg Hospital Authority, Health Care System Revenue,
5.90%, 1/15/16 ................................................................................... 7,010,000 7,544,933
Pre-Refunded, 5.90%, 1/15/16 ..................................................................... 2,890,000 3,264,024
Series A, 5.875%, 1/15/26 ........................................................................ 5,000,000 5,311,400
North Carolina Eastern Municipal Power Agency, Power System Revenue,
Refunding, Series A, 6.50%, 1/01/17 .............................................................. 25,700,000 27,406,737
Refunding, Series A, 6.50%, 1/01/24 .............................................................. 3,250,000 3,259,718
Refunding, Series B, 6.25%, 1/01/12 .............................................................. 6,875,000 7,224,800
Refunding, Series B, 6.00%, 1/01/22 .............................................................. 1,250,000 1,371,138
Refunding, Series B, 6.25%, 1/01/23 .............................................................. 39,030,000 44,219,039
Refunding, Series B, FGIC Insured, 6.25%, 1/01/23 ................................................ 4,000,000 4,378,520
Refunding, Series B, MBIA Insured, 5.80%, 1/01/16 ................................................ 11,175,000 12,296,411
Refunding, Series B, MBIA Insured, 5.75%, 12/01/16 ............................................... 14,420,000 14,944,311
Series B, 6.00%, 1/01/05 ......................................................................... 1,355,000 1,460,162
Series B, 6.00%, 1/01/14 ......................................................................... 16,000,000 16,691,520
Series D, 5.875%, 1/01/13 ........................................................................ 7,440,000 7,732,913
Series G, 5.875%, 1/01/21 ........................................................................ 13,325,000 14,595,406
North Carolina Municipal Power Agency No. 1, Catawba Electric Revenue,
6.25%, 1/01/17 ................................................................................... 9,720,000 10,336,151
Refunding, 5.75%, 1/01/15 ........................................................................ 12,435,000 12,594,168
Wake County IPC, Financing Authority Revenue, Carolina Power and Light, 6.90%, 4/01/09 ........... 5,000,000 5,287,450
-----------
199,918,801
-----------
North Dakota .4%
Dickinson Health Care Facilities Revenue, BHS Long-Term Care, Inc., 7.625%, 2/15/20 .............. 7,750,000 8,128,123
Ellendale MFHR, Ellendale Manor Apartments Project, 9.75%, 7/01/16 ............................... 249,000 249,697
Mercer County PCR, Basin Electric Power Corp.,
Second Series, AMBAC Insured, 6.05%, 1/01/19 ..................................................... 9,130,000 10,073,951
Series E, 7.00%, 1/01/19 ......................................................................... 11,540,000 11,930,167
Wahpeton MFHR, Evergreen Apartments Project, 9.75%, 7/01/16 ...................................... 710,000 712,059
-----------
31,093,997
-----------
Ohio 1.7%
Dayton Special Facilities Revenue, Emery Air Freight Corp., Refunding,
Emery Worldwide Air, Inc., Series E, 6.05%, 10/01/09 ............................................. $ 4,000,000 $ 4,311,240
Emery Worldwide Air, Inc., Series F, 6.05%, 10/01/09 ............................................. 2,750,000 2,963,978
Series A, 5.625%, 2/01/18 ........................................................................ 6,000,000 6,147,720
Franklin County Convention Facilities Authority, Tax and Lease Revenue Anticipation Bonds, MBIA Insured, 5.00%,
12/01/27 ......................................................................................... 7,500,000 7,488,300
Hamilton County Hospital Facilities Revenue, Childrens Hospital Medical Center, Series G, MBIA Insured, 5.00%,
5/15/23 .......................................................................................... 10,000,000 9,916,000
Montgomery County Health Systems Revenue,
Franciscan at Saint Leonard, Refunding, 5.50%, 7/01/18 ........................................... 3,625,000 3,676,040
Franciscan Facility, Series B-2, 8.10%, 7/01/01 .................................................. 1,400,000 1,489,796
Franciscan Medical Center-Dayton, 5.50%, 7/01/18 ................................................. 1,995,000 2,021,414
Series B-2, 8.10%, 7/01/18 ....................................................................... 3,705,000 4,449,779
Series B-2, Pre-Refunded, 8.10%, 7/01/18 ......................................................... 8,295,000 10,609,471
Montgomery County Hospital Revenue, Refunding, Grandview Hospital and Medical Center,
5.50%, 12/01/10 .................................................................................. 1,300,000 1,345,760
5.60%, 12/01/11 .................................................................................. 1,000,000 1,035,020
5.65%, 12/01/12 .................................................................................. 925,000 953,379
Ohio HFA, Residential Mortgage Revenue,
Series A-1, GNMA Secured, 5.40%, 9/01/29 ......................................................... 5,870,000 5,938,973
Series C, 5.75%, 9/01/28 ......................................................................... 7,745,000 8,048,062
Ohio State Air Quality Development Authority Revenue,
Dayton Power and Light Co. Project, Refunding, 6.10%, 9/01/30 .................................... 12,000,000 12,998,280
Toledo Edison, Series B, 8.00%, 5/15/19 .......................................................... 6,325,000 6,717,403
Ohio State EDR, Good Samaritan Medical Center, Series 1990-3, 7.875%, 12/01/10 ................... 1,515,000 1,606,415
Ohio State Solid Waste Disposal Revenue, USG Corp. Project, 5.65%, 3/01/33 ....................... 5,330,000 5,356,117
Ohio State Water Development Authority Revenue, Dayton Power, Refunding, Series A, 6.40%, 8/15/27 3,250,000 3,519,490
Ohio State Water Development Facilities Authority, PCR, Toledo Edison, Series A, 8.00%, 5/15/19 .. 10,000,000 10,620,400
University of Cincinnati COP, University Center Project, MBIA Insured, 5.125%, 6/01/24 ........... 10,500,000 10,612,140
-----------
121,825,177
-----------
Oklahoma 1.2%
Canadian County HFA, SFMR, Series A,
7.70%, 9/01/05 ................................................................................... 1,285,000 1,335,513
7.80%, 9/01/12 ................................................................................... 2,685,000 2,792,937
Oklahoma State Turnpike System Authority, First Senior Revenue,
7.875%, 1/01/21 .................................................................................. 610,000 625,817
Pre-Refunded, 7.875%, 1/01/21 .................................................................... 19,090,000 19,615,739
Stillwater Medical Center Authority Revenue,
Series A, 6.10%, 5/15/09 ......................................................................... 3,440,000 3,691,430
Series B, 6.35%, 5/15/12 ......................................................................... 1,235,000 1,333,417
Series B, 6.50%, 5/15/19 ......................................................................... 3,390,000 3,694,931
Tulsa County Home Financial Authority, Mortgage Revenue, Series D, GNMA Insured, 6.95%, 12/01/22 . 445,000 471,055
Tulsa County Municipal Airport Revenue, American Airlines, Inc.,
7.35%, 12/01/11 .................................................................................. 4,000,000 4,459,680
6.25%, 6/01/20 ................................................................................... 18,530,000 19,742,789
7.375%, 12/01/20 ................................................................................. 11,000,000 11,747,340
Oklahoma (cont.)
Tulsa County Parking Authority, Series B,
6.90%, 12/01/07 .................................................................................. $ 3,000,000 $ 3,327,120
7.00%, 12/01/14 .................................................................................. 5,500,000 5,980,040
Tulsa Housing Assistance Corp. Revenue, First Lien, Refunding, 6.80%, 7/01/11 .................... 2,740,000 2,919,114
Tulsa Industrial Authority, Hospital Revenue, St. John Medical Center Project, Series A, 6.25%, 2/15/14 2,000,000 2,163,840
Valley View Hospital Authority Revenue, Valley View Regional Medical Center, Refunding, 6.00%, 8/15/14 4,000,000 4,189,400
-----------
88,090,162
-----------
Oregon .3%
Medford Hospital Facilities Authority Revenue, Asante Health System, Series A, MBIA Insured, 5.00%, 3,655,000 3,644,218
8/15/24
Oregon State Department of Administrative Services COP, Series A, AMBAC Insured, 5.80%, 5/01/24 .. 5,000,000 5,451,800
Oregon State EDR, Georgia Pacific Corp. Project,
Refunding, Series 183, 5.70%, 12/01/25 ........................................................... 3,500,000 3,554,425
Series CLVII, 6.35%, 8/01/25 ..................................................................... 5,500,000 5,859,975
-----------
18,510,418
-----------
Pennsylvania 3.2%
Allegheny County Hospital Development Authority Revenue, University of Pittsburgh Health Center, Refunding,
Series A, MBIA Insured, 5.625%, 4/01/27 .......................................................... 6,550,000 6,873,308
Allegheny County IDA Revenue, Environmental Improvement, 6.70%, 12/01/20 ......................... 5,250,000 5,775,263
Beaver County IDA, PCR, Ohio Edison Co., Beaver Valley Project, Series A, 7.75%, 9/01/24 ......... 14,250,000 14,896,665
Cambria County HDA, Hospital Revenue, Conemaugh Valley Memorial Hospital, Refunding, Series B,
6.30%, 7/01/08 ................................................................................... 9,600,000 10,451,616
6.375%, 7/01/18 .................................................................................. 10,740,000 11,635,716
Delaware County IDA Revenue, Philadelphia Electric, Refunding, Series 1991, 7.375%, 4/01/21 ...... 6,500,000 7,027,540
Delaware River Port Authority Revenue, Pennsylvania and New Jersey, Series 1995, FGIC Insured, 5.50%, 5,000,000 5,294,550
1/01/26
Delaware Valley Regional Finance Authority, Local Government Revenue, Series B, AMBAC Insured, 5.60%, 5,000,000 5,450,150
7/01/17
Lehigh County IDA, PCR, Pennsylvania Power and Light Co. Project, Refunding, Series A, MBIA Insured, 6.15%,
8/01/29 .......................................................................................... 4,000,000 4,385,080
Montgomery County Higher Education and Health Authority, Hospital Revenue, Jeanes Health System Project,
Pre-Refunded, 8.75%, 7/01/20 ..................................................................... 5,500,000 6,059,955
Pennsylvania EDA,
Financing Authority Revenue, Macmillan, L.P. Project, 7.60%, 12/01/20 ............................ 5,000,000 6,105,500
Financing Resources Recovery Revenue, Colver Project, Series D, 7.125%, 12/01/15 ................. 13,500,000 14,998,500
Pennsylvania State Financial Authority Revenue, Municipal Capital Improvements Program, Refunding, 6.60%,
11/01/09 ......................................................................................... 33,280,000 36,654,592
Pennsylvania State HFA,
Rental Housing, Refunding, FGIC Insured, 6.40%, 7/01/12 .......................................... 10,590,000 11,322,193
SFM, Series 1991, 7.15%, 4/01/15 ................................................................. 3,635,000 3,839,723
Pennsylvania State Higher Educational Facilities Authorities Revenue, Temple University, First Series, MBIA Insured,
5.00%, 4/01/29 ................................................................................... 9,000,000 8,874,990
Pennsylvania State Pooled Finance Authority, Lease Revenue, Capital Improvement, Series B, MBIA Insured, 8.00%,
11/01/09 ......................................................................................... 4,445,000 4,650,003
Philadelphia Gas Works Revenue,
First Series A, FSA Insured, 5.00%, 7/01/26 ...................................................... 5,000,000 4,933,250
Series 13, Pre-Refunded, 7.70%, 6/15/21 .......................................................... 2,850,000 3,190,775
Series A, 6.375%, 7/01/26 ........................................................................ 3,950,000 4,366,014
Pennsylvania (cont.)
Philadelphia GO,
MBIA Insured, 5.00%, 5/15/25 ..................................................................... $ 5,000,000 $ 4,942,000
Refunding, Series A, 11.50%, 8/01/99 ............................................................. 2,400,000 2,545,872
Refunding, Series A, 11.50%, 8/01/00 ............................................................. 1,000,000 1,121,050
Philadelphia Hospital and Higher Education Facilities Authority Revenue,
Albert Einstein Medical Center, 7.50%, 4/01/99 ................................................... 3,955,000 4,009,856
Mortgage, North Philadelphia Health Systems, Series A, FHA Secured, 5.30%, 1/01/18 ............... 3,330,000 3,381,981
Mortgage, North Philadelphia Health Systems, Series A, FHA Secured, 5.35%, 1/01/23 ............... 5,780,000 5,882,075
Mortgage, North Philadelphia Health Systems, Series A, FHA Secured, 5.375%, 1/01/28 .............. 3,765,000 3,840,262
Philadelphia Hospitals and Higher Education Facilities Authority Revenue, Temple University Hospital, 5.875%,
11/15/23 ......................................................................................... 5,000,000 5,201,600
Philadelphia Municipal Authority, Gas Works Lease Revenue, 7.50%, 5/01/01 ........................ 1,000,000 1,036,530
Philadelphia School District, Series B, AMBAC Insured, 5.375%, 4/01/19 ........................... 7,000,000 7,192,570
Philadelphia Water and Sewer Revenue, ETM, Series 10, 7.35%, 9/01/04 ............................. 10,760,000 12,237,778
South Fork Municipal Authority, Hospital Revenue, Conemaugh Valley Memorial Hospital Project, Series A,
MBIA Insured, 5.75%, 7/01/26 ..................................................................... 5,000,000 5,327,500
Westmoreland County IDA Revenue, Citizens General Hospital Project, Refunding, Series A, 8.25%, 7/01/13 3,000,000 3,039,000
-----------
236,543,457
-----------
Rhode Island 1.3%
Providence Special Obligation Tax Increment, Series A, 7.65%, 6/01/16 ............................ 9,900,000 11,240,262
Rhode Island Clean Water Financial Agency Revenue, Drinking Water Providence, Series A, AMBAC Insured, 6.70%,
1/01/15 .......................................................................................... 2,200,000 2,505,140
Rhode Island Housing and Mortgage Finance Corp., Homeownership Opportunity,
Series 2, 7.75%, 4/01/22 ......................................................................... 1,645,000 1,712,100
Series 10-A, 6.50%, 10/01/22 ..................................................................... 20,200,000 21,432,604
Series 10-A, 6.50%, 4/01/27 ...................................................................... 13,085,000 13,864,343
Series 13, 6.70%, 10/01/15 ....................................................................... 7,400,000 7,984,748
Series 13, 6.85%, 4/01/27 ........................................................................ 2,600,000 2,807,116
Series 15-A, 6.85%, 10/01/24 ..................................................................... 15,000,000 16,064,250
Series 16-A, 6.375%, 10/01/26 .................................................................... 2,720,000 2,889,619
Series 17-A, 6.25%, 4/01/17 ...................................................................... 2,320,000 2,454,931
Rhode Island Port Authority and Economic Development Corp., Shepard Building Project, Refunding, Series B,
AMBAC Insured, Pre-Refunded, 6.75%, 6/01/25 ...................................................... 3,000,000 3,464,760
Rhode Island State Health and Educational Building Corp. Revenue,
Health Facilities, Tockwotton Home, Pre-Refunded, 7.25%, 4/15/17 ................................. 3,000,000 3,389,280
Roger William Realty, Elmhurst Nursing Home, FHA Insured, 7.50%, 8/01/29 ......................... 940,000 972,468
St. Antoine Residence, 6.70%, 11/15/12 ........................................................... 2,320,000 2,530,749
St. Antoine Residence, 6.75%, 11/15/18 ........................................................... 2,750,000 2,991,725
-----------
96,304,095
-----------
South Carolina 1.1%
Berkeley County School District COP, Berkeley School Facilities Group, Inc., AMBAC Insured, 6.30%, 1,800,000 2,027,700
2/01/16
Piedmont Municipal Power Agency, South Carolina Electric Revenue, Refunding,
6.60%, 1/01/21 ................................................................................... 25,505,000 25,574,119
Series A, 5.75%, 1/01/24 ......................................................................... 3,150,000 3,151,008
Series A, AMBAC Insured, 6.55%, 1/01/16 .......................................................... 18,115,000 18,162,642
South Carolina (cont.)
Piedmont Municipal Power Agency, South Carolina Electric Revenue, Refunding, (cont.)
Series A, AMBAC Insured, 5.75%, 1/01/24 .......................................................... $ 5,050,000 $ 5,056,212
Richland County PCR, Union Camp Corp. Project, Refunding, Series C, 6.55%, 11/01/20 .............. 3,000,000 3,273,810
South Carolina State Housing, Finance and Development Authority, Mortgage Revenue, Series A-2, AMBAC Insured,
5.80%, 7/01/27 ................................................................................... 6,405,000 6,765,794
South Carolina State Public Service Authority Revenue, Refunding, Series A, AMBAC Insured, 6.375%, 12,765,000 13,789,008
7/01/21
Spartanburg County Health Services District, Inc., Hospital Revenue, Series A, MBIA Insured, 5.50%, 3,000,000
4/15/27 3,158,250
-----------
80,958,543
-----------
South Dakota .4%
Lawrence County PCR, Black Hills Power and Light Co. Project, Refunding, 6.70%, 6/01/10 .......... 5,000,000 5,439,400
South Dakota State HDA, Homeownership Mortgage,
Series A, 6.30%, 5/01/17 ......................................................................... 3,680,000 3,903,192
Series A, 7.15%, 5/01/27 ......................................................................... 10,580,000 11,140,846
Series B, 7.10%, 5/01/17 ......................................................................... 2,885,000 3,042,204
Series D, 6.65%, 5/01/14 ......................................................................... 3,445,000 3,727,766
Series G, 7.125%, 5/01/14 ........................................................................ 3,405,000 3,726,636
-----------
30,980,044
-----------
Tennessee .9%
Chattanooga Health Educational and Housing Facility Board Revenue, Catholic Health Initiatives, Series A, 5.00%,
12/01/18 ......................................................................................... 2,150,000 2,112,504
Franklin IDB, MFHR, Landings Apartment Project, Refunding, Series A, FSA Insured, 6.00%, 10/01/26 2,000,000 2,119,380
Hamilton County IDB, MFHR, Patten Towers Apartments, Series A,
6.125%, 8/01/05 .................................................................................. 2,515,000 2,644,170
6.30%, 8/01/07 ................................................................................... 1,000,000 1,061,240
Jackson Hospital Revenue, Jackson Madison County General Hospital, 5.00%, 4/01/28 ................ 2,000,000 1,963,620
Knox County Health, Educational and Housing Facilities Board, MFHR, East Towne Village Project, GNMA Secured,
8.20%, 7/01/28 ................................................................................... 4,720,000 4,876,562
Memphis-Shelby County Airport Authority, Special Facilities and Project Revenue, Federal Express Corp.,
7.875%, 9/01/09 .................................................................................. 14,690,000 16,362,016
6.75%, 9/01/12 ................................................................................... 6,520,000 7,125,186
Metropolitan Government Nashville and Davidson County, Health and Educational Facilities Board Revenue,
Multi Modal Health Facility, Asset Guaranty Insurance Co. Insured, 5.50%, 5/01/23 ................ 995,000 1,037,307
Metropolitan Nashville Airport Authority Revenue, Series C, FGIC Insured, 6.60%, 7/01/15 ......... 1,940,000 2,104,396
Mount Pleasant IDR, PCR, Stauffer Chemical Co. Project, 8.00%, 12/01/12 .......................... 1,990,000 2,134,693
Nashville and Davidson County Revenue, IDB, Osco Treatment, Inc., Refunding and Improvement, 6.00%, 5,000,000 5,250,100
5/01/03
Shelby County Health Educational and Housing Facility Board Hospital Revenue, MBIA Insured, 5.00%, 5,000,000 4,950,750
4/01/18
Tennessee HDA, Homeownership Program,
Series 1992, 6.80%, 7/01/17 ...................................................................... 2,360,000 2,506,981
Series P, 7.70%, 7/01/16 ......................................................................... 4,580,000 4,740,117
Tennessee State Local Development Authority Revenue, Community Provider Pooled Loan Program, 6.45%,
10/01/14 ......................................................................................... 2,275,000 2,504,093
-----------
63,493,115
-----------
Texas 6.8%
Austin Combined Utility System Revenue, Series A, Pre-Refunded, 8.00%, 11/15/16 .................. 18,100,000 20,009,550
Austin Utility System Revenue, Refunding, FGIC Insured, 6.25%, 5/15/16 ........................... 11,310,000 12,645,485
Texas (cont.)
Bexar County Health Facilities Development Corp. Revenue,
Incarnate Word Facility, FSA Insured, 6.00%, 11/15/15 ............................................ $ 4,500,000 $ 4,980,240
Incarnate Word Health Services, Refunding, FSA Insured, 6.10%, 11/15/23 .......................... 8,300,000 9,235,327
Bexar County HFC, MFHR, Sunpark Apartments Project, 6.875%, 12/01/12 ............................. 1,725,000 1,797,226
Bexar Metropolitan Water District, Water Works Systems Revenue, Refunding, MBIA Insured, 5.875%, 5/01/22 5,000,000 5,411,100
Brazos River Authority, PCR,
Collateralized Utilities Electric Co. Project, Series A, 8.25%, 1/01/19 .......................... 15,000,000 15,390,600
Collateralized Utilities Electric Co., Refunding, Series C, 5.55%, 6/01/30 ....................... 20,000,000 19,677,000
Utilities Electric Co. Project, Series A, AMBAC Insured, 5.55%, 5/01/33 .......................... 23,965,000 24,830,616
Dallas-Fort Worth International Airport Facilities, Improvement Corp. Revenue, American Airlines, Inc.,
8.00%, 11/01/24 .................................................................................. 99,000,000 107,144,730
Refunding, 6.00%, 11/01/14 ....................................................................... 29,400,000 31,311,000
El Paso HFC, SFMR, Series A, 8.75%, 10/01/11 ..................................................... 3,730,000 4,045,745
Fort Worth Higher Education Financial Corp., Higher Education Revenue, Texas Christian University Project, 5.00%,
3/15/27 .......................................................................................... 4,000,000 3,999,760
Grand Prairie Health Facilities Development Corp., Hospital Revenue, Dallas/Ft. Worth Medical Center Project,
Refunding, AMBAC Insured, 6.875%, 11/01/10 ....................................................... 2,700,000 2,844,558
Gulf Coast Waste Disposal Authority, Environmental Improvement Revenue, UXS Corp. Projects, Refunding, 5.50%,
9/01/17 .......................................................................................... 3,250,000 3,315,650
Harris County IDR, Marine Terminal Revenue, Refunding, 6.95%, 2/01/22 ............................ 20,250,000 22,009,118
Houston Water and Sewer System Revenue,
Junior Lien, Refunding, Series A, MBIA Insured, Pre-Refunded, 6.20%, 12/01/20 .................... 22,500,000 25,523,325
Refunding, Series B, 6.375%, 12/01/14 ............................................................ 21,000,000 22,588,650
Joshua ISD, Refunding, Series B, 6.125%, 2/15/26 ................................................. 20,000 20,105
Lower Neches Valley Authority IDC Revenue, Mobil Oil Refunding Corp., Refunding, 5.55%, 3/01/33 .. 2,500,000 2,552,500
Lubbock HFC, SFMR, MBS Program, Refunding, Series A, GNMA Secured, 6.125%, 12/01/17 .............. 1,000,000 1,061,510
Matagorda County Navigation District No. 1, PCR,
Central Power and Light Co. Project, Refunding, Series E, MBIA Insured, 6.10%, 7/01/28 ........... 25,300,000 26,549,567
Collateralized, Houston Lighting and Power Co., Refunding, 6.00%, 7/01/28 ........................ 19,200,000 20,366,976
Series A, AMBAC Insured, 6.70%, 3/01/27 .......................................................... 5,500,000 5,989,225
Mesquite HFC, SFMR, Series 1983, 10.75%, 9/01/14 ................................................. 810,000 828,638
North Central Health Facilities Development Corp. Revenue, Texas Health Resources System, Series B, 5.125%,
2/15/22 .......................................................................................... 5,985,000 6,033,000
Nueces River Authority Environmental Improvement Revenue, Asarco Inc. Project, Refunding, 5.60%, 1/01/27 4,000,000 3,982,800
Nueces River Authority Texas, Asarco Inc., Project, Refunding, Series A, 5.60%, 4/01/18 .......... 4,500,000 4,467,150
Port Corpus Christi Authority, Nueces County General Revenue, Union Pacific, Refunding, 5.65%, 12/01/22 18,000,000 18,487,260
Port Corpus Christi IDC Revenue, Valero, Refunding,
Series B, 5.40%, 4/01/18 ......................................................................... 4,000,000 4,023,480
Series C, 5.40%, 4/01/18 ......................................................................... 6,000,000 6,035,220
Red River Authority, PCR, West Texas Utilities Co., Public Service Co., Oklahoma Central Power and Light Co.,
Refunding, MBIA Insured, 6.00%, 6/01/20 .......................................................... 5,000,000 5,497,200
Sabine River Authority, PCR,
Southwestern Electric Power Co., Refunding, MBIA Insured, 6.10%, 4/01/18 ......................... 4,000,000 4,416,680
Texas Utilities Electric Co. Project, Collateralized, Refunding, FGIC Insured, 6.55%, 10/01/22 ... 7,700,000 8,429,729
San Antonio Electric and Gas Revenue, Refunding, 5.50%, 2/01/20 .................................. 10,000,000 10,455,300
Texas (cont.)
San Antonio Water Revenue, Senior Lien, MBIA Insured,
6.50%, 5/15/10 ................................................................................... $ 2,795,000 $ 3,058,904
Pre-Refunded, 6.50%, 5/15/10 ..................................................................... 1,440,000 1,597,579
Tarrant County Health Facilities Development Corp.,
Health Services Revenue, Texas Health Resources System, Series A, MBIA Insured, 5.00%, 2/15/26 ... 10,000,000 9,795,100
Hospital Revenue, Ft. Worth Osteopathic Hospital, MBIA Insured, 5.25%, 5/15/28 ................... 5,010,000 5,090,962
Texas Housing Agency, Residential Development Mortgage Revenue, Series D, 8.35%,
1/01/08 .......................................................................................... 1,215,000 1,259,821
7/01/08 .......................................................................................... 2,720,000 2,820,341
Texas Water Development Board Revenue, State Revolving Fund, 6.00%, 7/15/13 ...................... 2,500,000 2,699,800
Texas Water Resources Finance Authority Revenue, 7.625%, 8/15/08 ................................. 2,210,000 2,271,968
Travis County HFC, SFMR, Refunding, Series A, 6.95%, 10/01/27 .................................... 3,735,000 4,054,006
Tyler Health Facilities Development Corp., Hospital Revenue, East Texas Medical Center Project, Refunding, Series A,
MBIA Insured, 5.50%, 11/01/17 .................................................................... 1,735,000 1,833,236
-----------
500,437,73
-----------
US Territories 1.6%
District of Columbia GO, Series E, MBIA-IBC Insured, 6.00%, 6/01/13 .............................. 155,000 170,767
District of Columbia GO, Series E, MBIA-IBC Insured, 6.00%, 6/01/13 .............................. 3,845,000 4,137,028
District of Columbia HFA,
MFHR, Refunding, Series A, FHA Insured, 7.10%, 9/01/12 ........................................... 1,830,000 1,952,006
MFHR, Refunding, Series A, FHA Insured, 7.15%, 3/01/24 ........................................... 6,575,000 6,984,228
SFMR, Refunding, Series B, 5.85%, 12/01/18 ....................................................... 2,830,000 2,931,456
District of Columbia Hospital Revenue, Washington Hospital Center Corp., Series A, Pre-Refunded, 9.00%, 3,955,000 4,454,319
1/01/08
District of Columbia Redevelopment Land Agency, Sports Arena, Special Tax Revenue, 5.625%, 11/01/10 990,000 1,024,502
District of Columbia Revenue,
Association of American Medical Colleges, Pre-Refunded, 7.50%, 2/15/20 ........................... 5,685,000 6,071,921
Catholic University of America, 6.45%, 10/01/23 .................................................. 5,265,000 5,826,512
Puerto Rico Commonwealth Highway and Transportation Authority Revenue, Series Y,
5.00%, 7/01/36 ................................................................................... 59,000,000 59,202,370
5.50%, 7/01/36 ................................................................................... 7,000,000 7,543,830
Puerto Rico Commonwealth Urban Renewal and Housing Corp., Commonwealth Appropriation, Refunding, 7.875%,
10/01/04 ......................................................................................... 3,200,000 3,369,312
Virgin Islands HFA Mortgage Revenue, Series B, GNMA Secured, Pre-Refunded, 8.10%, 12/01/18 ....... 690,000 706,374
Virgin Islands Public Finance Authority Revenue, Senior Lien, Fund Loan Notes, Refunding, Series A, 5.50%,
10/01/22 ......................................................................................... 6,485,000 6,552,444
Virgin Islands Public Financing Authority Revenue, Subordinated Lien, Fund Loan Notes, Refunding, Series D, 5.50%,
10/01/01 ......................................................................................... 1,755,000 1,806,123
10/01/02 ......................................................................................... 1,700,000 1,757,766
10/01/03 ......................................................................................... 1,850,000 1,923,14
-----------
116,414,107
-----------
Utah .7%
Carbon County, Solid Waste Disposal Revenue, Laidlaw, Inc. Project, Refunding, Series A, 7.50%, 2/01/10 5,050,000 5,743,769
Intermountain Power Agency, Power Supply Revenue, Refunding, Series A, 6.15%, 7/01/14 ............ 25,000,000 27,470,500
Salt Lake City College Revenue, Westminster College Project,
5.70%, 10/01/17 .................................................................................. 1,000,000 1,026,590
5.75%, 10/01/27 .................................................................................. 1,000,000 1,026,530
Utah (cont.)
Utah State HFA,
Refunding, Series A, 6.50%, 5/01/19 .............................................................. $ 2,945,000 $ 3,097,168
SFM, Refunding, 6.80%, 1/01/12 ................................................................... 1,300,000 1,384,084
SFM, Series A, 8.50%, 7/01/19 .................................................................... 210,000 214,979
SFM, Series B, 6.55%, 7/01/19 .................................................................... 3,105,000 3,330,640
SFM, Series B, 6.55%, 7/01/26 .................................................................... 3,345,000 3,571,122
SFM, Series C-1, 6.80%, 7/01/12 .................................................................. 205,000 218,258
SFM, Series C-1, 8.375%, 7/01/19 ................................................................. 1,185,000 1,201,008
SFM, Series D, 8.60%, 7/01/19 .................................................................... 100,000 101,121
SFM, Series E-1, 6.65%, 7/01/20 .................................................................. 2,150,000 2,295,921
SFM, Series G-1, 8.10%, 7/01/16 .................................................................. 585,000 600,952
-----------
51,282,642
-----------
Vermont .1%
Vermont HFA, SF, Series 5, 7.00%, 11/01/27 ....................................................... 9,400,000 10,077,740
-----------
Virginia .6%
Danville IDA, Hospital Revenue, Danville Regional Medical Center, Refunding, FGIC Insured, Pre-Refunded, 6.50%,
10/01/24 ......................................................................................... 5,840,000 6,680,610
Danville IDA Revenue, Regional Medical Center, FGIC Insured, 6.50%, 10/01/19 ..................... 5,885,000 6,732,086
Henrico County IDA, Public Facilities Lease Revenue, Regional Jail Project, 6.00%, 8/01/15 ....... 7,250,000 7,875,747
Lynchburg IDA, Healthcare Facilities Revenue, Central Health, Refunding, 5.20%, 1/01/28 .......... 2,000,000 1,996,880
Medical College Hospital Authority Revenue, MBIA Insured, 5.125%, 7/01/23 ........................ 2,000,000 2,014,720
Medical College Virginia Hospital Authority Revenue, General Revenue Bonds, MBIA Insured, 5.125%, 3,000,000 3,032,610
7/01/18
Richmond Public Utility Revenue, Refunding, Series A, 5.125%, 1/15/28 ............................ 5,510,000 5,544,602
Virginia State HDA, Commonwealth Mortgage,
Series C, Sub-Series C-6, 6.25%, 1/01/15 ......................................................... 5,120,000 5,378,202
Series H, Sub-Series H-2, 6.55%, 1/01/17 ......................................................... 4,755,000 5,121,895
-----------
44,377,352
-----------
Washington 2.6%
Chelan County PUD No. 1, Cheland Hydro Consolidated System Revenue, Series A, 5.65%, 7/01/32 ..... 5,000,000 5,173,650
Pierce County EDC, Solid Waste-Steilacoom Revenue, Refunding, 6.60%, 8/01/22 ..................... 32,480,000 34,632,450
Pierce County EDR, Occidental Petrol, 5.80%, 9/01/29 ............................................. 4,000,000 4,055,800
Port Moses Lake Public Corp., Washington PCR, Union Carbide Corp.,
7.50%, 8/01/04 ................................................................................... 2,100,000 2,103,422
7.875%, 8/01/06 .................................................................................. 1,000,000 1,026,790
SeaTac GO, Series 1994, 6.50%, 12/01/13 .......................................................... 2,760,000 3,090,675
Seattle Municipality, Metropolitan Seattle Sewer Revenue,
Refunding, Series V, 6.20%, 1/01/32 .............................................................. 9,680,000 10,145,511
Series W, MBIA Insured, 6.25%, 1/01/21 ........................................................... 2,500,000 2,771,024
Seattle Special Obligation, Chinatown International District, 5.90%, 8/01/26 ..................... 4,810,000 5,174,116
Snohomish County USD No. 6, 6.50%, 12/01/11 ...................................................... 7,000,000 8,341,410
University of Washington Alumni Association, Lease Revenue, Medical Center Roosevelt II, 6.30%, 8/15/14 4,000,000 4,469,200
Washington State Health Care Facilities Authority Revenue, Swedish Health Services, AMBAC Insured, 5.50%,
11/15/28 ......................................................................................... 5,000,000 5,178,100
Washington State Public Power Supply System Revenue,
Nuclear Project No. 1, Refunding, Series A, 6.05%, 7/01/12 ....................................... 35,355,000 37,928,843
Washington (cont.)
Washington State Public Power Supply System Revenue, (cont.)
Nuclear Project No. 1, Refunding, Series A, MBIA Insured, 6.25%, 7/01/17 ......................... $ 19,965,000 $ 21,539,640
Nuclear Project No. 2, Refunding, Series A, 6.00%, 7/01/09 ....................................... 18,330,000 19,997,296
Nuclear Project No. 2, Refunding, Series A, 6.30%, 7/01/12 ....................................... 7,700,000 8,973,348
Nuclear Project No. 2, Series A, 6.25%, 7/01/12 .................................................. 3,200,000 3,454,655
Nuclear Project No. 3, Refunding, Series B, 5.50%, 7/01/18 ....................................... 10,050,000 10,089,395
-----------
188,145,325
-----------
West Virginia .7%
Braxton County Solid Waste Disposal Revenue, Weyerhaeuser Co. Project,
6.50%, 4/01/25 ................................................................................... 3,500,000 3,829,594
Refunding, 5.40%, 5/01/25 ........................................................................ 10,000,000 10,091,200
Putnam County PCR, FMC Corp. Project, Refunding, 5.625%, 10/01/13 ................................ 1,700,000 1,769,546
Taylor County PCR, Union Carbide Corp., 7.625%, 8/01/05 .......................................... 2,400,000 2,824,103
West Virginia State Hospital Financing Authority Revenue, Logan General Hospital Project, Refunding and
Improvement, 7.25%, 7/01/20 ...................................................................... 7,000,000 6,824,720
West Virginia State Housing Development Fund, Housing Finance, Series D,
7.00%, 5/01/17 ................................................................................... 6,000,000 6,399,420
7.05%, 11/01/24 .................................................................................. 9,000,000 9,604,350
West Virginia State, Series A, FGIC Insured, 5.20%, 11/01/26 ..................................... 10,000,000 10,292,000
-----------
51,634,933
-----------
Wisconsin 1.3%
Janesville IDR, Simmons Manufacturing Co., 7.00%, 10/15/17 ....................................... 2,200,000 2,319,063
Madison Industrial Gas and Electric Co. Project, Series A, 6.75%, 4/01/27 ........................ 4,220,000 4,575,240
Wisconsin Housing and EDA, Homeownership Revenue,
Refunding, Series A, 6.10%, 11/01/10 ............................................................. 9,190,000 9,904,431
Series 1, 6.75%, 9/01/15 ......................................................................... 10,230,000 10,917,148
Series 1, 6.75%, 9/01/17 ......................................................................... 3,000,000 3,198,420
Series A, 6.90%, 3/01/16 ......................................................................... 1,985,000 2,170,914
Series A, 6.45%, 3/01/17 ......................................................................... 5,500,000 5,870,204
Series A, 7.10%, 3/01/23 ......................................................................... 8,635,000 9,192,906
Series B, 7.05%, 11/01/22 ........................................................................ 3,000,000 3,220,500
Wisconsin State Health and Educational Facilities Authority Revenue,
Childrens Hospital of Wisconsin Inc., AMBAC Insured, 5.375%, 2/15/28 ............................. 21,050,000 21,506,995
Franciscan Sisters Christian, Series A, 5.50%, 2/15/18 ........................................... 1,500,000 1,517,474
Franciscan Sisters Christian, Series A, 5.50%, 2/15/28 ........................................... 3,000,000 3,022,320
Mercy Health Systems Corp., AMBAC Insured, 6.125%, 8/15/13 ....................................... 6,500,000 7,231,250
Mercy Health Systems Corp., AMBAC Insured, 6.125%, 8/15/17 ....................................... 7,500,000 8,278,574
-----------
92,925,439
-----------
Wyoming .3%
Wyoming CDA,
Housing Revenue, Refunding, Series 6, 6.10%, 12/01/28 ............................................ 11,540,000 12,252,941
MF Mortgage, Series A, 6.90%, 6/01/12 ............................................................ 1,395,000 1,467,944
MF Mortgage, Series A, 6.95%, 6/01/24 ............................................................ 3,530,000 3,722,561
SFM, Series A, 7.25%, 6/01/21 .................................................................... 2,500,000 2,683,650
Wyoming (cont.)
Wyoming CDA, (cont.)
SFM, Series G, 7.375%, 6/01/17 ................................................................... $ 645,000 $ 680,068
-----------
20,807,164
-----------
Total Bonds (Cost $6,458,220,889) ................................................................ 6,975,367,419
-----------
Zero Coupon Bonds 2.2%
Calcasieu Parish, Louisiana, Memorial Hospital Service District Revenue, Lake Charles Parish Memorial Hospital
Project, Series A,12/01/22 ....................................................................... 11,040,000 7,614,508
Chicago RMR, Refunding, Series B, MBIA Insured,10/01/09 .......................................... 8,785,000 4,134,483
Coldwater, Michigan, Community Schools, MBIA Insured, Pre-Refunded, 5/01/18 ...................... 5,935,000 2,143,068
Colorado Springs Airport Revenue, Series C,
1/01/03 .......................................................................................... 1,660,000 1,367,840
1/01/05 .......................................................................................... 1,610,000 1,207,241
1/01/07 .......................................................................................... 1,675,000 1,115,081
1/01/08 .......................................................................................... 800,000 501,720
1/01/11 .......................................................................................... 1,450,000 753,231
Cook County, Illinois, Community Consolidated School District No. 54, Schaumburg Township, Series B, FGIC Insured,
Pre-Refunded,
1/01/07 .......................................................................................... 3,505,000 2,329,422
1/01/08 .......................................................................................... 4,800,000 2,985,167
1/01/09 .......................................................................................... 4,380,000 2,546,575
1/01/10 .......................................................................................... 5,760,000 3,138,335
Florida State Mid-Bay Bridge Authority Revenue, Senior Lien, Series A, AMBAC Insured,
10/01/23 ......................................................................................... 5,000,000 1,364,550
10/01/24 ......................................................................................... 3,000,000 769,260
Harrison, Michigan, Community Schools, AMBAC Insured, 5/01/20 .................................... 6,000,000 1,725,840
Jefferson County, Kentucky, Capital Projects Corp., Lease Revenue, Refunding, Series A,
8/15/07........................................................................................... 1,640,000 1,124,908
8/15/08........................................................................................... 4,505,000 2,898,516
8/15/09........................................................................................... 4,580,000 2,781,480
8/15/10........................................................................................... 4,620,000 2,648,275
8/15/13........................................................................................... 6,825,000 3,346,638
8/15/14........................................................................................... 6,860,000 3,171,103
8/15/16........................................................................................... 7,005,000 2,885,920
8/15/17........................................................................................... 7,115,000 2,763,252
Metropolitan Pier and Exposition Authority, Illinois, Dedicated State Tax Revenue,
Capital Appreciation, Series A, 6/15/09........................................................... 9,510,000 5,929,961
Capital Appreciation, Series A, Pre-Refunded, 6/15/09............................................. 1,490,000 943,676
McCormick Place Expansion Project, Series A, FGIC Insured, 6/15/08 ............................... 8,500,000 5,657,260
McCormick Place Expansion Project, Series A, FGIC Insured, 6/15/10 ............................... 8,000,000 4,717,360
McCormick Place Expansion Project, Series A, FGIC Insured, 6/15/11 ............................... 9,690,000 5,392,970
McCormick Place Expansion Project, Series A, FGIC Insured, 6/15/12 ............................... 250,000 220,832
McCormick Place Expansion Project, Series A, FGIC Insured, Pre-Refunded, 6/15/12 ................. 11,550,000 10,477,813
Miami, Dade County Special Obligation, Subordinated Lien, Series B, MBIA Insured,10/01/34 ........ 5,500,000 779,844
Owensboro, Kentucky, Electric Light and Power Revenue, Series B, AMBAC Insured,1/01/08 ........... 5,250,000 3,575,040
San Joaquin Hills, California, Transportation Corridor Agency, Toll Road Revenue,
Refunding, Series A, 1/15/21 ..................................................................... $ 50,000,000 $ 34,110,500
Senior Lien, Pre-Refunded, 1/01/23 ............................................................... 7,000,000 2,108,050
Shreveport, Louisiana, Water and Sewer Revenue, Series B, FGIC Insured,
12/01/07 ......................................................................................... 490,000 303,123
12/01/08 ......................................................................................... 2,530,000 1,446,425
12/01/09 ......................................................................................... 4,080,000 2,173,782
12/01/10 ......................................................................................... 5,630,000 2,793,267
Spring, Texas, ISD, Refunding, FGIC Insured, Pre-Refunded, 8/15/08 ............................... 7,000,000 3,602,550
University of Illinois Revenues, AMBAC Insured, 4/01/10 .......................................... 14,250,000 8,481,742
Washington State Public Power Supply System, Nuclear Project No. 3 Revenue, Refunding, Series B,
7/01/12 .......................................................................................... 6,400,000 3,317,120
7/01/13 .......................................................................................... 11,000,000 5,356,340
7/01/14 .......................................................................................... 15,000,000 6,848,700
-----------
Total Zero Coupon Bonds (Cost $103,721,369) ...................................................... 163,552,768
-----------
Total Long Term Investments (Cost $6,561,942,258) ................................................ 7,138,920,187
-----------
aShort-term Investments 1.3%
Allegheny County Hospital Development Authority Revenue, Aces Presbyterian University Hospital, Series B-1,
Weekly VRDN and Put, 3.15%, 3/01/18 .............................................................. 700,000 700,000
Arkansas State Development Finance Authority, Higher Education Capital Asset, Series A 1995, FGIC Insured,
Weekly VRDN and Put, 3.00%, 12/01/15 ............................................................. 300,000 300,000
Calcasieu Parish Inc., Louisiana Industrial Development Board,
Industrial Revenue, Refunding, Olin Corp. Project,
Series B, Daily VRDN and Put, 3.40%, 2/01/16 ..................................................... 1,000,000 1,000,000
Colorado Health Facilities Authority Revenue, Catholic Health Series B,
Weekly VRDN and Put, 3.00%, 12/01/25 ............................................................. 1,300,000 1,300,000
Denver City and County MFHR, Ogden Residence Project, Daily VRDN and Put, 3.45%, 12/01/09 ........ 2,080,000 2,080,000
Duluth Minnesota Tax Increment Revenue, Lake Superior Paper, Registered, Weekly VRDN and Put, 3.00%, 100,000 100,000
9/01/10
Georgia Development Authority, PCR, Georgia Power Company Plant,
Appling County, Hatch Project, Daily VRDN and Put, 3.25%, 9/01/29 ................................ 8,300,000 8,300,000
Heard County, Wansley Project, Daily VRDN and Put, 3.30%, 9/01/29 ................................ 9,000,000 9,000,000
Putnam County, Branch Project, Daily VRDN and Put, 3.25%, 3/01/24 ................................ 3,200,000 3,200,000
Kansas City IDA, Hospital Revenue, Resh Health Services System,
MBIA Insured, Daily VRDN and Put, 2.80%,
10/15/14 ......................................................................................... 2,500,000 2,500,000
Long Island New York Power Authority Electric System Revenue,
Subordinated, Series B, Daily VRDN and Put,
2.75%, 5/01/33 ................................................................................... 5,300,000 5,300,000
Louisiana, East Baton Rouge Parish Pollution Control Revenue,
Refunding, Exxon Project, Daily VRDN and Put,
3.30%, 11/01/19 .................................................................................. 4,500,000 4,500,000
Maryland Community Development Administration MF, Development Revenue,
Avalon Lea Apartments Project,
Refunding, FNMA Secured, Weekly VRDN and Put, 3.20%, 6/15/26 ..................................... 400,000 400,000
Maryland State Industrial Development Financing Authority,
Economic Development Revenue, Chesapeake
Biological Inc., Weekly VRDN and Put, 3.25%, 8/01/18 ............................................. 1,945,000 1,945,000
Massachusetts State Health and Educational Facilities Authority Revenue,
Capital Assets Program, Series D, MBIA
Insured, Weekly VRDN and Put, 3.10%, 1/01/35 ..................................................... 3,300,000 3,300,000
New York City Health and Hospital Corporation Revenue Health Systems,
Series A, Weekly VRDN and Put, 3.00%,
2/15/26 .......................................................................................... 9,400,000 9,400,000
New York City Municipal Water Financing Authority,
Water and Sewer System Revenue, Bond Purchase Agreement,
Series G, FGIC Insured, Daily VRDN and Put, 2.40%, 6/15/24 ....................................... 5,900,000 5,900,000
New York and New Jersey Port Authority, Special Obligation Revenue,
Versatile Structure, Series 2, Daily VRDN and
Put, 3.25%, 5/01/19 .............................................................................. $ 2,800,000 $ 2,800,000
North Carolina Medical Care Commission Revenue, Carol Woods Project, Daily VRDN and Put, 2.95%, 4/01/21 2,000,000 2,000,000
Perry County Mississippi PCR, Leaf River Forest Project, Refunding, Daily VRDN and Put, 3.20%, 3/01/02 3,300,000 3,300,000
Roanoke IDA, Hospital Revenue, Carilion Health System, Series B, Daily VRDN and Put, 2.80%, 7/01/27 500,000 500,000
Uinta County PCR, Refunding, Chevron USA Inc. Project,
Letter of Credit from Chevron Corp., Daily VRDN and Put,
2.40%, 8/15/20 ................................................................................... 21,350,000 21,350,000
Washington State Health Care Facilities Authority Revenue,
Sisters Providence, Series E, Daily VRDN and Put, 2.75%,
10/01/05 ......................................................................................... 6,000,000 6,000,000
Waynesboro Virginia IDA Revenue, Residential Care Facilities,
Sunnyside Presbyterian Home, Refunding, Daily
VRDN and Put, 3.25%, 12/15/28 .................................................................... 2,500,000 2,500,000
-----------
Total Short-term Investments (Cost $97,675,000)................................................... 97,675,000
-----------
Total Investments (Cost $6,659,617,258) 99.0% .................................................... 7,236,595,187
Other Assets, less Liabilities 1.0% .............................................................. 73,545,755
-----------
Net Assets 100.0% ................................................................................ $7,310,140,942
===========
</TABLE>
See glossary of terms on page 47.
aVariable rate demand notes (VRDNs) are tax-exempt obligations which contain a
floating or variable interest rate adjustment formula and an unconditional right
of demand to receive payment of the principle balance plus accrued interest at
specified dates.
bSufficient collateral has been segregated for securities traded on a
when-issued or delayed delivery basis.
FRANKLIN FEDERAL TAX-FREE INCOME FUND
Statement of Investments, October 31, 1998 (unaudited) (cont.)
Glossary of Terms
AMBAC - American Municipal Bond Assurance Corp.
CDA - Community Development Authority/Agency
COP - Certificate of Participation
CRDA - Community Redevelopment Authority/Agency
EDA - Economic Development Authority
EDC - Economic Development Corp.
EDR - Economic Development Revenue
ETM - Escrow to Maturity
FGIC - Financial Guaranty Insurance Co.
FHA - Federal Housing Authority/Agency
FI/GML- Federally Insured or Guaranteed Mortgage Loans
FNMA - Federal National Mortgage Association
FSA - Financial Security Assistance (Some of the securities shown as FSA
Insured were originally insured by Capital Guaranty Insurance Co.
(CGIC) which was acquired by FSA in 1995 and no longer does business
under this name.)
GNMA - Government National Mortgage Association
GO - General Obligation
HDA - Housing Development Authority
HFA - Housing Finance Agency
HFC - Housing Finance Corp.
IDA - Industrial Development Authority/Agency
IDB - Industrial Development Board
IDC - Industrial Development Corp.
IDBR - Industrial Development Board Revenue
IDR - Industrial Development Revenue
IPC - Industrial Pollution Control
ISD - Independent School District
L.P. - Limited Partnership
MBIA - Municipal Bond Investors Assurance Corp.
MBIA-IBC - Municipal Bond Investors Assurance Corp.-Insured Bond Certificates
MBS - Mortgage-Backed Securities
MF - Multi-Family
MFHR - Multi-Family Housing Revenue
MFMR - Multi-Family Mortgage Revenue
MFR - Multi-Family Revenue
MTA - Metropolitan Transit Authority
PCR - Pollution Control Revenue
PUD - Public Utility District
RDA - Redevelopment Authority/Agency
RMR - Residential Mortgage Revenue
SF - Single Family
SFM - Single Family Mortgage
SFMR - Single Family Mortgage Revenue
SFR - Single Family Revenue
USD - Unified School District
FRANKLIN FEDERAL TAX-FREE INCOME FUND
Financial Statements
<TABLE>
<CAPTION>
Statement of Assets and Liabilities
October 31, 1998 (unaudited)
<S> <C>
Assets:
Investments in securities, at value (cost $6,659,617,258) ...................................... $7,236,595,187
Cash ........................................................................................... 999,580
Receivables:
Investment securities sold .................................................................... 45,797,924
Capital shares sold ........................................................................... 11,440,003
Interest ...................................................................................... 131,259,562
----------------
Total assets .............................................................................. 7,426,092,256
----------------
Liabilities:
Payables:
Investment securities purchased ............................................................... 51,839,305
Capital shares redeemed ....................................................................... 53,547,779
Affiliates .................................................................................... 4,517,604
Shareholders .................................................................................. 5,910,123
Other liabilities .............................................................................. 136,503
----------------
Total liabilities ......................................................................... 115,951,314
----------------
Net assets, at value ..................................................................... $7,310,140,942
================
Net assets consist of:
Undistributed net investment income ............................................................ $ 6,567,734
Net unrealized appreciation .................................................................... 576,977,929
Accumulated net realized loss .................................................................. (7,136,726)
Capital shares ................................................................................. 6,733,732,005
----------------
Net assets, at value ..................................................................... $7,310,140,942
================
Class I:
Net asset value per share ($7,133,824,075 / 574,189,590 shares outstanding)* ................... $12.42
================
Maximum offering price per share ($12.42 / 95.75%) ............................................. $12.97
================
Class II:
Net asset value per share ($176,316,867 / 14,196,540 shares outstanding)* ...................... $12.42
================
Maximum offering price per share ($12.42 / 99%) ................................................ $12.55
================
</TABLE>
*Redemption price is equal to net asset value less any applicable contingent
deferred sales charge.
See notes to financial statements.
FRANKLIN FEDERAL TAX-FREE INCOME FUND
Financial Statements (continued)
<TABLE>
<CAPTION>
Statement of Operations
for the six months ended October 31, 1998 (unaudited)
<S> <C> <C>
Investment income:
Interest ............................................................. $219,845,745
--------------
Expenses:
Management fees (Note 3) ............................................. $16,537,312
Distribution fees (Note 3)
Class I ............................................................. 2,693,558
Class II ............................................................ 506,604
Transfer agent fees (Note 3) ......................................... 1,288,527
Custodian fees ....................................................... 35,891
Reports to shareholders .............................................. 394,672
Registration and filing fees ......................................... 100,397
Professional fees .................................................... 89,851
Directors' fees and expenses ......................................... 72,488
Other ................................................................ 136,097
--------------
Total expenses .................................................. 21,855,397
--------------
Net investment income .......................................... 197,990,348
--------------
Realized and unrealized gains:
Net realized gain from investments ................................... 18,742,105
Net unrealized appreciation on investments ........................... 84,347,573
--------------
Net realized and unrealized gain ...................................... 103,089,678
--------------
Net increase in net assets resulting from operations .................. $301,080,026
==============
</TABLE>
See notes to financial statements.
FRANKLIN FEDERAL TAX-FREE INCOME FUND
Financial Statements (continued)
<TABLE>
<CAPTION>
Statements of Changes in Net Assets for the six months ended October 31, 1998
(unaudited) and the year ended April 30, 1998
Six Months Ended Year Ended
October 31, 1998 April 30, 1998
---------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income ...................................... $ 197,990,348 $ 404,855,331
Net realized gain from investments ......................... 18,742,105 42,732,886
Net unrealized appreciation on investments ................. 84,347,573 156,385,279
---------------------------------------
Net increase in net assets resulting from operations ...... 301,080,026 603,973,496
Distributions to shareholders from:
Net investment income:
Class I ................................................... (193,297,707) (396,082,048)
Class II .................................................. (3,695,119) (5,046,130)
---------------------------------------
Total distributions to shareholders ......................... (196,992,826) (401,128,178)
Capital share transactions: (Note 2)
Class I .................................................... 8,936,649 (83,120,865)
Class II ................................................... 38,961,503 60,999,749
---------------------------------------
Total capital share transactions ............................ 47,898,152 (22,121,116)
Net increase in net assets ................................ 151,985,352 180,724,202
Net assets:
Beginning of period ......................................... 7,158,155,590 6,977,431,388
---------------------------------------
End of period ............................................... $7,310,140,942 $7,158,155,590
=======================================
Undistributed net investment income included in net assets:
End of period ............................................... $ 6,567,734 $ 5,570,212
=======================================
</TABLE>
See notes to financial statements.
FRANKLIN FEDERAL TAX-FREE INCOME FUND
Notes to Financial Statements (unaudited)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Federal Tax-Free Income Fund (the Fund) is registered under the
Investment Company Act of 1940 as a diversified, open-end investment company.
The Fund seeks to provide tax-free income. The following summarizes the Fund's
significant accounting policies.
a. Security Valuation
Tax-free bonds generally trade in the over-the-counter market and are valued
within the range of the latest quoted bid and asked prices. In the absence of a
sale or reported bid and asked prices, information with respect to bond and note
transactions, quotations from bond dealers, market transactions in comparable
securities, and various relationships between securities are used to determine
the value of the security. The Fund may utilize a pricing service, bank or
broker/dealer experienced in such matters to perform any of the pricing
functions under procedures approved by the Board of Directors. Securities for
which market quotations are not readily available are valued at fair value as
determined by management in accordance with procedures established by the Board
of Directors.
b. Income Taxes
No provision has been made for income taxes because the Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute all of its taxable income.
c. Security Transactions, Investment Income, Expenses and Distributions
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Interest income and estimated expenses are accrued daily. Bond discount and
premium are amortized on an income tax basis. Distributions to shareholders are
recorded on the ex-dividend date.
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class.
d. Accounting Estimates
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.
2. CAPITAL STOCK
The Fund offers two classes of shares: Class I and Class II. The shares differ
by their initial sales load, distribution fees, voting rights on matters
affecting a single class and the exchange privilege of each class.
At October 31, 1998, there were 10 billion shares of no par value stock
authorized, of which 3 billion each were designated as Class I and Class II.
Transactions in the Fund's shares were as follows:
<TABLE>
<CAPTION>
Six months ended Year ended
October 31, 1998 April 30, 1998
------------------------------------------------------------------
Shares Amount Shares Amount
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class I Shares:
Shares sold ................................ 61,185,738 $ 756,127,723 114,214,913 $ 1,390,939,797
Shares issued in reinvestment of distributions 6,438,796 79,316,705 13,093,027 159,083,079
Shares redeemed ............................ (66,857,382) (826,507,779) (134,063,708) (1,633,143,741)
------------------------------------------------------------------
Net increase (decrease) .................... 767,152 $ 8,936,649 (6,755,768) $ (83,120,865)
==================================================================
Class II Shares:
Shares sold ................................ 3,595,843 $ 44,424,342 5,941,310 $ 72,517,830
Shares issued in reinvestment of distributions 188,524 2,323,994 259,109 3,154,246
Shares redeemed ............................ (630,733) (7,786,833) (1,202,566) (14,672,327)
------------------------------------------------------------------
Net increase ............................... 3,153,634 $ 38,961,503 4,997,853 $ 60,999,749
==================================================================
</TABLE>
3. TRANSACTIONS WITH AFFILIATES
Certain officers and directors of the Fund are also officers or directors of
Franklin/Templeton Distributors, Inc. (Distributors), Franklin Advisers, Inc.
(Advisers), Franklin/Templeton Investor Services, Inc. (Investor Services), and
Franklin Templeton Services, Inc. (FT Services), the Fund's principal
underwriter, investment manager, transfer agent, and administrative manager,
respectively.
The Fund pays an investment management fee to Advisers based on the average net
assets of the Fund as follows:
Annualized
Fee Rate Month-End Net Assets
-----------------------------------------------------------------
.625% First $100 million
.50% Over $100 million, up to and including $250 million
.45% Over $250 million, up to and including $10 billion
Fees are further reduced on net assets over $10 billion.
Under an agreement with Advisers, FT Services provides administrative services
to the Fund. The fee is paid by Advisers based on average daily net assets, and
is not an additional expense of the Fund.
3. TRANSACTIONS WITH AFFILIATES (cont.)
The Fund reimburses Distributors up to .10% and .65% per year of the average
daily net assets of Class I and Class II, respectively, for costs incurred in
marketing the Fund's shares.
Distributors paid net commissions on sales of the Fund shares, and received
contingent deferred sales charges for the period of $1,492,843 and $33,627,
respectively.
The Fund paid transfer agent fees of $1,288,527 of which $1,208,001 was paid to
Investor Services.
4. INCOME TAXES
At April 30, 1998, the Fund had tax basis capital losses of $25,878,831 which
may be carried over to offset future capital gains. Such losses expire as
follows:
Capital loss carryovers expiring in:
2003 ............................. $22,451,357
2005 ............................. 3,427,474
------------
$25,878,831
============
At October 31, 1998, the net unrealized appreciation based on the cost of
investments for income tax purposes of $6,659,617,258 was as follows:
Unrealized appreciation ........... $579,370,985
Unrealized depreciation ........... (2,393,056)
------------
Net unrealized appreciation ....... $576,977,929
============
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the
period ended October 31, 1998 aggregated $520,820,687 and $463,656,753,
respectively.
6. CREDIT RISK
The Fund has investments in excess of 10% of its total net assets in the state
of New York. Such concentration may subject the Fund more significantly to
economic changes occurring within that state.
Franklin Federal Tax-Free Income Fund
Semi-Annual Report
October 31, 1998.
APPENDIX
DESCRIPTION OF GRAPHIC MATERIAL OMITTED FROM EDGAR FILING (PURSUANT TO ITEM
304 (a) OF REGULATION S-T)
GRAPHIC MATERIAL (1)
This chart shows in pie format the credit quality breakdown of the Franklin
Federal Tax-Free Income Fund based on total long-term investments as of
10/31/98.
AAA 38.1%
AA 12.7%
A 19.5%
BBB 27.2%
Below Investment Grade 2.5%
* Quality breakdown may include internal ratings for bonds not rated by a
national rating agency.
GRAPHIC MATERIAL (2)
This chart shows the portfolio breakdown by sector based on the percentage of
total long-term investments on 10/31/98 for the Franklin Federal Tax-Free
Income Fund.
% of Total Long-
Sector Term Investments
Utilities 25.2%
Prerefunded 13.9%
Housing 13.0%
Transportation 12.0%
Hospitals 10.6%
General Obligations 8.1%
Industrial 6.3%
Other Revenue 4.0%
Education 3.1%
Certificates of Participation 1.9%
Health Care 1.3%
Tax Allocation 0.4%
Sales Tax Revenue 0.2%
GRAPHIC MATERIAL (3)
The following line graph compares the performance of the Bond Buyer Municipal
40 Index to the 30-year U.S. Treasury yield from 5/1/98 to 10/31/98.
30-Year U.S. Bond Buyer 40
Treasury Index
- ---------------------------------------------------------
5/1/98 5.94% 5.37%
5/4/98 5.94% 5.35%
5/5/98 5.98% 5.36%
5/6/98 5.94% 5.34%
5/7/98 5.95% 5.34%
5/8/98 5.98% 5.34%
5/11/98 6.04% 5.36%
5/12/98 5.96% 5.33%
5/13/98 5.95% 5.30%
5/14/98 5.98% 5.28%
5/15/98 5.97% 5.28%
5/18/98 5.92% 5.26%
5/19/98 5.94% 5.26%
5/20/98 5.89% 5.24%
5/21/98 5.93% 5.25%
5/22/98 5.90% 5.26%
5/26/98 5.85% 5.23%
5/27/98 5.83% 5.22%
5/28/98 5.83% 5.23%
5/29/98 5.81% 5.22%
6/1/98 5.78% 5.22%
6/2/98 5.80% 5.23%
6/3/98 5.80% 5.24%
6/4/98 5.82% 5.25%
6/5/98 5.79% 5.22%
6/8/98 5.79% 5.23%
6/9/98 5.79% 5.23%
6/10/98 5.70% 5.20%
6/11/98 5.65% 5.19%
6/12/98 5.66% 5.18%
6/15/98 5.61% 5.16%
6/16/98 5.65% 5.18%
6/17/98 5.74% 5.23%
6/18/98 5.70% 5.21%
6/19/98 5.67% 5.22%
6/22/98 5.66% 5.21%
6/23/98 5.64% 5.21%
6/24/98 5.66% 5.22%
6/25/98 5.66% 5.23%
6/26/98 5.64% 5.23%
6/29/98 5.65% 5.23%
6/30/98 5.62% 5.22%
7/1/98 5.63% 5.23%
7/2/98 5.60% 5.21%
7/6/98 5.57% 5.21%
7/7/98 5.60% 5.21%
7/8/98 5.63% 5.22%
7/9/98 5.60% 5.21%
7/10/98 5.63% 5.21%
7/13/98 5.68% 5.23%
7/14/98 5.72% 5.25%
7/15/98 5.70% 5.25%
7/16/98 5.72% 5.26%
7/17/98 5.75% 5.27%
7/20/98 5.71% 5.26%
7/21/98 5.67% 5.25%
7/22/98 5.68% 5.25%
7/23/98 5.66% 5.25%
7/24/98 5.68% 5.25%
7/27/98 5.70% 5.25%
7/28/98 5.74% 5.26%
7/29/98 5.77% 5.26%
7/30/98 5.73% 5.25%
7/31/98 5.72% 5.26%
8/3/98 5.67% 5.24%
8/4/98 5.65% 5.24%
8/5/98 5.66% 5.24%
8/6/98 5.67% 5.24%
8/7/98 5.63% 5.22%
8/10/98 5.63% 5.22%
8/11/98 5.60% 5.20%
8/12/98 5.62% 5.21%
8/13/98 5.60% 5.21%
8/14/98 5.55% 5.20%
8/17/98 5.56% 5.19%
8/18/98 5.56% 5.19%
8/19/98 5.56% 5.19%
8/20/98 5.52% 5.18%
8/21/98 5.46% 5.16%
8/24/98 5.48% 5.16%
8/25/98 5.44% 5.15%
8/26/98 5.44% 5.13%
8/27/98 5.38% 5.12%
8/28/98 5.37% 5.12%
8/31/98 5.30% 5.11%
9/1/98 5.34% 5.14%
9/2/98 5.34% 5.15%
9/3/98 5.31% 5.14%
9/4/98 5.29% 5.15%
9/8/98 5.34% 5.16%
9/9/98 5.28% 5.15%
9/10/98 5.18% 5.13%
9/11/98 5.23% 5.13%
9/14/98 5.23% 5.14%
9/15/98 5.25% 5.15%
9/16/98 5.23% 5.13%
9/17/98 5.18% 5.12%
9/18/98 5.15% 5.10%
9/21/98 5.12% 5.07%
9/22/98 5.16% 5.09%
9/23/98 5.16% 5.09%
9/24/98 5.15% 5.09%
9/25/98 5.13% 5.09%
9/28/98 5.15% 5.09%
9/29/98 5.10% 5.08%
9/30/98 4.98% 5.04%
10/1/98 4.90% 4.99%
10/2/98 4.85% 4.97%
10/5/98 4.70% 4.95%
10/6/98 4.75% 4.95%
10/7/98 4.83% 4.98%
10/8/98 4.99% 5.04%
10/9/98 5.13% 5.12%
10/13/98 5.10% 5.11%
10/14/98 5.00% 5.09%
10/15/98 5.02% 5.09%
10/16/98 4.96% 5.05%
10/19/98 4.98% 5.04%
10/20/98 5.06% 5.08%
10/21/98 5.08% 5.08%
10/22/98 5.13% 5.11%
10/23/98 5.16% 5.14%
10/26/98 5.13% 5.14%
10/27/98 5.08% 5.12%
10/28/98 5.13% 5.12%
10/29/98 5.09% 5.11%
10/30/98 5.15% 5.13%
GRAPHIC MATERIAL (4)
This chart shows the dividend distributions for Franklin Federal Tax-Free
Income Fund - Class I from 5/1/98 to 10/31/98.
May 5.6 cents
June 5.6 cents
July 5.6 cents
August 5.6 cents
September 5.6 cents
October 5.6 cents
Total 33.6 cents
GRAPHIC MATERIAL (5)
This chart shows in bar format the comparison between Franklin Federal
Tax-Free Income Fund - Class I distribution rate of 5.18% and the taxable
equivalent rate of 8.58% on 10/31/98.
GRAPHIC MATERIAL (6)
This chart shows the dividend distributions for Franklin Federal Tax-Free
Income Fund - Class II from 5/1/98 to 10/31/98.
May 5.00 cents
June 5.00 cents
July 5.01 cents
August 5.01 cents
September 5.01 cents
October 5.01 cents
Total 30.04 cents
GRAPHIC MATERIAL (7)
This chart shows in bar format the comparison between Franklin Federal
Tax-Free Income Fund - Class II distribution rate of 4.79% and the taxable
equivalent rate of 7.93% on 10/31/98.
SHAREHOLDER LETTER
Dear Shareholder:
It's a pleasure to bring you Franklin Tax-Free Trust's annual report for the 12
months ended February 28, 1999.
The year under review was challenging for the global and domestic bond markets.
Rarely have we witnessed the magnitude of volatility that we experienced over
the past year, which was due to a number of different factors, ranging from the
global financial crisis that impacted regions in Asia, Latin America and eastern
Europe, to the liquidity crisis created by the concerns and uncertainties
associated with a number of hedge funds' investment activities in third quarter
1998. Although certain market segments, such as the corporate high yield and
mortgage areas, were hit the hardest, the municipal bond market also faced some
challenges. The four-year declining interest-rate trend continued in 1998 as
many regions around the world experienced slowing and, in certain cases,
recession- or even depression-like economies. These regions had a direct impact
on the U.S. economy through fewer purchases of American goods, reducing U.S.
export levels. Throughout the same period, the American consumer boosted the
domestic economy at much higher-than-anticipated levels. With global and
domestic inflation virtually nonexistent, the Federal Reserve Board's (the
Fed's) monetary policy panel, the Federal Open Market Committee, three times
made quarter-point cuts to the federal funds target rate, lowering it to 4.75%
on November 17, 1998. The Fed hoped to stimulate global economic growth and
instill confidence in the financial markets. The 30-year Treasury bond followed
suit, dropping from 5.92% on February 28, 1998, to 5.57% on February 28, 1999.
As interest rates declined, municipal bond issuers increased their refinancing
activity of outstanding, higher interest-rate debt. In addition, many
municipalities were in excellent fiscal condition due to the strong national
economy, which gave them greater confidence to borrow money for new projects.
These two conditions led to a surge in 1998's new-issue supply with total volume
closely matching 1993's record $293 billion. Although demand from individual
investors was relatively stable, at
CONTENTS
<TABLE>
<S> <C>
Shareholder Letter ....................................................... 1
Special Feature:
A Word About
Municipal Bond Insurance ................................................. 4
Fund Reports
Franklin Arizona
Tax-Free Income Fund ................................................... 6
Franklin Colorado
Tax-Free Income Fund ................................................... 11
Franklin Connecticut
Tax-Free Income Fund ................................................... 16
Franklin Federal
Intermediate-Term
Tax-Free Income Fund ................................................... 21
Franklin High Yield
Tax-Free Income Fund ................................................... 25
Franklin Indiana
Tax-Free Income Fund ................................................... 31
Franklin Michigan
Tax-Free Income Fund ................................................... 36
Franklin New Jersey
Tax-Free Income Fund ................................................... 41
Franklin Oregon
Tax-Free Income Fund ................................................... 46
Franklin Pennsylvania
Tax-Free Income Fund ................................................... 51
Franklin Puerto Rico
Tax-Free Income Fund ................................................... 56
Municipal Bond Ratings ................................................... 61
Financial Highlights &
Statement of Investments ................................................. 63
Financial Statements ..................................................... 135
Notes to Financial Statements ............................................ 147
Independent Auditors' Report ............................................. 153
Tax Information .......................................................... 154
</TABLE>
FUND CATEGORY
[PYRAMID GRAPHIC]
times, the municipal bond market had difficulty absorbing this huge bond supply,
which caused the municipal bond market to underperform the Treasury bond market
during the past year. To put it in perspective, in October 1998 an investor
could purchase a 30-year, AAA municipal bond yielding approximately 105% of the
yield on a comparable Treasury bond versus the historical average of
approximately 89%. The last time we saw such attractive municipal market
valuations was 1985 or 1986.
The prevalence of bond insurance was another trend affecting municipal bond
market fundamentals. The increasingly higher percentages of AAA-insured
municipal bond issues coming to market over the past four years seems to have
finally peaked at approximately 50% in 1998, compared with 37% in 1994. One of
the impacts on the market from having so many new bonds insured has been fewer
and fewer uninsured bonds. With investors continuing to demand higher yields in
a falling interest-rate environment, municipal bond market credit spreads, or
the additional interest rate paid to investors for AAA- versus BBB-rated bonds,
were extremely narrow. This condition abruptly changed in July 1998 when a large
health care organization, with a substantial amount of insured debt outstanding,
filed for bankruptcy. In large part, this significant event prompted municipal
bond insurers to reevaluate their business models and use a less aggressive
strategy in certain market sectors, particularly health care. The market impact
has been a widening of credit spreads in the lower-quality, or high yield,
market segment.
Franklin's municipal bond portfolio managers and research analysts certainly
welcome the widening credit spreads, as we have focused on purchasing
AAA-insured securities for the most part, over the past few years. We felt we
weren't getting the appropriate reward of higher interest rates, to take on the
additional credit risk of many lower-quality bonds. As a result, many of our
investment-grade portfolios have a record-high percentage of their net assets
invested in AAA bonds at the funds' fiscal year-end. We believe this puts us in
an excellent position to take advantage of portfolio management opportunities,
as we are now seeing lower-quality securities with the appropriate risk/reward
relationship. Our team of research analysts will continue to seek out these
opportunities and work closely with the portfolio managers in making their
recommendations.
2
Looking forward, we anticipate supply pressures to moderate in 1999. Already,
municipal new issuance for the first six weeks of the year was down about 18%,
compared with the same period last calendar year.* We also expect mid-1998's
improved municipal bond demand to continue. Under such circumstances, the
municipal bond market would be well-positioned in 1999.
Municipal bonds continue to be an attractive investment for those investors
seeking tax-free income as well as providing an opportunity to diversify risk in
their portfolios. Generally, a taxable investment would need to offer a higher
yield, called the taxable equivalent yield, to match the yield on a tax-free
investment. We encourage you to discuss your financial goals with an investment
representative. He or she can address concerns about volatility and help you
diversify your investments and stay focused on the long term. Mutual funds offer
a level of diversification that is almost impossible for individual investors to
achieve on their own. As always, we appreciate your support, welcome your
questions and comments and look forward to serving your investment needs in the
years ahead.
Sincerely,
/s/ Charles B. Johnson
- ----------------------
Charles B. Johnson
Chairman
Franklin Tax-Free Trust
/s/ Thomas J. Kenny
- ----------------------
Thomas J. Kenny
Director
Franklin Municipal Bond Department
WHAT DOES "TAXABLE EQUIVALENT" MEAN FOR YOU?
For yield and distribution rate, the taxable equivalent is the amount a taxable
investment would have to earn to match a tax-free investment such as municipal
bonds.+ You can find your fund's taxable equivalent distribution rate and yield
in the Performance Summary that follows your fund's report.
+For investors subject to the federal or state alternative minimum tax, a
portion of this income may be subject to such tax. Distributions of capital
gains and of ordinary income from accrued market discount, if any, are generally
taxable.
*Source: The Bond Buyer, February 18, 1999.
3
A WORD ABOUT MUNICIPAL BOND INSURANCE
[SPECIAL FEATURE LOGO]
Municipal bond insurers guarantee the timely payment of interest and principal
on insured bond issues, providing bond investors with additional protection
against the potential of the issuer's payment default. Moody's and Standard &
Poor's assign the four principal municipal bond insurers -- MBIA, AMBAC, FGIC
and FSA -- their highest rating, AAA, based on their ability to pay claims. This
is important, as once a bond is insured it no longer carries the underlying
security's rating, but the insurer's rating. In 1998, the four primary municipal
bond insurers comprised more than 98% of the market, with MBIA controlling the
largest share, 35.4%.
Municipal bond insurers often work with bond reinsurers to enhance their ability
to generate new business. By purchasing portions of insured bond portfolios from
the insurers, bond reinsurers assume a portion of the risk, freeing up the
insurers' capital and enabling them to insure additional municipal bond issues.
The added capital provided by the reinsurers, in turn, increases the overall
size of the insured municipal bond market.
Currently, many municipal bond issuers favor the use of bond insurance. In 1998,
municipal bond insurers covered 50.8% of the new-issue municipal bond market,
involving 5,825 new issues valued at $145 billion. For issuers, obtaining bond
insurance can often lower their borrowing costs as it often improves their
credit rating,
4
which more than makes up for the cost of the insurance. In addition, the four
primary, AAA-rated bond insurers presently charge issuers comparatively
inexpensive insurance premiums, due to the extremely competitive environment for
municipal bond insurance. Bond insurance also enables issuers to market their
bonds to a larger pool of potential buyers. For example, insured municipal bond
funds purchase primarily, if not exclusively, insured bonds.
Low-cost municipal bond insurance benefits investors beyond the credit
protection it provides against payment default. As insured bonds appeal to a
wider variety of investors, insurance can lead to improved liquidity, allowing
investors to more easily buy and sell bonds.
[PIE CHART]
INSURERS' MARKET SHARE*
12/31/98
<TABLE>
<S> <C>
MBIA 35.4%
FSA 22.0%
GFIC 21.5%
AMBAC 19.6%
Other 1.5%
</TABLE>
[BAR GRAPH]
INSURED MUNICIPAL BOND ISSUES*
As a % of Municipal Bond Market
<TABLE>
<S> <C>
1993 37.0%
1994 37.0%
1995 43.0%
1996 46.0%
1997 49.0%
1998 50.8%
</TABLE>
*Source: The Bond Buyer, 1999.
5
FRANKLIN ARIZONA TAX-FREE INCOME FUND
CREDIT QUALITY BREAKDOWN*
Franklin Arizona Tax-Free Income Fund
Based on Total Long-Term Investments
2/28/99
[PIE CHART]
<TABLE>
<S> <C>
AAA 50.2%
AA 17.2%
A 14.6%
BBB 18.0%
</TABLE>
*Quality breakdown may include internal ratings for bonds not rated by a
national rating agency
- --------------------------------------------------------------------------------
Your Fund's Goal: Franklin Arizona Tax-Free Income Fund seeks to provide high,
current income exempt from regular federal and Arizona state personal income
taxes through a portfolio consisting primarily of Arizona municipal bonds.(1)
- --------------------------------------------------------------------------------
STATE UPDATE
[ARIZONA STATE GRAPHIC]
Fueled by solid economic gains, high income tax receipts and stringent borrowing
practices, Arizona achieved tremendous growth during the year under review. This
was accomplished despite the state's lower-than-average income levels and
reduced corporate and personal income tax rates.(2) Unemployment levels remained
below the nation's while efforts to shift away from the traditional pillars of
mining, agriculture and real estate were successful. The state generated its
fourth consecutive operating surplus as ongoing diversification efforts
increased the activities of the services and manufacturing sectors. With exports
accounting for more than 100,000 jobs, and high-technology goods making up some
80% of the total, Arizona, like many states, faced vulnerabilities as a result
of the Asian economic crisis. However, the state's ample $291 million budget
stabilization fund could counter a cyclical downturn. In addition, the state
intends to increase maximum contribution levels to this "rainy day" fund to
7.1%, from 5.6% of general fund revenues, in fiscal 1999.(2)
The state predicts some general fund depletion in fiscal 1999, in part due to
increased spending as a result of "Students FIRST." This legislation, upheld by
the Arizona Supreme Court, mandated centralization of various aspects of the
school system. Although not allowed to issue general obligation (GO) debt, which
helps to explain the low overall debt levels and Standard & Poor's high ratings
on the state's revenue bonds, certain districts will be allowed to vote in
support of property tax increases that may ultimately help fund special GO
issues. Regardless, as one of the fastest-growing economies in the nation,
Arizona looks well-positioned to handle the increased burden.
(1) For investors subject to the federal alternative minimum tax, a small
portion of this income may be subject to such tax. Distributions of capital
gains and of ordinary income from accrued market discount, if any, are generally
taxable.
(2) Source: Standard & Poor's(R) CreditWeek Municipal, August 10, 1998.
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 64 of
this report.
6
PORTFOLIO NOTES
The supply of Arizona bonds in 1998 was very strong at $4.18 billion, an
increase of 35.6% from 1997. Fifty-eight percent of Arizona bonds were insured,
compared with 47.5% in 1997, as bond insurance was comparatively inexpensive
during the 12 months under review. The large supply of insured bonds, which
typically garner the highest investment rating, enabled the fund to maintain
approximately 50% of the portfolio in AAA-rated securities at the end of the
reporting period.
We focused on purchasing insured and high quality bonds during the 12 months
under review, as a result of the tight credit spreads, the difference in the
interest rates of lower- and higher-quality issues. Such purchases included
Chandler Hospital District, Gilbert School District #41, Mesa General Obligation
and Mohave County United School District #1.
We also found value in the hospital sector during the reporting period. We felt
the bonds were cheap relative to other market sectors. Hospitals increased from
11.8% of total long-term investments on February 28, 1998, to 16.7% on February
28, 1999. Significant purchases included Maricopa County Industrial Development
Authority Catholic Healthcare West Project, Arizona Health Facilities Authority
Hospital System Revenue - Northern Arizona Healthcare Systems and Maricopa
County Industrial Development Authority for the Mayo Clinic Hospital.
Asset growth was steady during the fund's fiscal year -- the fund's total net
assets increased 7%, from $824.8 million on February 28, 1998, to $884.9 million
at the end of the reporting period. However, due to the low interest-rate
environment, it was difficult for the fund to generate enough capital losses to
offset the gains realized from prerefunded bond sales. Thus, the fund made
distributions totaling 4.81 cents per share in long-term capital gains and 0.19
cents per share in short-term capital gains in June and December. In addition,
we were forced to invest proceeds from sales as well as new money in securities
that carried a lower interest rate than those bonds we sold. As a result, the
dividend decreased in March 1998, and the fund may make another capital gain
distribution in June 1999.
PORTFOLIO BREAKDOWN
Franklin Arizona
Tax-Free Income Fund
2/28/99
<TABLE>
<CAPTION>
% OF TOTAL
LONG-TERM
SECTOR INVESTMENTS
- ------ -----------
<S> <C>
Utilities 30.2%
Hospitals 16.7%
Prerefunded 13.2%
Education 9.2%
Industrial 6.8%
Housing 6.6%
General Obligation 4.6%
Transportation 4.4%
Other Revenue 4.3%
Certificates of Participation 2.7%
Miscellaneous 0.8%
Sales Tax 0.5%
</TABLE>
7
Going forward, we expect the Arizona bond supply to remain stable in 1999. This,
combined with strong demand for the state's bonds, should continue to make
Arizona municipal securities attractive investments for investors seeking
tax-free income. We will continue our strategy of protecting share value and
maintaining the fund's competitive yield.
Please remember that this discussion reflects our views, opinions and portfolio
holdings as of February 28, 1999. However, market and economic conditions are
changing constantly, which can be expected to affect our strategies and the
fund's portfolio composition. Although historical performance is no guarantee of
future results, these insights may help you understand our investment and
management philosophy.
DIVIDEND DISTRIBUTIONS*
Franklin Arizona Tax-Free Income Fund
3/1/98 - 2/28/99
<TABLE>
<CAPTION>
DIVIDEND PER SHARE
------------------------------------------
MONTH CLASS A CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C>
March 5.0 cents 4.44 cents
April 5.0 cents 4.47 cents
May 5.0 cents 4.47 cents
June 5.0 cents 4.47 cents
July 5.0 cents 4.46 cents
August 5.0 cents 4.46 cents
September 4.8 cents 4.26 cents
October 4.8 cents 4.23 cents
November 4.8 cents 4.23 cents
December 4.8 cents 4.23 cents
January 4.8 cents 4.23 cents
February 4.8 cents 4.23 cents
- --------------------------------------------------------------------------------
TOTAL 58.8 CENTS 52.18 CENTS
</TABLE>
*Assumes shares were purchased and held for the entire accrual period. Since
dividends accrue daily, your actual distributions will vary depending on the
date you purchased your shares and any account activity during the month. Income
distributions include all accrued income earned by the fund during the reporting
period.
8
PERFORMANCE SUMMARY AS OF 2/28/99
Distributions will vary based on earnings of the fund's portfolio and any
profits realized from the sale of the portfolio's securities. Past distributions
are not indicative of future trends. All total returns include reinvested
distributions at net asset value.
PRICE AND DISTRIBUTION INFORMATION (3/1/98 - 2/28/99)
<TABLE>
<CAPTION>
CLASS A CHANGE 2/28/99 2/28/98
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value -$0.06 $11.38 $11.44
DISTRIBUTIONS
----------------------------------
Dividend Income $0.5880
Long-Term Capital Gain $0.0481
Short-Term Capital Gain $0.0019
Total $0.6380
CLASS C CHANGE 2/28/99 2/28/98
- --------------------------------------------------------------------------------
Net Asset Value -$0.06 $11.45 $11.51
DISTRIBUTIONS
----------------------------------
Dividend Income $0.5218
Long-Term Capital Gain $0.0481
Short-Term Capital Gain $0.0019
Total $0.5718
</TABLE>
PERFORMANCE
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR 5-YEAR 10-YEAR (9/1/87)
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return(1) +5.17% +33.16% +107.43% +133.44%
Average Annual Total Return(2) +0.68% +4.99% +7.10% +7.25%
Distribution Rate(3) 4.79%
Taxable Equivalent Distribution Rate(4) 8.35%
30-Day Standardized Yield(5) 3.87%
Taxable Equivalent Yield(4) 6.75%
INCEPTION
CLASS C 1-YEAR 3-YEAR (5/1/95)
- -------------------------------------------------------------------------------------
Cumulative Total Return(1) +4.54% +18.06% +27.03%
Average Annual Total Return(2) +2.47% +5.35% +6.17%
Distribution Rate(3) 4.40%
Taxable Equivalent Distribution Rate(4) 7.67%
30-Day Standardized Yield(5) 3.45%
Taxable Equivalent Yield(4) 6.01%
</TABLE>
Franklin Arizona Tax-Free Income Fund paid distributions derived from long-term
capital gains totaling 4.81 cents ($0.0481) per share in June and December 1998.
The fund hereby designates such distributions as capital gain dividends per
Internal Revenue Code Section 852 (b)(3).
Past performance is not predictive of future results.
FRANKLIN ARIZONA
TAX-FREE INCOME FUND
CLASS A (formerly Class I):
Subject to the current, maximum 4.25% initial sales charge. Prior to July 1,
1994, fund shares were offered at a lower initial sales charge; thus actual
total returns may differ. Effective May 1, 1994, the fund eliminated the sales
charge on reinvested dividends and implemented a Rule 12b-1 plan, which affects
subsequent performance.
CLASS C (formerly Class II):
Subject to 1% initial sales charge and 1% contingent deferred sales charge for
shares redeemed within 18 months of investment. These shares have higher annual
fees and expenses than Class A shares.
(1) Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
(2) Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the current, applicable,
maximum sales charge(s) for that class.
(3) Distribution rate is based on an annualization of the respective class's
current monthly dividend and the maximum offering price per share on February
28, 1999.
(4) Taxable equivalent distribution rate and yield assume the 1999 maximum
combined federal and Arizona state personal income tax bracket of 42.6%, based
on the federal income tax rate of 39.6%.
(5) Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended February 28, 1999.
Bond prices, and thus the fund's share price, generally move in the opposite
direction from interest rates. Since markets can go down as well as up,
investment return and principal value will fluctuate with market conditions, and
you may have a gain or loss when you sell your shares.
9
FRANKLIN ARIZONA
TAX-FREE INCOME FUND
AVERAGE ANNUAL TOTAL RETURN
2/28/99
<TABLE>
<CAPTION>
CLASS A
- ---------------------------------
<S> <C>
1-Year +0.68%
5-Year +4.99%
10-Year +7.10%
Since Inception (9/1/87) +7.25%
</TABLE>
AVERAGE ANNUAL TOTAL RETURN
2/28/99
<TABLE>
<CAPTION>
CLASS C
- ---------------------------------
<S> <C>
1-Year +2.47%
3-Year +5.35%
Since Inception (5/1/95) +6.17%
</TABLE>
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT
The unmanaged index differs from the fund in composition, does not pay
management fees or expenses and includes reinvested dividends. One cannot invest
directly in an index. Total return represents the change in value of an
investment over the periods shown. It includes the current, applicable, maximum
sales charge(s), fund expenses, account fees and reinvested distributions.
Performance of the fund's shares exceeded the rate of inflation as measured by
the Consumer Price Index (CPI).
CLASS A (3/1/89--2/28/99)
The following line graph compares the performance of the Franklin Arizona
Tax-Free Income Fund's Class A shares to that of the Lehman Brothers Municipal
Bond Index, and to the Consumer Price Index based on a $10,000 investment from
3/1/89 to 2/28/99.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Fund No. 0126 Inception 9/1/87
- -------------------------------------------------------------------------------
Date Franklin Arizona Lehman Brothers CPI
Tax-Free Income Municipal Bond
Fund-Class A Index
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
3/1/89 $9,575 $10,000 $10,000
3/31/89 $9,551 -0.24% $9,976 0.58% $10,058
4/30/89 $9,769 2.37% $10,212 0.65% $10,123
5/31/89 $9,979 2.08% $10,425 0.57% $10,181
6/30/89 $10,105 1.36% $10,567 0.24% $10,206
7/31/89 $10,194 1.36% $10,710 0.24% $10,230
8/31/89 $10,122 -0.98% $10,605 0.16% $10,246
9/30/89 $10,068 -0.30% $10,574 0.32% $10,279
10/31/89 $10,159 1.22% $10,703 0.48% $10,329
11/30/89 $10,308 1.75% $10,890 0.24% $10,353
12/31/89 $10,390 0.82% $10,979 0.16% $10,370
1/31/90 $10,316 -0.47% $10,928 1.03% $10,477
2/28/90 $10,438 0.89% $11,025 0.47% $10,526
3/31/90 $10,442 0.03% $11,028 0.55% $10,584
4/30/90 $10,386 -0.72% $10,949 0.16% $10,601
5/31/90 $10,601 2.18% $11,187 0.23% $10,625
6/30/90 $10,707 0.88% $11,286 0.54% $10,682
7/31/90 $10,884 1.48% $11,453 0.38% $10,723
8/31/90 $10,601 -1.45% $11,287 0.92% $10,822
9/30/90 $10,595 0.06% $11,294 0.84% $10,913
10/31/90 $10,755 1.81% $11,498 0.60% $10,978
11/30/90 $10,989 2.01% $11,729 0.22% $11,002
12/31/90 $10,993 0.44% $11,781 0.00% $11,002
1/31/91 $11,188 1.34% $11,939 0.60% $11,068
2/28/91 $11,298 0.87% $12,042 0.15% $11,085
3/31/91 $11,324 0.04% $12,047 0.15% $11,102
4/30/91 $11,479 1.34% $12,209 0.15% $11,118
5/31/91 $11,559 0.89% $12,317 0.30% $11,152
6/30/91 $11,538 -0.10% $12,305 0.29% $11,184
7/31/91 $11,713 1.22% $12,455 0.15% $11,201
8/31/91 $11,835 1.32% $12,620 0.29% $11,233
9/30/91 $12,001 1.30% $12,784 0.44% $11,283
10/31/91 $12,068 0.90% $12,899 0.15% $11,299
11/30/91 $12,113 0.28% $12,935 0.29% $11,332
12/31/91 $12,339 2.15% $13,213 0.07% $11,340
1/31/92 $12,384 0.23% $13,243 0.15% $11,357
2/29/92 $12,379 0.03% $13,247 0.36% $11,398
3/31/92 $12,386 0.04% $13,253 0.51% $11,456
4/30/92 $12,485 0.89% $13,370 0.14% $11,472
5/31/92 $12,642 1.18% $13,528 0.14% $11,488
6/30/92 $12,800 1.68% $13,756 0.36% $11,530
7/31/92 $13,263 3.00% $14,168 0.21% $11,554
8/31/92 $13,118 -0.98% $14,029 0.28% $11,586
9/30/92 $13,219 0.65% $14,121 0.28% $11,619
10/31/92 $13,072 -0.98% $13,982 0.35% $11,659
11/30/92 $13,377 1.79% $14,232 0.14% $11,676
12/31/92 $13,552 1.02% $14,378 -0.07% $11,667
1/31/93 $13,728 1.16% $14,544 0.49% $11,725
2/28/93 $14,062 3.62% $15,071 0.35% $11,766
3/31/93 $13,984 -1.06% $14,911 0.35% $11,807
4/30/93 $14,064 1.01% $15,062 0.28% $11,840
5/31/93 $14,145 0.56% $15,146 0.14% $11,856
6/30/93 $14,375 1.67% $15,399 0.14% $11,873
7/31/93 $14,370 0.13% $15,419 0.00% $11,873
8/31/93 $14,651 2.08% $15,740 0.28% $11,906
9/30/93 $14,808 1.14% $15,919 0.21% $11,931
10/31/93 $14,851 0.19% $15,949 0.41% $11,980
11/30/93 $14,782 -0.88% $15,809 0.07% $11,989
12/31/93 $15,068 2.11% $16,143 0.00% $11,989
1/31/94 $15,215 1.14% $16,327 0.27% $12,021
2/28/94 $14,900 -2.59% $15,904 0.34% $12,062
3/31/94 $14,416 -4.07% $15,257 0.34% $12,103
4/30/94 $14,485 0.85% $15,386 0.14% $12,120
5/31/94 $14,554 0.87% $15,520 0.07% $12,128
6/30/94 $14,518 -0.61% $15,425 0.34% $12,170
7/31/94 $14,745 1.83% $15,708 0.27% $12,202
8/31/94 $14,802 0.35% $15,763 0.40% $12,251
9/30/94 $14,660 -1.47% $15,531 0.27% $12,284
10/31/94 $14,450 -1.78% $15,255 0.07% $12,293
11/30/94 $14,188 -1.81% $14,978 0.13% $12,309
12/31/94 $14,461 2.20% $15,308 0.00% $12,309
1/31/95 $14,776 2.86% $15,746 0.40% $12,358
2/28/95 $15,146 2.91% $16,204 0.40% $12,408
3/31/95 $15,302 1.15% $16,390 0.33% $12,448
4/30/95 $15,348 0.12% $16,410 0.33% $12,490
5/31/95 $15,725 3.19% $16,933 0.20% $12,515
6/30/95 $15,620 -0.87% $16,786 0.20% $12,540
7/31/95 $15,723 0.95% $16,946 0.00% $12,540
8/31/95 $15,883 1.27% $17,161 0.26% $12,572
9/30/95 $15,958 0.63% $17,269 0.20% $12,597
10/31/95 $16,175 1.45% $17,519 0.33% $12,639
11/30/95 $16,422 1.66% $17,810 -0.07% $12,630
12/31/95 $16,574 0.96% $17,981 -0.07% $12,621
1/31/96 $16,652 0.76% $18,118 0.59% $12,696
2/29/96 $16,541 -0.68% $17,995 0.32% $12,736
3/31/96 $16,358 -1.28% $17,764 0.52% $12,803
4/30/96 $16,334 -0.28% $17,714 0.39% $12,852
5/31/96 $16,354 -0.04% $17,707 0.19% $12,877
6/30/96 $16,553 1.09% $17,900 0.06% $12,885
7/31/96 $16,663 0.91% $18,063 0.19% $12,909
8/31/96 $16,676 -0.02% $18,060 0.19% $12,934
9/30/96 $16,905 1.40% $18,313 0.32% $12,975
10/31/96 $17,060 1.13% $18,519 0.32% $13,017
11/30/96 $17,306 1.83% $18,858 0.19% $13,041
12/31/96 $17,264 -0.42% $18,779 0.00% $13,041
1/31/97 $17,298 0.19% $18,815 0.32% $13,083
2/28/97 $17,439 0.92% $18,988 0.31% $13,124
3/31/97 $17,240 -1.33% $18,735 0.25% $13,156
4/30/97 $17,384 0.84% $18,893 0.12% $13,172
5/31/97 $17,590 1.51% $19,178 -0.06% $13,164
6/30/97 $17,753 1.07% $19,383 0.12% $13,180
7/31/97 $18,167 2.77% $19,920 0.12% $13,196
8/31/97 $18,043 -0.94% $19,733 0.19% $13,221
9/30/97 $18,237 1.19% $19,968 0.25% $13,254
10/31/97 $18,337 0.64% $20,096 0.25% $13,287
11/30/97 $18,453 0.59% $20,214 -0.06% $13,279
12/31/97 $18,691 1.46% $20,509 -0.12% $13,263
1/31/98 $18,841 1.03% $20,720 0.19% $13,288
2/28/98 $18,860 0.03% $20,727 0.19% $13,314
3/31/98 $18,860 0.09% $20,745 0.19% $13,339
4/30/98 $18,827 -0.45% $20,652 0.18% $13,363
5/31/98 $19,060 1.58% $20,978 0.18% $13,387
6/30/98 $19,117 0.39% $21,060 0.12% $13,403
7/31/98 $19,168 0.25% $21,113 0.12% $13,419
8/31/98 $19,405 1.55% $21,440 0.12% $13,435
9/30/98 $19,640 1.25% $21,708 0.12% $13,451
10/31/98 $19,619 0.00% $21,708 0.24% $13,484
11/30/98 $19,684 0.35% $21,784 0.00% $13,484
12/31/98 $19,707 0.25% $21,838 -0.06% $13,476
1/31/99 $19,912 1.19% $22,098 0.24% $13,508
2/28/99 $19,862 -0.44% $22,001 0.12% $13,524
Total Return 98.62% 120.01% 35.24%
- -------------------------------------------------------------------------------
</TABLE>
CLASS C (5/1/95--2/28/99)
The following line graph compares the performance of the Franklin Arizona
Tax-Free Income Fund's Class C shares to that of the Lehman Brothers Municipal
Bond Index, and to the Consumer Price Index based on a $10,000 investment from
5/1/95 to 2/28/99.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Date Franklin Arizona Lehman Brothers CPI
Tax-Free Income Municipal Bond
Fund-Class C Index
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
5/1/95 $9,902 $10,000 $10,000
5/31/95 $10,155 3.19% $10,319 0.20% $10,020
6/30/95 $10,082 -0.87% $10,229 0.20% $10,040
7/31/95 $10,142 0.95% $10,326 0.00% $10,040
8/31/95 $10,249 1.27% $10,458 0.26% $10,066
9/29/95 $10,301 0.63% $10,523 0.20% $10,086
10/31/95 $10,426 1.45% $10,676 0.33% $10,120
11/30/95 $10,588 1.66% $10,853 -0.07% $10,112
12/29/95 $10,671 0.96% $10,957 -0.07% $10,105
1/31/96 $10,724 0.76% $11,041 0.59% $10,165
2/29/96 $10,638 -0.68% $10,966 0.32% $10,198
3/29/96 $10,527 -1.28% $10,825 0.52% $10,251
4/30/96 $10,507 -0.28% $10,795 0.39% $10,291
5/31/96 $10,515 -0.04% $10,791 0.19% $10,310
6/28/96 $10,627 1.09% $10,908 0.06% $10,316
7/31/96 $10,701 0.91% $11,008 0.19% $10,336
8/30/96 $10,704 -0.02% $11,005 0.19% $10,356
9/30/96 $10,844 1.40% $11,159 0.32% $10,389
10/31/96 $10,947 1.13% $11,286 0.32% $10,422
11/29/96 $11,098 1.83% $11,492 0.19% $10,442
12/31/96 $11,065 -0.42% $11,444 0.00% $10,442
1/31/97 $11,072 0.19% $11,466 0.32% $10,475
2/28/97 $11,158 0.92% $11,571 0.31% $10,508
3/31/97 $11,039 -1.33% $11,417 0.25% $10,534
4/30/97 $11,126 0.84% $11,513 0.12% $10,547
5/31/97 $11,252 1.51% $11,687 -0.06% $10,540
6/30/97 $11,339 1.07% $11,812 0.12% $10,553
7/31/97 $11,598 2.77% $12,139 0.12% $10,565
8/31/97 $11,524 -0.94% $12,025 0.19% $10,586
9/30/97 $11,642 1.19% $12,168 0.25% $10,612
10/31/97 $11,700 0.64% $12,246 0.25% $10,639
11/30/97 $11,768 0.59% $12,318 -0.06% $10,632
12/31/97 $11,912 1.46% $12,498 -0.12% $10,619
1/31/98 $12,012 1.03% $12,627 0.19% $10,640
2/28/98 $12,018 0.03% $12,631 0.19% $10,660
3/31/98 $12,013 0.09% $12,642 0.19% $10,680
4/30/98 $11,975 -0.45% $12,585 0.18% $10,699
5/31/98 $12,117 1.58% $12,784 0.18% $10,719
6/30/98 $12,159 0.39% $12,834 0.12% $10,731
7/31/98 $12,174 0.25% $12,866 0.12% $10,744
8/31/98 $12,329 1.55% $13,065 0.12% $10,757
9/30/98 $12,482 1.25% $13,229 0.12% $10,770
10/31/98 $12,452 0.00% $13,229 0.24% $10,796
11/30/98 $12,487 0.35% $13,275 0.00% $10,796
12/31/98 $12,495 0.25% $13,308 -0.06% $10,789
1/31/99 $12,617 1.19% $13,466 0.24% $10,815
2/28/99 $12,579 -0.44% $13,407 0.12% $10,828
Total Return 25.79% 34.07% 8.28%
- -----------------------------------------------------------------------------
</TABLE>
*Source: Standard and Poor's Micropal.
Past performance is not predictive of future results.
10
FRANKLIN COLORADO TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
Your Fund's Goal: Franklin Colorado Tax-Free Income Fund seeks to provide high,
current income exempt from regular federal and Colorado state personal income
taxes through a portfolio consisting primarily of Colorado municipal bonds.(1)
- --------------------------------------------------------------------------------
STATE UPDATE
[COLORADO STATE GRAPHIC]
Colorado finds itself the envy of most of the nation, with a booming and diverse
economy, exceptionally low debt, and a unique, actively practiced tax rebate
policy. Employment growth continued unabated for the year under review, rising
approximately 3.9%, while the 3.1% unemployment rate remained below the national
average. The state continued to outpace the nation in population, retail trade,
personal income and employment.(2) Further resiliency came from the sector
makeup among services, trade, government and manufacturing, which provided a
considerable buffer against a cyclical downturn. Proving this point, the
previous military base closures, which resulted in the loss of some 7,000 jobs,
were absorbed with no noticeable consequences. Adding another layer against
economic shock, the state's general fund held approximately $1.26 billion as of
year-end 1998.
Colorado avoids issuing debt whenever possible. Preferring the pay-as-you-go
method to traditional debt financing, the state constitution prohibits the
issuance of general obligation (GO) bond issues. As a result, the state's debt
ratios, at $158 per capita in 1997, were among the nation's lowest. The taxpayer
bill of rights (TABOR), enacted in 1992, further underscores prudent fiscal
control. TABOR restricts state expenditures to inflation and population growth,
with any additional annual revenues rebated back to the populace. Projections
for 1999 show continued general fund income tax growth above 6.0%.(3)
CREDIT QUALITY BREAKDOWN*
Franklin Colorado Tax-Free Income Fund
Based on Total Long-Term Investments
2/28/99
[PIE CHART]
<TABLE>
<S> <C>
AAA 64.7%
AA 8.0%
A 14.0%
BBB 13.3%
</TABLE>
*Quality breakdown may include internal ratings for bonds not rated by a
national rating agency
(1) For investors subject to the federal alternative minimum tax, a small
portion of this income may be subject to such tax. Distributions of capital
gains and of ordinary income from accrued market discount, if any, are generally
taxable.
(2) Source: Moody's Investors Service, Municipal Credit Research, April 22,
1998.
(3) Source: Standard & Poor's CreditWeek Municipal, August 24, 1998.
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 70 of
this report.
11
PORTFOLIO BREAKDOWN
Franklin Colorado
Tax-Free Income Fund
2/28/99
<TABLE>
<CAPTION>
% OF TOTAL
LONG-TERM
SECTOR INVESTMENTS
- --------------------------------------------
<S> <C>
Hospitals 17.7%
Utilities 13.4%
Transportation 12.0%
Housing 11.5%
Education 10.5%
Prerefunded 8.2%
Certificates of Participation 7.5%
Health Care 6.0%
General Obligation 3.9%
Sales Tax 3.8%
Industrial 3.0%
Other Revenue 2.1%
Tax Allocation 0.4%
</TABLE>
PORTFOLIO NOTES
Franklin Colorado Tax-Free Income Fund enjoyed healthy performance for the
12 months under review. The 1998 Colorado bond supply was $3.21 billion, down
36.7% from 1997. However, 55% of the Colorado bond market was insured in 1998.
The fund took advantage of the tight credit spreads and the market's abundance
of insurance to increase the percentage of high-quality bonds in the portfolio.
AAA- rated securities increased to 64.7% of the portfolio's total long-term
investments on February 28, 1999, compared with 63.1% on February 28, 1998. Some
of our high-grade purchases included Auraria Higher Education Certificates of
Participation, Englewood Civic Center Project Certificates of Participation and
Jefferson County School District #R-1.
During the one-year period, we attempted to maintain diversification by making
purchases in a number of different industries. We found value in the hospital
sector in particular, which we felt was inexpensive relative to other sectors.
The large bond supply temporarily pushed down the price, and we were able to
take advantage of the situation. During the reporting period, hospitals
increased from 12.9% of total long-term investments on February 28, 1998, to
17.7% at the end of the reporting period. Significant purchases in this sector
included Colorado Health Facilities Authority Revenue for Parkview Medical
Center Inc. Project, Colorado Health Facilities Authority Revenue for Kaiser
Permanente and Colorado Health Facilities Authority Revenue for National
Benevolent Association.
We also participated in the $255 million Denver City and County School District
issue, which was the state's largest voted school district deal ever. As a
result of the TABOR, all new issues must be approved by taxpayers, and the size
of this deal indicates strong voter support.
The fund's Class A share price, as measured by net asset value, decreased six
cents, from $12.11 on February 28, 1998, to $12.05 on February 28, 1999.
However, due to the low interest-rate environment, it was difficult for the fund
to generate enough capital losses to offset the gains realized from prerefunded
bond sales. Thus, the fund made distributions totaling 7.4 cents per share in
long-term capital gains and 0.2 cents per share in short-term capital gains in
June and December. As a result, the dividend decreased in June 1998, and the
fund may make another capital gain distribution in June 1999.
12
Looking forward, the 1999 municipal bond supply is expected to remain
approximately the same as in 1998. This coupled with strong demand for Colorado
bonds should continue to make Colorado municipals attractive investments for
investors seeking income. Please keep in mind that the fund can distribute only
what it earns, so it is probable that dividend payments will remain suppressed
while interest rates stay down.
Please remember that this discussion reflects our views, opinions and portfolio
holdings as of February 28, 1999. However, market and economic conditions are
changing constantly, which can be expected to affect our strategies and the
fund's portfolio composition. Although historical performance is no guarantee of
future results, these insights may help you understand our investment and
management philosophy.
DIVIDEND DISTRIBUTIONS*
Franklin Colorado Tax-Free Income Fund
3/1/98 - 2/28/99
<TABLE>
<CAPTION>
DIVIDEND PER SHARE
----------------------
MONTH CLASS A CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C>
March 5.2 cents 4.61 cents
April 5.2 cents 4.64 cents
May 5.2 cents 4.64 cents
June 5.0 cents 4.44 cents
July 5.0 cents 4.42 cents
August 5.0 cents 4.42 cents
September 5.0 cents 4.42 cents
October 5.0 cents 4.43 cents
November 5.0 cents 4.43 cents
December 5.0 cents 4.43 cents
January 5.0 cents 4.43 cents
February 5.0 cents 4.43 cents
- --------------------------------------------------------------------------------
TOTAL 60.6 CENTS 53.74 CENTS
</TABLE>
*Assumes shares were purchased and held for the entire accrual period. Since
dividends accrue daily, your actual distributions will vary depending on the
date you purchased your shares and any account activity during the month. Income
distributions include all accrued income earned by the fund during the reporting
period.
13
FRANKLIN COLORADO
TAX-FREE INCOME FUND
CLASS A (formerly Class I):
Subject to the current, maximum 4.25% initial sales charge. Prior
to July 1, 1994, fund shares were offered at a lower initial sales charge; thus
actual total returns may differ. Effective May 1, 1994, the fund eliminated the
sales charge on reinvested dividends and implemented a Rule 12b-1 plan, which
affects subsequent performance. Past expense reductions by the fund's manager
increased the fund's total returns.
CLASS C (formerly Class II):
Subject to 1% initial sales charge and 1% contingent deferred sales charge for
shares redeemed within 18 months of investment. These shares have higher annual
fees and expenses than Class A shares.
(1) Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
(2) Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the current, applicable,
maximum sales charge(s) for that class.
(3) Distribution rate is based on an annualization of the respective class's
current monthly dividend and the maximum offering price per share on February
28, 1999.
(4) Taxable equivalent distribution rate and yield assume the 1999 maximum
combined federal and Colorado state personal income tax bracket of 42.6%, based
on the federal income tax rate of 39.6%.
(5) Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended February 28, 1999.
Bond prices, and thus the fund's share price, generally move in the opposite
direction from interest rates. Since markets can go down as well as up,
investment return and principal value will fluctuate with market conditions, and
you may have a gain or loss when you sell your shares.
PERFORMANCE SUMMARY AS OF 2/28/99
Distributions will vary based on earnings of the fund's portfolio and any
profits realized from the sale of the portfolio's securities. Past distributions
are not indicative of future trends. All total returns include reinvested
distributions at net asset value.
PRICE AND DISTRIBUTION INFORMATION (3/1/98 - 2/28/99)
<TABLE>
<CAPTION>
CLASS A CHANGE 2/28/99 2/28/98
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value -$0.06 $12.05 $12.11
DISTRIBUTIONS
----------------------------------
Dividend Income $0.606
Long-Term Capital Gain $0.074
Short-Term Capital Gain $0.002
Total $0.682
CLASS C CHANGE 2/28/99 2/28/98
- --------------------------------------------------------------------------------
Net Asset Value -$0.06 $12.11 $12.17
DISTRIBUTIONS
----------------------------------
Dividend Income $0.5374
Long-Term Capital Gain $0.0740
Short-Term Capital Gain $0.0020
Total $0.6134
</TABLE>
PERFORMANCE
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR 5-YEAR 10-YEAR (9/1/87)
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return(1) +5.24% +34.47% +112.18% +141.22%
Average Annual Total Return(2) +0.75% +5.18% +7.34% +7.55%
Distribution Rate(3) 4.72%
Taxable Equivalent Distribution Rate(4) 8.23%
30-Day Standardized Yield(5) 3.95%
Taxable Equivalent Yield(4) 6.88%
INCEPTION
CLASS C 1-YEAR 3-YEAR (5/1/95)
- -------------------------------------------------------------------------------------
Cumulative Total Return(1) +4.63% +18.99% +29.20%
Average Annual Total Return(2) +2.62% +5.61% +6.62%
Distribution Rate(3) 4.30%
Taxable Equivalent Distribution Rate(4) 7.49%
30-Day Standardized Yield(5) 3.53%
Taxable Equivalent Yield(4) 6.15%
</TABLE>
Franklin Colorado Tax-Free Income Fund paid distributions derived from long-term
capital gains totaling 7.4 cents ($0.074) per share in June and December 1998.
The fund hereby designates such distributions as capital gain dividends per
Internal Revenue Code Section 852 (b)(3).
Past performance is not predictive of future results.
14
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT
The unmanaged index differs from the fund in composition, does not pay
management fees or expenses and includes reinvested dividends. One cannot invest
directly in an index. Total return represents the change in value of an
investment over the periods shown. It includes the current, applicable, maximum
sales charge(s), fund expenses, account fees and reinvested distributions.
Performance of the fund's shares exceeded the rate of inflation as measured by
the Consumer Price Index (CPI).
CLASS A (3/1/89--2/28/99)
The following line graph compares the performance of the Franklin Colorado
Tax-Free Income Fund's Class A shares to that of the Lehman Brothers Municipal
Bond Index, and to the Consumer Price Index based on a $10,000 investment from
3/1/89 to 2/28/99.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Date Franklin Colorado Lehman Brothers CPI
Tax-Free Income Municipal Bond
Fund-Class A Index
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
3/1/89 $9,573 $10,000 $10,000
3/31/89 $9,539 -0.24% $9,976 0.58% $10,058
4/30/89 $9,725 2.37% $10,212 0.65% $10,123
5/31/89 $9,940 2.08% $10,425 0.57% $10,181
6/30/89 $10,073 1.36% $10,567 0.24% $10,206
7/31/89 $10,159 1.36% $10,710 0.24% $10,230
8/31/89 $10,106 -0.98% $10,605 0.16% $10,246
9/30/89 $10,052 -0.30% $10,574 0.32% $10,279
10/31/89 $10,140 1.22% $10,703 0.48% $10,329
11/30/89 $10,277 1.75% $10,890 0.24% $10,353
12/31/89 $10,366 0.82% $10,979 0.16% $10,370
1/31/90 $10,301 -0.47% $10,928 1.03% $10,477
2/28/90 $10,440 0.89% $11,025 0.47% $10,526
3/31/90 $10,433 0.03% $11,028 0.55% $10,584
4/30/90 $10,357 -0.72% $10,949 0.16% $10,601
5/31/90 $10,578 2.18% $11,187 0.23% $10,625
6/30/90 $10,700 0.88% $11,286 0.54% $10,682
7/31/90 $10,874 1.48% $11,453 0.38% $10,723
8/31/90 $10,605 -1.45% $11,287 0.92% $10,822
9/30/90 $10,598 0.06% $11,294 0.84% $10,913
10/31/90 $10,733 1.81% $11,498 0.60% $10,978
11/30/90 $10,982 2.01% $11,729 0.22% $11,002
12/31/90 $10,965 0.44% $11,781 0.00% $11,002
1/31/91 $11,113 1.34% $11,939 0.60% $11,068
2/28/91 $11,210 0.87% $12,042 0.15% $11,085
3/31/91 $11,255 0.04% $12,047 0.15% $11,102
4/30/91 $11,416 1.34% $12,209 0.15% $11,118
5/31/91 $11,515 0.89% $12,317 0.30% $11,152
6/30/91 $11,519 -0.10% $12,305 0.29% $11,184
7/31/91 $11,694 1.22% $12,455 0.15% $11,201
8/31/91 $11,795 1.32% $12,620 0.29% $11,233
9/30/91 $11,950 1.30% $12,784 0.44% $11,283
10/31/91 $12,008 0.90% $12,899 0.15% $11,299
11/30/91 $12,066 0.28% $12,935 0.29% $11,332
12/31/91 $12,319 2.15% $13,213 0.07% $11,340
1/31/92 $12,316 0.23% $13,243 0.15% $11,357
2/29/92 $12,336 0.03% $13,247 0.36% $11,398
3/31/92 $12,368 0.04% $13,253 0.51% $11,456
4/30/92 $12,478 0.89% $13,370 0.14% $11,472
5/31/92 $12,657 1.18% $13,528 0.14% $11,488
6/30/92 $12,827 1.68% $13,756 0.36% $11,530
7/31/92 $13,308 3.00% $14,168 0.21% $11,554
8/31/92 $13,168 -0.98% $14,029 0.28% $11,586
9/30/92 $13,202 0.65% $14,121 0.28% $11,619
10/31/92 $12,979 -0.98% $13,982 0.35% $11,659
11/30/92 $13,329 1.79% $14,232 0.14% $11,676
12/31/92 $13,528 1.02% $14,378 -0.07% $11,667
1/31/93 $13,680 1.16% $14,544 0.49% $11,725
2/28/93 $14,143 3.62% $15,071 0.35% $11,766
3/31/93 $14,058 -1.06% $14,911 0.35% $11,807
4/30/93 $14,164 1.01% $15,062 0.28% $11,840
5/31/93 $14,235 0.56% $15,146 0.14% $11,856
6/30/93 $14,453 1.67% $15,399 0.14% $11,873
7/31/93 $14,485 0.13% $15,419 0.00% $11,873
8/31/93 $14,775 2.08% $15,740 0.28% $11,906
9/30/93 $14,956 1.14% $15,919 0.21% $11,931
10/31/93 $15,014 0.19% $15,949 0.41% $11,980
11/30/93 $14,973 -0.88% $15,809 0.07% $11,989
12/31/93 $15,254 2.11% $16,143 0.00% $11,989
1/31/94 $15,411 1.14% $16,327 0.27% $12,021
2/28/94 $15,089 -2.59% $15,904 0.34% $12,062
3/31/94 $14,488 -4.07% $15,257 0.34% $12,103
4/30/94 $14,519 0.85% $15,386 0.14% $12,120
5/31/94 $14,615 0.87% $15,520 0.07% $12,128
6/30/94 $14,518 -0.61% $15,425 0.34% $12,170
7/31/94 $14,795 1.83% $15,708 0.27% $12,202
8/31/94 $14,828 0.35% $15,763 0.40% $12,251
9/30/94 $14,639 -1.47% $15,531 0.27% $12,284
10/31/94 $14,396 -1.78% $15,255 0.07% $12,293
11/30/94 $14,128 -1.81% $14,978 0.13% $12,309
12/31/94 $14,425 2.20% $15,308 0.00% $12,309
1/31/95 $14,870 2.86% $15,746 0.40% $12,358
2/28/95 $15,251 2.91% $16,204 0.40% $12,408
3/31/95 $15,378 1.15% $16,390 0.33% $12,448
4/30/95 $15,425 0.12% $16,410 0.33% $12,490
5/31/95 $15,824 3.19% $16,933 0.20% $12,515
6/30/95 $15,722 -0.87% $16,786 0.20% $12,540
7/31/95 $15,811 0.95% $16,946 0.00% $12,540
8/31/95 $16,039 1.27% $17,161 0.26% $12,572
9/30/95 $16,114 0.63% $17,269 0.20% $12,597
10/31/95 $16,329 1.45% $17,519 0.33% $12,639
11/30/95 $16,587 1.66% $17,810 -0.07% $12,630
12/31/95 $16,748 0.96% $17,981 -0.07% $12,621
1/31/96 $16,826 0.76% $18,118 0.59% $12,696
2/29/96 $16,790 -0.68% $17,995 0.32% $12,736
3/31/96 $16,642 -1.28% $17,764 0.52% $12,803
4/30/96 $16,634 -0.28% $17,714 0.39% $12,852
5/31/96 $16,641 -0.04% $17,707 0.19% $12,877
6/30/96 $16,793 1.09% $17,900 0.06% $12,885
7/31/96 $16,916 0.91% $18,063 0.19% $12,909
8/31/96 $16,922 -0.02% $18,060 0.19% $12,934
9/30/96 $17,149 1.40% $18,313 0.32% $12,975
10/31/96 $17,317 1.13% $18,519 0.32% $13,017
11/30/96 $17,575 1.83% $18,858 0.19% $13,041
12/31/96 $17,538 -0.42% $18,779 0.00% $13,041
1/31/97 $17,561 0.19% $18,815 0.32% $13,083
2/28/97 $17,702 0.92% $18,988 0.31% $13,124
3/31/97 $17,499 -1.33% $18,735 0.25% $13,156
4/30/97 $17,643 0.84% $18,893 0.12% $13,172
5/31/97 $17,847 1.51% $19,178 -0.06% $13,164
6/30/97 $18,037 1.07% $19,383 0.12% $13,180
7/31/97 $18,488 2.77% $19,920 0.12% $13,196
8/31/97 $18,327 -0.94% $19,733 0.19% $13,221
9/30/97 $18,577 1.19% $19,968 0.25% $13,254
10/31/97 $18,689 0.64% $20,096 0.25% $13,287
11/30/97 $18,817 0.59% $20,214 -0.06% $13,279
12/31/97 $19,094 1.46% $20,509 -0.12% $13,263
1/31/98 $19,286 1.03% $20,720 0.19% $13,288
2/28/98 $19,273 0.03% $20,727 0.19% $13,314
3/31/98 $19,308 0.09% $20,745 0.19% $13,339
4/30/98 $19,247 -0.45% $20,652 0.18% $13,363
5/31/98 $19,539 1.58% $20,978 0.18% $13,387
6/30/98 $19,619 0.39% $21,060 0.12% $13,403
7/31/98 $19,651 0.25% $21,113 0.12% $13,419
8/31/98 $19,896 1.55% $21,440 0.12% $13,435
9/30/98 $20,126 1.25% $21,708 0.12% $13,451
10/31/98 $20,077 0.00% $21,708 0.24% $13,484
11/30/98 $20,159 0.35% $21,784 0.00% $13,484
12/31/98 $20,187 0.25% $21,838 -0.06% $13,476
1/31/99 $20,371 1.19% $22,098 0.24% $13,508
2/28/99 $20,311 -0.44% $22,001 0.12% $13,524
Total Return 103.11% 120.01% 35.24%
- --------------------------------------------------------------------------------
</TABLE>
CLASS C (3/1/89--2/28/99)
The following line graph compares the performance of the Franklin Colorado
Tax-Free Income Fund's Class C shares to that of the Lehman Brothers Municipal
Bond Index, and to the Consumer Price Index based on a $10,000 investment from
5/1/95 to 2/28/99.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
Date Franklin Colorado Lehman Brothers CPI
Tax-Free Municipal Bond
Income Fund- Index
Class C
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
5/1/95 $9,896 $10,000 $10,000
5/31/95 $10,143 3.19% $10,319 0.20% $10,020
6/30/95 $10,082 -0.87% $10,229 0.20% $10,040
7/31/95 $10,133 0.95% $10,326 0.00% $10,040
8/31/95 $10,273 1.27% $10,458 0.26% $10,066
9/29/95 $10,316 0.63% $10,523 0.20% $10,086
10/31/95 $10,457 1.45% $10,676 0.33% $10,120
11/30/95 $10,617 1.66% $10,853 -0.07% $10,112
12/29/95 $10,714 0.96% $10,957 -0.07% $10,105
1/31/96 $10,758 0.76% $11,041 0.59% $10,165
2/29/96 $10,730 -0.68% $10,966 0.32% $10,198
3/29/96 $10,630 -1.28% $10,825 0.52% $10,251
4/30/96 $10,621 -0.28% $10,795 0.39% $10,291
5/31/96 $10,620 -0.04% $10,791 0.19% $10,310
6/28/96 $10,720 1.09% $10,908 0.06% $10,316
7/31/96 $10,785 0.91% $11,008 0.19% $10,336
8/30/96 $10,794 -0.02% $11,005 0.19% $10,356
9/30/96 $10,933 1.40% $11,159 0.32% $10,389
10/31/96 $11,035 1.13% $11,286 0.32% $10,422
11/29/96 $11,194 1.83% $11,492 0.19% $10,442
12/31/96 $11,165 -0.42% $11,444 0.00% $10,442
1/31/97 $11,174 0.19% $11,466 0.32% $10,475
2/28/97 $11,259 0.92% $11,571 0.31% $10,508
3/31/97 $11,125 -1.33% $11,417 0.25% $10,534
4/30/97 $11,210 0.84% $11,513 0.12% $10,547
5/31/97 $11,334 1.51% $11,687 -0.06% $10,540
6/30/97 $11,458 1.07% $11,812 0.12% $10,553
7/31/97 $11,729 2.77% $12,139 0.12% $10,565
8/31/97 $11,631 -0.94% $12,025 0.19% $10,586
9/30/97 $11,774 1.19% $12,168 0.25% $10,612
10/31/97 $11,839 0.64% $12,246 0.25% $10,639
11/30/97 $11,924 0.59% $12,318 -0.06% $10,632
12/31/97 $12,093 1.46% $12,498 -0.12% $10,619
1/31/98 $12,209 1.03% $12,627 0.19% $10,640
2/28/98 $12,204 0.03% $12,631 0.19% $10,660
3/31/98 $12,211 0.09% $12,642 0.19% $10,680
4/30/98 $12,167 -0.45% $12,585 0.18% $10,699
5/31/98 $12,345 1.58% $12,784 0.18% $10,719
6/30/98 $12,389 0.39% $12,834 0.12% $10,731
7/31/98 $12,414 0.25% $12,866 0.12% $10,744
8/31/98 $12,562 1.55% $13,065 0.12% $10,757
9/30/98 $12,700 1.25% $13,229 0.12% $10,770
10/31/98 $12,663 0.00% $13,229 0.24% $10,796
11/30/98 $12,709 0.35% $13,275 0.00% $10,796
12/31/98 $12,721 0.25% $13,308 -0.06% $10,789
1/31/99 $12,830 1.19% $13,466 0.24% $10,815
2/28/99 $12,785 -0.44% $13,407 0.12% $10,828
Total Return 27.85% 34.07% 8.28%
- -----------------------------------------------------------------------------------
</TABLE>
*Source: Standard and Poor's Micropal.
Past performance is not predictive of future results.
15
CREDIT QUALITY BREAKDOWN*
Franklin Connecticut Tax-Free Income Fund
Based on Total Long-Term Investments
2/28/99
[PIE CHART]
<TABLE>
<S> <C>
AAA 29.0%
AA 22.5%
A 16.5%
BBB 32.0%
</TABLE>
*Quality breakdown may include internal ratings for bonds not rated by a
national rating agency
FRANKLIN CONNECTICUT TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
Your Fund's Goal: Franklin Connecticut Tax-Free Income Fund seeks to provide
high, current income exempt from regular federal and Connecticut state personal
income taxes through a portfolio consisting primarily of Connecticut municipal
bonds.(1)
- --------------------------------------------------------------------------------
STATE UPDATE(2)
[CONNECTICUT STATE GRAPHIC]
Connecticut's economy during the year under review can be compared to a
tortoise, slow but steady. Deeply affected by the recession of the early '90s,
the state is undergoing an economic recovery that, while slower than much of the
nation's, appears to be solid and enduring. Employment grew 1.1% in the 12
months ended September 1998. Although this was less than half of the national
increase during the same period, Connecticut's unemployment rate stood at 3.9%
in September 1998, down from 4.9% in September 1997 and below the national rate
of 4.6%. Gains in construction, financial services, real estate and other
services propelled the growth. The expansion of two casinos, run by the Pequot
and Mohegan Indians, significantly added to the growth in the construction and
services sectors.
Connecticut is a wealthy state with per capita personal income at 142% of the
national average as of December 1998, the highest of any state. Personal income
per capita rose a strong 6.1% in 1997, higher than the national average of 4.8%.
However, the state's collective growth in personal income remains below the
national average, owing to a weak employment growth rate, low unemployment and a
slowly diminishing population. In what may be a sign that the population
declines are over, Connecticut recorded 0.1% population increase in 1997, the
first since 1990.
(1) For investors subject to the federal alternative minimum tax, a small
portion of this income may be subject to such tax. Distributions of capital
gains and of ordinary income from accrued market discount, if any, are generally
taxable.
A non-diversified fund may be subject to greater risk of adverse economic or
regulatory developments in that state than a fund with broader geographical
diversification.
(2) Source: Moody's, December 1998.
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 75 of
this report.
16
Although Connecticut is one the nation's wealthiest states, it also carries a
heavy debt load. Debt ratios are among the country's highest, with a per capita
debt of $3,135 compared with the median state debt of $446. Recently, the state
announced that it is negotiating to move the New England Patriots football team
to Hartford and build a new stadium and practice facilities. If successful, this
would add approximately $375 million to the state's already burgeoning debt
level.
Reflecting the state's high level of wealth and positive economic outlook going
forward, Standard and Poor's, a national credit rating agency, recently upgraded
the state's rating to AA.(3)
PORTFOLIO NOTES
In 1998, Connecticut's new bond issuance increased to $3.9 billion, 14.2% higher
than 1997. The state's low issuance level kept demand strong and yields low
compared with national levels. During this time of limited diversification
choices, the fund purchased Puerto Rico issues, which enjoy tax-free exemption
in a number of states. Puerto Rico securities are in general highly liquid and
well-received in the marketplace. When opportunities allowed, the fund sold
Puerto Rico bonds and bought attractively priced state issues. The fund's total
net assets grew, from $212.3 million on February 28, 1998, to $268.5 million on
February 28, 1999. In addition, the fund's Class A share price, as measured by
net asset value, increased four cents, from $11.23, to $11.27, during the same
period.
More than 50% of the municipal debt brought to market nationally in 1998 was
insured, which generally raises the issue's rating to AAA, as once insured, a
security carries the insurer's credit rating. Partially due to the number of
insured issues, the majority of the fund's purchases had bond insurance,
maintaining the percentage of the portfolio's AAA-rated bonds. As of February
28, 1999, AAA-rated bonds comprised 29.0% of the fund's total long-term
investments.
As in the previous reporting period, many issuers took advantage of declining
interest rates to refinance outstanding debt. This increased the number of
prerefunded bonds in the fund's portfolio. When a bond is prerefunded, a new
issue is brought to market with a lower interest rate to pay off the older issue
at its first call date. In most cases, the proceeds from the sale of the new
bonds are invested in U.S. Treasury securities that mature on the first call
date of the original bonds. Because of the U.S. Treasury backing, prerefunded
bonds usually offer a substantial price increase-depending on their call date.
(3) This does not indicate Standard and Poor's rating of the fund.
PORTFOLIO BREAKDOWN
Franklin Connecticut
Tax-Free Income Fund
2/28/99
<TABLE>
<CAPTION>
% OF TOTAL
LONG-TERM
SECTOR INVESTMENTS
- -----------------------------
<S> <C>
Hospitals 22.9%
Prerefunded 20.9%
Housing 16.5%
Utilities 12.2%
Education 11.7%
General Obligation 5.5%
Health Care 4.9%
Other Revenue 3.8%
Industrial 0.9%
Transportation 0.7%
</TABLE>
17
Generally, we look to sell prerefunded bonds as they approach five years to
their call date. At this point, the premium on prerefunded bonds often begins to
decline rapidly to the stated call price. Our strategy aims to capture the
bond's premium, increase the fund's call protection and protect its share value.
On February 28, 1999, prerefunded bonds comprised 20.9% of the fund's total
long-term investments, compared with 19.9% a year earlier.
Franklin Connecticut Tax-Free Income Fund maintained sector diversity with
purchases in a wide range of industries. The fund's most recent purchases were
Puerto Rico Commonwealth General Obligation, Puerto Rico Commonwealth Highway
and Transportation Authority Revenue, Connecticut State Health and Educational
Facilities Authority Revenue - Trinity College, Connecticut State Health and
Educational Facilities Authority Revenue - Quinnipiac College and Connecticut
State Health and Educational Facilities Authority Revenue - Hebrew Home and
Hospital. Going forward, we will continue to follow our strategy of investing
for income, price stability and tax efficiency.
Please remember that this discussion reflects our views, opinions and portfolio
holdings as of February 28, 1999. However, market and economic conditions are
changing constantly, which can be expected to affect our strategies and the
fund's portfolio composition. Although historical performance is no guarantee of
future results, these insights may help you understand our investment and
management philosophy.
DIVIDEND DISTRIBUTIONS*
Franklin Connecticut Tax-Free Income Fund
3/1/98 - 2/28/99
<TABLE>
<CAPTION>
DIVIDEND PER SHARE
----------------------
MONTH CLASS A CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C>
March 4.9 cents 4.37 cents
April 4.9 cents 4.38 cents
May 4.9 cents 4.38 cents
June 4.8 cents 4.28 cents
July 4.8 cents 4.30 cents
August 4.8 cents 4.30 cents
September 4.8 cents 4.30 cents
October 4.8 cents 4.26 cents
November 4.8 cents 4.26 cents
December 4.8 cents 4.26 cents
January 4.8 cents 4.26 cents
February 4.8 cents 4.26 cents
- --------------------------------------------------------------------------------
TOTAL 57.9 CENTS 51.61 CENTS
</TABLE>
*Assumes shares were purchased and held for the entire accrual period. Since
dividends accrue daily, your actual distributions will vary depending on the
date you purchased your shares and any account activity during
18
PERFORMANCE SUMMARY AS OF 2/28/99
Distributions will vary based on earnings of the fund's portfolio and any
profits realized from the sale of the portfolio's securities. Past distributions
are not indicative of future trends. All total returns include reinvested
distributions at net asset value.
PRICE AND DISTRIBUTION INFORMATION (3/1/98-2/28/99)
<TABLE>
<CAPTION>
CLASS A CHANGE 2/28/99 2/28/98
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value +$0.04 $11.27 $11.23
DISTRIBUTIONS
-----------------------------------
Dividend Income $0.579
CLASS C CHANGE 2/28/99 2/28/98
- --------------------------------------------------------------------------------
Net Asset Value +$0.04 $11.30 $11.26
DISTRIBUTIONS
-----------------------------------
Dividend Income $0.5161
</TABLE>
PERFORMANCE
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR 5-YEAR 10-YEAR (10/3/88)
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return(1) +5.62% +32.54% +100.57% +104.92%
Average Annual Total Return(2) +1.12% +4.88% +6.74% +6.70%
Distribution Rate(3) 4.74%
Taxable Equivalent Distribution Rate(4) 8.22%
30-Day Standardized Yield(5) 3.81%
Taxable Equivalent Yield(4) 6.61%
INCEPTION
CLASS C 1-YEAR 3-YEAR (5/1/95)
- ------------------------------------------------------------------------------------
Cumulative Total Return(1) +5.02% +19.24% +28.13%
Average Annual Total Return(2) +3.02% +5.69% +6.40%
Distribution Rate(3) 4.33%
Taxable Equivalent Distribution Rate(4) 7.51%
30-Day Standardized Yield(5) 3.38%
Taxable Equivalent Yield(4) 5.86%
</TABLE>
FRANKLIN CONNECTICUT
TAX-FREE INCOME FUND
CLASS A (formerly Class I):
Subject to the current, maximum 4.25% initial sales charge. Prior to July 1,
1994, fund shares were offered at a lower initial sales charge; thus actual
total returns may differ. Effective May 1, 1994, the fund eliminated the sales
charge on reinvested dividends and implemented a Rule 12b-1 plan, which affects
subsequent performance. Past expense reductions by the fund's manager increased
the fund's total returns.
CLASS C (formerly Class II):
Subject to 1% initial sales charge and 1% contingent deferred sales charge for
shares redeemed within 18 months of investment. These shares have higher annual
fees and expenses than Class A shares.
(1) Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
(2) Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the current, applicable,
maximum sales charge(s) for that class.
(3) Distribution rate is based on an annualization of the respective class's
current monthly dividend and the maximum offering price per share on February
28, 1999.
(4) Taxable equivalent distribution rate and yield assume the 1999 maximum
combined federal and Connecticut state personal income tax bracket of 42.3%,
based on the federal income tax rate of 39.6%.
(5) Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended February 28, 1999.
Bond prices, and thus the fund's share price, generally move in the opposite
direction from interest rates. Since markets can go down as well as up,
investment return and principal value will fluctuate with market conditions, and
you may have a gain or loss when you sell your shares.
Past performance is not predictive of future results.
19
FRANKLIN CONNECTICUT
TAX-FREE INCOME FUND
AVERAGE ANNUAL TOTAL RETURN
2/28/99
<TABLE>
<CAPTION>
CLASS A
- ---------------------------------
<S> <C>
1-Year +1.12%
5-Year +4.88%
10-Year +6.74%
Since Inception (10/3/88) +6.70%
</TABLE>
AVERAGE ANNUAL TOTAL RETURN
2/28/99
<TABLE>
<CAPTION>
CLASS C
- ---------------------------------
<S> <C>
1-Year +3.02%
3-Year +5.69%
Since Inception (5/1/95) +6.40%
</TABLE>
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT
The unmanaged index differs from the fund in composition, does not pay
management fees or expenses and includes reinvested dividends. One cannot invest
directly in an index. Total return represents the change in value of an
investment over the periods shown. It includes the current, applicable, maximum
sales charge(s), fund expenses, account fees and reinvested distributions.
Performance of the fund's shares exceeded the rate of inflation as measured by
the Consumer Price Index (CPI).
CLASS A (3/1/89--2/28/99)
The following line graph compares the performance of the Franklin Connecticut
Tax-Free Income Fund's Class A shares to that of the Lehman Brothers Municipal
Bond Index, and to the Consumer Price Index based on a $10,000 investment from
3/1/89 to 2/28/99.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
Date Franklin Connecticut Lehman CPI
Tax-Free Income Brothers
Fund-Class A Municipal
Bond Index
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
3/1/89 $9,576 10,000 10,000
3/31/89 $9,554 -0.24% 9,976 0.58% 10,058
4/28/89 $9,779 2.37% 10,212 0.65% 10,123
5/31/89 $9,977 2.08% 10,425 0.57% 10,181
6/30/89 $10,089 1.36% 10,567 0.24% 10,206
7/31/89 $10,183 1.36% 10,710 0.24% 10,230
8/31/89 $10,112 -0.98% 10,605 0.16% 10,246
9/29/89 $10,060 -0.30% 10,574 0.32% 10,279
10/31/89 $10,126 1.22% 10,703 0.48% 10,329
11/30/89 $10,281 1.75% 10,890 0.24% 10,353
12/29/89 $10,377 0.82% 10,979 0.16% 10,370
1/31/90 $10,304 -0.47% 10,928 1.03% 10,477
2/28/90 $10,431 0.89% 11,025 0.47% 10,526
3/30/90 $10,408 0.03% 11,028 0.55% 10,584
4/30/90 $10,334 -0.72% 10,949 0.16% 10,601
5/31/90 $10,565 2.18% 11,187 0.23% 10,625
6/29/90 $10,665 0.88% 11,286 0.54% 10,682
7/31/90 $10,827 1.48% 11,453 0.38% 10,723
8/31/90 $10,554 -1.45% 11,287 0.92% 10,822
9/28/90 $10,520 0.06% 11,294 0.84% 10,913
10/31/90 $10,653 1.81% 11,498 0.60% 10,978
11/30/90 $10,903 2.01% 11,729 0.22% 11,002
12/31/90 $10,889 0.44% 11,781 0.00% 11,002
1/31/91 $11,067 1.34% 11,939 0.60% 11,068
2/28/91 $11,128 0.87% 12,042 0.15% 11,085
3/29/91 $11,168 0.04% 12,047 0.15% 11,102
4/30/91 $11,306 1.34% 12,209 0.15% 11,118
5/31/91 $11,390 0.89% 12,317 0.30% 11,152
6/28/91 $11,244 -0.10% 12,305 0.29% 11,184
7/31/91 $11,406 1.22% 12,455 0.15% 11,201
8/30/91 $11,547 1.32% 12,620 0.29% 11,233
9/30/91 $11,711 1.30% 12,784 0.44% 11,283
10/31/91 $11,786 0.90% 12,899 0.15% 11,299
11/29/91 $11,839 0.28% 12,935 0.29% 11,332
12/31/91 $12,062 2.15% 13,213 0.07% 11,340
1/31/92 $12,070 0.23% 13,243 0.15% 11,357
2/28/92 $12,052 0.03% 13,247 0.36% 11,398
3/31/92 $12,068 0.04% 13,253 0.51% 11,456
4/30/92 $12,153 0.89% 13,370 0.14% 11,472
5/29/92 $12,332 1.18% 13,528 0.14% 11,488
6/30/92 $12,477 1.68% 13,756 0.36% 11,530
7/31/92 $12,881 3.00% 14,168 0.21% 11,554
8/31/92 $12,720 -0.98% 14,029 0.28% 11,586
9/30/92 $12,748 0.65% 14,121 0.28% 11,619
10/30/92 $12,549 -0.98% 13,982 0.35% 11,659
11/30/92 $12,840 1.79% 14,232 0.14% 11,676
12/31/92 $13,048 1.02% 14,378 -0.07% 11,667
1/29/93 $13,221 1.16% 14,544 0.49% 11,725
2/26/93 $13,613 3.62% 15,071 0.35% 11,766
3/31/93 $13,543 -1.06% 14,911 0.35% 11,807
4/30/93 $13,644 1.01% 15,062 0.28% 11,840
5/31/93 $13,697 0.56% 15,146 0.14% 11,856
6/30/93 $13,937 1.67% 15,399 0.14% 11,873
7/30/93 $13,940 0.13% 15,419 0.00% 11,873
8/31/93 $14,244 2.08% 15,740 0.28% 11,906
9/30/93 $14,411 1.14% 15,919 0.21% 11,931
10/29/93 $14,450 0.19% 15,949 0.41% 11,980
11/30/93 $14,388 -0.88% 15,809 0.07% 11,989
12/31/93 $14,656 2.11% 16,143 0.00% 11,989
1/31/94 $14,786 1.14% 16,327 0.27% 12,021
2/28/94 $14,479 -2.59% 15,904 0.34% 12,062
3/31/94 $13,963 -4.07% 15,257 0.34% 12,103
4/29/94 $13,951 0.85% 15,386 0.14% 12,120
5/31/94 $14,083 0.87% 15,520 0.07% 12,128
6/30/94 $13,992 -0.61% 15,425 0.34% 12,170
7/29/94 $14,243 1.83% 15,708 0.27% 12,202
8/31/94 $14,271 0.35% 15,763 0.40% 12,251
9/30/94 $14,100 -1.47% 15,531 0.27% 12,284
10/31/94 $13,834 -1.78% 15,255 0.07% 12,293
11/30/94 $13,488 -1.81% 14,978 0.13% 12,309
12/30/94 $13,866 2.20% 15,308 0.00% 12,309
1/31/95 $14,220 2.86% 15,746 0.40% 12,358
2/28/95 $14,534 2.91% 16,204 0.40% 12,408
3/31/95 $14,631 1.15% 16,390 0.33% 12,448
4/28/95 $14,687 0.12% 16,410 0.33% 12,490
5/31/95 $15,033 3.19% 16,933 0.20% 12,515
6/30/95 $14,910 -0.87% 16,786 0.20% 12,540
7/31/95 $14,995 0.95% 16,946 0.00% 12,540
8/31/95 $15,193 1.27% 17,161 0.26% 12,572
9/29/95 $15,321 0.63% 17,269 0.20% 12,597
10/31/95 $15,506 1.45% 17,519 0.33% 12,639
11/30/95 $15,708 1.66% 17,810 -0.07% 12,630
12/29/95 $15,853 0.96% 17,981 -0.07% 12,621
1/31/96 $15,928 0.76% 18,118 0.59% 12,696
2/29/96 $15,844 -0.68% 17,995 0.32% 12,736
3/29/96 $15,703 -1.28% 17,764 0.52% 12,803
4/30/96 $15,720 -0.28% 17,714 0.39% 12,852
5/31/96 $15,752 -0.04% 17,707 0.19% 12,877
6/28/96 $15,916 1.09% 17,900 0.06% 12,885
7/31/96 $16,023 0.91% 18,063 0.19% 12,909
8/30/96 $16,069 -0.02% 18,060 0.19% 12,934
9/30/96 $16,236 1.40% 18,313 0.32% 12,975
10/31/96 $16,359 1.13% 18,519 0.32% 13,017
11/29/96 $16,573 1.83% 18,858 0.19% 13,041
12/31/96 $16,561 -0.42% 18,779 0.00% 13,041
1/31/97 $16,594 0.19% 18,815 0.32% 13,083
2/28/97 $16,719 0.92% 18,988 0.31% 13,124
3/31/97 $16,584 -1.33% 18,735 0.25% 13,156
4/30/97 $16,695 0.84% 18,893 0.12% 13,172
5/31/97 $16,914 1.51% 19,178 -0.06% 13,164
6/30/97 $17,069 1.07% 19,383 0.12% 13,180
7/31/97 $17,460 2.77% 19,920 0.12% 13,196
8/31/97 $17,350 -0.94% 19,733 0.19% 13,221
9/30/97 $17,539 1.19% 19,968 0.25% 13,254
10/31/97 $17,619 0.64% 20,096 0.25% 13,287
11/30/97 $17,746 0.59% 20,214 -0.06% 13,279
12/31/97 $17,969 1.46% 20,509 -0.12% 13,263
1/31/98 $18,113 1.03% 20,720 0.19% 13,288
2/28/98 $18,162 0.03% 20,727 0.19% 13,314
3/31/98 $18,176 0.09% 20,745 0.19% 13,339
4/30/98 $18,191 -0.45% 20,652 0.18% 13,363
5/31/98 $18,418 1.58% 20,978 0.18% 13,387
6/30/98 $18,496 0.39% 21,060 0.12% 13,403
7/31/98 $18,559 0.25% 21,113 0.12% 13,419
8/31/98 $18,754 1.55% 21,440 0.12% 13,435
9/30/98 $18,934 1.25% 21,708 0.12% 13,451
10/31/98 $18,913 0.00% 21,708 0.24% 13,484
11/30/98 $18,977 0.35% 21,784 0.00% 13,484
12/31/98 $19,041 0.25% 21,838 -0.06% 13,476
1/31/99 $19,241 1.19% 22,098 0.24% 13,508
2/28/99 $19,206 -0.44% 22,001 0.12% 13,524
Total Return 92.06% 120.01% 35.24%
- ---------------------------------------------------------------------------
</TABLE>
CLASS C (5/1/95--2/28/99)
The following line graph compares the performance of the Franklin Connecticut
Tax-Free Income Fund's Class C shares to that of the Lehman Brothers Municipal
Bond Index, and to the Consumer Price Index based on a $10,000 investment from
5/1/95 to 2/28/99.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
Date Franklin Lehman Brothers CPI
Connecticut Municipal
Tax-Free Income Bond Index
Fund-Class C
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
5/1/95 $9,898 $10,000 $10,000
5/31/95 $10,125 3.19% $10,319 0.20% $10,020
6/30/95 $10,045 -0.87% $10,229 0.20% $10,040
7/31/95 $10,097 0.95% $10,326 0.00% $10,040
8/31/95 $10,234 1.27% $10,458 0.26% $10,066
9/29/95 $10,323 0.63% $10,523 0.20% $10,086
10/31/95 $10,442 1.45% $10,676 0.33% $10,120
11/30/95 $10,572 1.66% $10,853 -0.07% $10,112
12/29/95 $10,644 0.96% $10,957 -0.07% $10,105
1/31/96 $10,689 0.76% $11,041 0.59% $10,165
2/29/96 $10,618 -0.68% $10,966 0.32% $10,198
3/29/96 $10,523 -1.28% $10,825 0.52% $10,251
4/30/96 $10,539 -0.28% $10,795 0.39% $10,291
5/31/96 $10,555 -0.04% $10,791 0.19% $10,310
6/28/96 $10,631 1.09% $10,908 0.06% $10,316
7/31/96 $10,708 0.91% $11,008 0.19% $10,336
8/30/96 $10,754 -0.02% $11,005 0.19% $10,356
9/30/96 $10,861 1.40% $11,159 0.32% $10,389
10/31/96 $10,938 1.13% $11,286 0.32% $10,422
11/29/96 $11,076 1.83% $11,492 0.19% $10,442
12/31/96 $11,053 -0.42% $11,444 0.00% $10,442
1/31/97 $11,069 0.19% $11,466 0.32% $10,475
2/28/97 $11,157 0.92% $11,571 0.31% $10,508
3/31/97 $11,061 -1.33% $11,417 0.25% $10,534
4/30/97 $11,130 0.84% $11,513 0.12% $10,547
5/31/97 $11,271 1.51% $11,687 -0.06% $10,540
6/30/97 $11,379 1.07% $11,812 0.12% $10,553
7/31/97 $11,623 2.77% $12,139 0.12% $10,565
8/31/97 $11,545 -0.94% $12,025 0.19% $10,586
9/30/97 $11,675 1.19% $12,168 0.25% $10,612
10/31/97 $11,712 0.64% $12,246 0.25% $10,639
11/30/97 $11,801 0.59% $12,318 -0.06% $10,632
12/31/97 $11,944 1.46% $12,498 -0.12% $10,619
1/31/98 $12,034 1.03% $12,627 0.19% $10,640
2/28/98 $12,060 0.03% $12,631 0.19% $10,660
3/31/98 $12,064 0.09% $12,642 0.19% $10,680
4/30/98 $12,068 -0.45% $12,585 0.18% $10,699
5/31/98 $12,213 1.58% $12,784 0.18% $10,719
6/30/98 $12,259 0.39% $12,834 0.12% $10,731
7/31/98 $12,295 0.25% $12,866 0.12% $10,744
8/31/98 $12,419 1.55% $13,065 0.12% $10,757
9/30/98 $12,532 1.25% $13,229 0.12% $10,770
10/31/98 $12,512 0.00% $13,229 0.24% $10,796
11/30/98 $12,548 0.35% $13,275 0.00% $10,796
12/31/98 $12,585 0.25% $13,308 -0.06% $10,789
1/31/99 $12,711 1.19% $13,466 0.24% $10,815
2/28/99 $12,682 -0.44% $13,407 0.12% $10,828
Total Return 26.82% 34.07% 8.28%
- --------------------------------------------------------------------------
</TABLE>
*Source: Standard and Poor's Micropal.
Past performance is not predictive of future results.
20
FRANKLIN FEDERAL INTERMEDIATE-TERM
TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
Your Fund's Goal: Franklin Federal Intermediate-Term Tax-Free Income Fund seeks
to provide high, current income exempt from regular federal income tax through a
portfolio of municipal bonds with an average weighted maturity (the time in
which a debt must be repaid) between three and 10 years.(1)
- --------------------------------------------------------------------------------
PORTFOLIO NOTES
During the 12 months under review, the U.S. economy remained a bastion of
growth. Concurrently, interest rates declined, unusual in a time of such heady
economic expansion. The yield on the 30-year Treasury bond declined from 5.92%
on February 28, 1998, to a low of 4.70% on October 5, 1998. However, toward the
end of the reporting period, interest rates crept back up, reflecting the
economy's continuing strength.
In general, most municipalities' fiscal health remained robust, due to
increasing tax revenues and payrolls. New municipal bond supply was extremely
strong in 1998, $284 billion, more than 28.5% greater than 1997's new issuance
supply. Insured bonds, typically rated AAA, reached a record 50.8% of all new
issues for the year. Throughout much of the reporting period, yield spreads, the
interest-rate difference between AAA- and BBB-rated securities, narrowed, as
investors purchased lower quality issues to earn additional yields. However, in
a sign that the trend may be changing, yield spreads began to widen late in the
reporting period. The fund was very selective in each issue purchased during the
reporting period. Utilizing our extensive research capabilities, we were able to
add some lower-rated securities to capture additional yield without compromising
the fund's overall credit quality.
CREDIT QUALITY BREAKDOWN*
Franklin Federal Intermediate-Term
Tax-Free Income Fund
Based on Total Long-Term Investments
2/28/99
[PIE CHART]
AAA - 14.6%
AA - 12.6%
A - 20.3%
BBB - 50.4%
Below Investment Grade - 2.1%
*Quality breakdown may include internal ratings for bonds not rated by a
national rating agency.
(1) For investors subject to the federal or state alternative minimum tax, a
portion of this income may be subject to such tax. Distributions of capital
gains and of ordinary income from accrued market discount, if any, are generally
taxable.
A non-diversified fund may be subject to greater risk of adverse economic or
regulatory developments than a fund with broader diversification.
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 78 of
this report.
21
DIVIDEND DISTRIBUTIONS*
Franklin Federal Intermediate-Term
Tax-Free Income Fund
3/1/98 - 2/28/99
<TABLE>
<CAPTION>
DIVIDEND
MONTH PER SHARE
- -----------------------------
<S> <C>
March 4.4 cents
April 4.4 cents
May 4.4 cents
June 4.4 cents
July 4.4 cents
August 4.4 cents
September 4.4 cents
October 4.4 cents
November 4.4 cents
December 4.2 cents
January 4.2 cents
February 4.2 cents
- -----------------------------
TOTAL 52.2 CENTS
</TABLE>
*Assumes shares were purchased and held for the entire accrual period. Since
dividends accrue daily, your actual distributions will vary depending on the
date you purchased your shares and any account activity during the month. Income
distributions include all accrued income earned by the fund during the reporting
period.
PORTFOLIO BREAKDOWN
Franklin Federal Intermediate-Term
Tax-Free Income Fund
2/28/99
<TABLE>
<CAPTION>
% OF TOTAL
LONG-TERM
SECTOR INVESTMENTS
- -----------------------------------------------
<S> <C>
Utilities 20.4%
Hospitals 13.1%
Industrial 11.0%
Transportation 8.9%
Housing 8.7%
General Obligation 6.3%
Other Revenue 6.1%
Special Assessment 5.7%
Health Care 5.2%
Education 5.0%
Prerefunded 3.4%
Certificates of Participation 3.3%
Marks-Roos 1.7%
Tax Allocation 1.2%
</TABLE>
Franklin Federal Intermediate-Term Tax-Free Income Fund's Class A share price,
as measured by net asset value, increased five cents, from $11.25 on February
28, 1998, to $11.30 on February 28, 1999. In addition, the fund's total net
assets increased by approximately $56.1 million during the reporting period,
from $139.5 million to $195.6 million. We invested new money and proceeds from
sold securities in current coupon bonds as they became available.
Due to the number of insured bonds, the fund's overall quality improved slightly
during the 12 months under review. As of February 28, 1999, AAA-rated bonds
comprised 14.6% of the fund's total long-term investments, compared with 13.7% a
year earlier. However, the fund purchased bonds with different credit qualities
and maturities as the fund looked for value in a declining interest-rate
environment. We purchased bonds in a variety of sectors, maintaining the fund's
strong diversification and an average maturity of approximately nine years.
Significant purchases included Port Saint Lucie, FL Special Assessment Revenue;
Adams County Schools, CO Certificate of Participation; Virgin Islands Water and
Power Authority Water System Revenue; and New York City Metropolitan
Transportation Authority Commuter Facilities Revenue. Going forward, we will
continue to follow our strategy of investing for income, price stability and tax
efficiency.
Please remember that this discussion reflects our views, opinions and portfolio
holdings as of February 28, 1999. However, market and economic conditions are
changing constantly, which can be expected to affect our strategies and the
fund's portfolio composition. Although historical performance is no guarantee of
future results, these insights may help you understand our investment and
management philosophy.
22
PERFORMANCE SUMMARY AS OF 2/28/99
Distributions will vary based on earnings of the fund's portfolio and any
profits realized from the sale of the portfolio's securities. Past distributions
are not indicative of future trends. All total returns include reinvested
distributions at net asset value.
PRICE AND DISTRIBUTION INFORMATION (3/1/98-2/28/99)
<TABLE>
<CAPTION>
CLASS A CHANGE 2/28/99 2/28/98
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value +$0.05 $11.30 $11.25
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTIONS
---------------------------------
<S> <C>
Dividend Income $0.522
</TABLE>
PERFORMANCE
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR 5-YEAR (9/23/92)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) +5.17% +34.07% +53.82%
Average Annual Total Return(2) +2.80% +5.56% +6.54%
Distribution Rate(3) 4.31%
Taxable Equivalent Distribution Rate(4) 7.14%
30-Day Standardized Yield(5) 3.80%
Taxable Equivalent Yield(4) 6.29%
</TABLE>
FRANKLIN FEDERAL
INTERMEDIATE-TERM
TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
CLASS A (formerly Class I):
Subject to the maximum 2.25% initial sales charge. The fund's manager agreed in
advance to waive a portion of its management fees, which reduces operating
expenses and increases yield, distribution rate and total return to
shareholders. Without these reductions, the fund's distribution rate and total
return would have been lower, and yield for the period would have been 3.80%.
The fee waiver may be discontinued at any time upon notification to the fund's
Board of Trustees.
- --------------------------------------------------------------------------------
(1) Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
(2) Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the applicable, maximum
sales charge.
(3) Distribution rate is based on an annualization of the current 4.15 cent per
share monthly dividend and the maximum offering price of $11.56 on February 28,
1999.
(4) Taxable equivalent distribution rate and yield assume the 1999 maximum
federal income tax rate of 39.6%.
(5) Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended February 28, 1999.
- --------------------------------------------------------------------------------
Bond prices, and thus the fund's share price, generally move in the opposite
direction from interest rates. Since markets can go down as well as up,
investment return and principal value will fluctuate with market conditions, and
you may have a gain or loss when you sell your shares.
- --------------------------------------------------------------------------------
Past performance is not predictive of future results.
23
FRANKLIN FEDERAL INTERMEDIATE-TERM
TAX-FREE INCOME FUND
AVERAGE ANNUAL TOTAL RETURN
2/28/99
<TABLE>
<CAPTION>
CLASS A
- ----------------------------------
<S> <C>
1-Year +2.80%
5-Year +5.56%
Since Inception (9/23/92) +6.54%
</TABLE>
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT
The unmanaged index differs from the fund in composition, does not pay
management fees or expenses and includes reinvested dividends. One cannot invest
directly in an index. Total return represents the change in value of an
investment over the periods shown. It includes the applicable, maximum sales
charge, fund expenses, account fees and reinvested distributions.
Performance of the fund's shares exceeded the rate of inflation as measured by
the Consumer Price Index (CPI).
CLASS A (9/23/92 - 2/28/99)
The following line graph compares the performance of the Franklin Federal
Intermediate-Term Tax-Free Income Fund's shares to that of the Lehman Brothers
Municipal Bond Index, and to the Consumer Price Index based on a $10,000
investment from 9/23/92 to 2/28/99.
<TABLE>
<CAPTION>
Date Franklin Federal Lehman Brothers CPI
Intermediate-Term Municipal Bond
Tax-Free Income Index
Fund-Class A
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
9/23/92 $ 9,775 $10,000 $10,000
9/30/92 $ 9,785 0.19% $10,019 0.07% $10,007
10/31/92 $ 9,746 -1.02% $ 9,917 0.35% $10,042
11/30/92 $ 9,932 1.83% $10,099 0.14% $10,056
12/31/92 $10,010 1.16% $10,216 -0.07% $10,049
1/31/93 $10,094 1.69% $10,388 0.49% $10,098
2/28/93 $10,395 3.66% $10,769 0.35% $10,133
3/31/93 $10,420 -1.46% $10,611 0.35% $10,169
4/30/93 $10,496 0.95% $10,712 0.28% $10,197
5/31/93 $10,531 0.35% $10,750 0.14% $10,211
6/30/93 $10,687 1.97% $10,962 0.14% $10,226
7/31/93 $10,744 0.25% $10,989 0.00% $10,226
8/31/93 $10,931 2.07% $11,216 0.28% $10,254
9/30/93 $11,038 1.23% $11,354 0.21% $10,276
10/31/93 $11,105 0.16% $11,373 0.41% $10,318
11/30/93 $11,040 -0.82% $11,279 0.07% $10,325
12/31/93 $11,280 2.13% $11,520 0.00% $10,325
1/31/94 $11,408 1.23% $11,661 0.27% $10,353
2/28/94 $11,205 -2.74% $11,342 0.34% $10,388
3/31/94 $10,855 -3.82% $10,908 0.34% $10,424
4/30/94 $10,912 1.10% $11,028 0.14% $10,438
5/31/94 $11,000 0.80% $11,117 0.07% $10,445
6/30/94 $10,972 -0.43% $11,069 0.34% $10,481
7/31/94 $11,124 1.68% $11,255 0.27% $10,509
8/31/94 $11,203 0.39% $11,299 0.40% $10,551
9/30/94 $11,111 -1.35% $11,146 0.27% $10,580
10/31/94 $10,965 -1.46% $10,983 0.07% $10,587
11/30/94 $10,820 -1.89% $10,776 0.13% $10,601
12/31/94 $10,975 1.80% $10,970 0.00% $10,601
1/31/95 $11,229 2.59% $11,254 0.40% $10,643
2/28/95 $11,440 2.83% $11,572 0.40% $10,686
3/31/95 $11,543 1.35% $11,729 0.33% $10,721
4/30/95 $11,570 0.12% $11,743 0.33% $10,757
5/31/95 $11,862 3.17% $12,115 0.20% $10,778
6/30/95 $11,801 -0.62% $12,040 0.20% $10,800
7/31/95 $11,907 1.47% $12,217 0.00% $10,800
8/31/95 $12,070 1.36% $12,383 0.26% $10,828
9/30/95 $12,178 0.64% $12,462 0.20% $10,849
10/31/95 $12,319 1.15% $12,606 0.33% $10,885
11/30/95 $12,473 1.34% $12,774 -0.07% $10,878
12/31/95 $12,560 0.61% $12,852 -0.07% $10,870
1/31/96 $12,635 1.01% $12,982 0.59% $10,934
2/29/96 $12,573 -0.41% $12,929 0.32% $10,969
3/31/96 $12,477 -1.24% $12,769 0.52% $11,026
4/30/96 $12,472 -0.35% $12,724 0.39% $11,069
5/31/96 $12,455 -0.28% $12,688 0.19% $11,090
6/30/96 $12,579 0.95% $12,809 0.06% $11,097
7/31/96 $12,656 0.96% $12,932 0.19% $11,118
8/31/96 $12,663 0.00% $12,932 0.19% $11,139
9/30/96 $12,788 1.03% $13,065 0.32% $11,175
10/31/96 $12,925 1.26% $13,230 0.32% $11,210
11/30/96 $13,099 2.02% $13,497 0.19% $11,232
12/31/96 $13,094 -0.45% $13,436 0.00% $11,232
1/31/97 $13,102 0.39% $13,489 0.32% $11,268
2/28/97 $13,217 0.94% $13,615 0.31% $11,303
3/31/97 $13,091 -1.34% $13,433 0.25% $11,331
4/30/97 $13,195 0.74% $13,532 0.12% $11,344
5/31/97 $13,276 1.42% $13,724 -0.06% $11,338
6/30/97 $13,430 1.10% $13,875 0.12% $11,351
7/31/97 $13,732 2.81% $14,265 0.12% $11,365
8/31/97 $13,665 -0.97% $14,127 0.19% $11,386
9/30/97 $13,772 1.27% $14,306 0.25% $11,415
10/31/97 $13,842 0.53% $14,382 0.25% $11,443
11/30/97 $13,925 0.46% $14,448 -0.06% $11,437
12/31/97 $14,105 1.58% $14,677 -0.12% $11,423
1/31/98 $14,274 1.11% $14,840 0.19% $11,445
2/28/98 $14,279 -0.01% $14,838 0.19% $11,466
3/31/98 $14,284 -0.07% $14,828 0.19% $11,488
4/30/98 $14,263 -0.55% $14,746 0.18% $11,509
5/31/98 $14,448 1.70% $14,997 0.18% $11,530
6/30/98 $14,491 0.37% $15,052 0.12% $11,543
7/31/98 $14,535 0.16% $15,076 0.12% $11,557
8/31/98 $14,696 1.74% $15,339 0.12% $11,571
9/30/98 $14,844 1.49% $15,567 0.12% $11,585
10/31/98 $14,836 0.04% $15,573 0.24% $11,613
11/30/98 $14,881 0.30% $15,620 0.00% $11,613
12/31/98 $14,923 0.31% $15,669 -0.06% $11,606
1/31/99 $15,098 1.53% $15,908 0.24% $11,634
2/28/99 $15,036 -0.90% $15,765 0.12% $11,648
Total Return 50.36% 57.65% 16.48%
- -----------------------------------------------------------------------
</TABLE>
*Source: Standard and Poor's Micropal.
Past performance is not predictive of future results.
24
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
Your Fund's Goal: Franklin High Yield Tax-Free Income Fund seeks to provide
high, current income exempt from regular federal income tax through a portfolio
consisting primarily of higher-yielding, medium- to lower-rated and non-rated
municipal securities.(1) As discussed in the fund's prospectus, these securities
entail greater risk than higher-rated municipal securities.
- --------------------------------------------------------------------------------
PORTFOLIO NOTES
The high yield municipal bond market was especially challenging during the year
under review. For the first time in a number of years, the average national high
yield fund, according to Lipper, underperformed the average national investment
grade fund. As mentioned in the Shareholder Letter, credit spreads finally
widened after narrowing for a number of years, due in part to the aggressive
strategy of the municipal bond insurers and investors demanding higher yields in
a declining interest-rate environment. As credit spreads widened, the weakness
of high yield bonds dampened the performance of Franklin High Yield Tax-Free
Income Fund. As a result, the fund's Class A share price, as measured by net
asset value, decreased 19 cents, from $11.68 on February 28, 1998, to $11.49 on
February 28, 1999.
Health care and project finance-related bond issuers were the most volatile over
the 12-month period. In health care financing, and hospitals specifically, the
market was especially volatile. The two main catalysts to the health care
sector's problems continue to be an extremely competitive environment and a
declining reimbursement system to health care providers. Many higher quality
health care systems received downgrades from the rating agencies, while some
lower quality borrowers defaulted
CREDIT QUALITY BREAKDOWN*
Franklin High Yield Tax-Free Income Fund
Based on Total Long-Term Investments
2/28/99
[PIE CHART]
AAA - 26.2%
AA - 2.6%
A - 10.8%
BBB - 22.0%
Below Investment Grade - 38.4%
*Quality breakdown may include internal ratings for bonds not rated by a
national rating agency.
(1) For investors subject to the federal or state alternative minimum tax, a
portion of this income may be subject to such tax. Distributions of capital
gains and of ordinary income from accrued market discount, if any, are generally
taxable.
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 86 of
this report.
25
PORTFOLIO BREAKDOWN
Franklin High Yield
Tax-Free Income Fund
2/28/99
<TABLE>
<CAPTION>
% OF TOTAL
LONG-TERM
SECTOR INVESTMENTS
- -----------------------------------------------
<S> <C>
Utilities 31.3%
Prerefunded 13.2%
Hospitals 10.1%
Transportation 9.1%
General Obligation 7.6%
Special Assessment 7.0%
Industrial 6.5%
Health Care 4.9%
Housing 3.6%
Other Revenue 2.8%
Mello-Roos 1.2%
Certificates of Participation 1.2%
Education 1.1%
Tax Allocation 0.3%
Marks-Roos 0.1%
</TABLE>
on their bond obligations or filed for bankruptcy protection. Moody's, a
national credit rating agency, downgraded 54 hospitals and health systems with
$10.7 billion of par amount outstanding during the past year. Although the fund
avoided many of the worst situations, some of its health care holdings did face
pressures, resulting in a decline in market value.
The project finance sector, where bond repayment depends on the income produced
by a public project, also faced a number of challenges during the period under
review. One holding, a resource recovery or waste-to-energy project, experienced
a significant decline in market value after the owner was forced to take an
accounting write-off for its equity investment in the project. Although the
project is having some difficulties, there are sufficient reserves and
company-guaranteed support to prevent default for three or more years. While
these situations dampened the fund's performance during the year under review,
the prevailing market conditions provided our portfolio management team with
some excellent investment opportunities. With approximately 26% of the fund in
AAA holdings, we believe we are well positioned to take advantage of buying
opportunities in market sectors that were heavily impacted.
On a positive note, the fund benefited from many investments in other market
sectors made over the past few years. We acquired large holdings, such as New
York City and Washington, D.C. general obligation bonds, when investors were
extremely nervous about these issuers' prospects. These holdings were among the
market's best performers. Similarly, the fund took advantage of utility sector
weakness during the past three years with the threat of deregulation in the
utility industry. This provided some excellent investment opportunities in such
issuers as Tucson Electric Power Company Project PCR; Public Service Co. of New
Hampshire Project; Sam Rayburn Municipal Power Agency Supply System Revenue
(TX); Iberville Parish (LA) PCR Entergy Gulf States Inc. Project, and others
where we felt we were receiving superior income and potential total return
before the market fully understood the specific situation.
At times, the market tends to "paint issuers with the same broad brush" without
differentiating among them. These opportunities can provide significant returns
to those who have the ability to find value and are willing to take a contrarian
approach when
26
appropriate. This strategy is one that we strive for and will continue to employ
in the future. It has served the fund's investors well in the past, and we hope
to attain similar results going forward.
However, in the generally declining interest-rate environment over the past
several years, many municipalities prerefunded their higher yielding outstanding
debt. The fund has profited by selling many of its prerefunded securities for
more than it paid, which may make a capital gain distribution necessary in June
1999.
Please remember that this discussion reflects our views, opinions and portfolio
holdings as of February 28, 1999. However, market and economic conditions are
changing constantly, which can be expected to affect our strategies and the
fund's portfolio composition. Although historical performance is no guarantee of
future results, these insights may help you understand our investment and
management philosophy.
DIVIDEND DISTRIBUTIONS*
Franklin High Yield Tax-Free Income Fund
3/1/98 - 2/28/99
<TABLE>
<CAPTION>
DIVIDEND PER SHARE
-------------------------------------------------
MONTH CLASS A CLASS B** CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
March 5.6 cents -- 5.04 cents
April 5.6 cents -- 5.04 cents
May 5.6 cents -- 5.04 cents
June 5.5 cents -- 4.94 cents
July 5.5 cents -- 4.95 cents
August 5.5 cents -- 4.95 cents
September 5.4 cents -- 4.85 cents
October 5.4 cents -- 4.87 cents
November 5.4 cents -- 4.87 cents
December 5.4 cents -- 4.87 cents
January 5.4 cents 3.91 cents 4.87 cents
February 5.4 cents 4.87 cents 4.87 cents
- --------------------------------------------------------------------------------
TOTAL 65.7 CENTS 8.78 CENTS 59.16 CENTS
</TABLE>
*Assumes shares were purchased and held for the entire accrual period. Since
dividends accrue daily, your actual distributions will vary depending on the
date you purchased your shares and any account activity during the month. Income
distributions include all accrued income earned by the fund during the reporting
period.
**January 1, 1999, the fund began offering Class B shares to investors. See the
prospectus for details.
27
FRANKLIN HIGH YIELD
TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
CLASS A (formerly Class I):
Subject to the current, maximum 4.25% initial sales charge. Prior to July 1,
1994, fund shares were offered at a lower initial sales charge; thus actual
total returns may differ. Effective May 1, 1994, the fund eliminated the sales
charge on reinvested dividends and implemented a Rule 12b-1 plan, which affects
subsequent performance. Past expense reductions by the fund's manager increased
the fund's total returns.
CLASS B:
Subject to no initial sales charge, but subject to a contingent deferred sales
charge (CDSC) declining from 4% to 0% over six years. These shares have higher
annual fees and expenses than Class A shares.
CLASS C (formerly Class II):
Subject to 1% initial sales charge and 1% CDSC for shares redeemed within 18
months of investment. These shares have higher annual fees and expenses than
Class A shares.
- --------------------------------------------------------------------------------
PERFORMANCE SUMMARY AS OF 2/28/99
Distributions will vary based on earnings of the fund's portfolio and any
profits realized from the sale of the portfolio's securities. Past distributions
are not indicative of future trends. All total returns include reinvested
distributions at net asset value.
PRICE AND DISTRIBUTION INFORMATION (3/1/98-2/28/99)
<TABLE>
<CAPTION>
CLASS A CHANGE 2/28/99 2/28/98
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value -$0.19 $11.49 $11.68
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTIONS
---------------------------------
<S> <C>
Dividend Income $0.6570
Long-Term Capital Gain $0.0156
TOTAL $0.6726
</TABLE>
<TABLE>
<CAPTION>
CLASS B CHANGE 2/28/99 1/1/99
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value +$0.01 $11.52 $11.51
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTIONS
---------------------------------
<S> <C>
Dividend Income $0.0878
</TABLE>
<TABLE>
<CAPTION>
CLASS C CHANGE 2/28/99 2/28/98
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value -$0.18 $11.57 $11.75
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTIONS
---------------------------------
<S> <C>
Dividend Income $0.5916
Long-Term Capital Gain $0.0156
TOTAL $0.6072
</TABLE>
Franklin High Yield Tax-Free Income Fund paid distributions derived from
long-term capital gains of 1.56 cents ($0.0156) per share in December 1998. The
fund hereby designates such distributions as capital gain dividends per Internal
Revenue Code Section 852 (b)(3).
Past performance is not predictive of future results.
28
PERFORMANCE
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR 5-YEAR 10-YEAR (3/18/86)
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return(1) +4.21% +40.57% +122.45% +184.76%
Average Annual Total Return(2) -0.23% +6.12% +7.85% +8.06%
Distribution Rate(3) 5.40%
Taxable Equivalent Distribution Rate(4) 8.94%
30-Day Standardized Yield(5) 4.71%
Taxable Equivalent Yield(4) 7.80%
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS B (1/1/99)
- --------------------------------------------------------------------------------
<S> <C> <C>
Cumulative Total Return(1) +0.96%
Aggregate Annual Total Return(2) -3.04%
Distribution Rate(3) 5.04%
Taxable Equivalent Distribution Rate(4) 8.34%
30-Day Standardized Yield(5) 4.56%
Taxable Equivalent Yield(4) 7.55%
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS C 1-YEAR 3-YEAR (5/1/95)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) +3.69% +21.48% +32.74%
Average Annual Total Return(2) +1.67% +6.35% +7.39%
Distribution Rate(3) 4.92%
Taxable Equivalent Distribution Rate(4) 8.15%
30-Day Standardized Yield(5) 4.32%
Taxable Equivalent Yield(4) 7.15%
</TABLE>
(1) Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
(2) Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the current, applicable,
maximum sales charge(s) for that class. Since Class B shares have existed for
less than one year, the figures for that class represent aggregate total return
from inception; therefore, average annual total returns are not provided.
(3) Distribution rate is based on an annualization of the respective class's
current monthly dividend and the maximum offering price per share on February
28, 1999.
(4) Taxable equivalent distribution rate and yield assume the 1999 maximum
federal income tax rate of 39.6%.
(5) Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended February 28, 1999.
- --------------------------------------------------------------------------------
Bond prices, and thus the fund's share price, generally move in the opposite
direction from interest rates. Since markets can go down as well as up,
investment return and principal value will fluctuate with market conditions, and
you may have a gain or loss when you sell your shares.
- --------------------------------------------------------------------------------
Past performance is not predictive of future results.
29
FRANKLIN HIGH YIELD
TAX-FREE INCOME FUND
AVERAGE ANNUAL TOTAL RETURN
2/28/99
<TABLE>
<CAPTION>
CLASS A
- ----------------------------------
<S> <C>
1-Year -0.23%
5-Year +6.12%
10-Year +7.85%
Since Inception (3/18/86) +8.06%
</TABLE>
AVERAGE ANNUAL TOTAL RETURN
2/28/99
<TABLE>
<CAPTION>
CLASS C
- ----------------------------------
<S> <C>
1-Year +1.67%
3-Year +6.35%
Since Inception (5/1/95) +7.39%
</TABLE>
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT
The unmanaged index differs from the fund in composition, does not pay
management fees or expenses and includes reinvested dividends. One cannot invest
directly in an index. Total return represents the change in value of an
investment over the periods shown. It includes the current, applicable, maximum
sales charge(s), fund expenses, account fees and reinvested distributions.
Performance of the fund's shares exceeded the rate of inflation as measured by
the Consumer Price Index (CPI).
CLASS A (3/1/89 - 2/28/99)
The following line graph compares the performance of the Franklin High Yield
Tax-Free Income Fund's Class A shares to that of the Lehman Brothers Municipal
Bond Index, and to the Consumer Price Index based on a $10,000 investment from
3/1/89 to 2/28/99.
<TABLE>
<CAPTION>
Date Franklin High Yield Lehman CPI
Tax-Free Income Brothers
Fund-Class A Municipal
Bond
Index
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
3/1/89 $ 9,572 $10,000 $10,000
3/31/89 $ 9,586 -0.24% $ 9,976 0.58% $10,058
4/30/89 $ 9,783 2.37% $10,212 0.65% $10,123
5/31/89 $ 9,945 2.08% $10,425 0.57% $10,181
6/30/89 $10,081 1.36% $10,567 0.24% $10,206
7/31/89 $10,142 1.36% $10,710 0.24% $10,230
8/31/89 $10,118 -0.98% $10,605 0.16% $10,246
9/30/89 $10,085 -0.30% $10,574 0.32% $10,279
10/31/89 $10,176 1.22% $10,703 0.48% $10,329
11/30/89 $10,297 1.75% $10,890 0.24% $10,353
12/31/89 $10,370 0.82% $10,979 0.16% $10,370
1/31/90 $10,311 -0.47% $10,928 1.03% $10,477
2/28/90 $10,449 0.89% $11,025 0.47% $10,526
3/31/90 $10,439 0.03% $11,028 0.55% $10,584
4/30/90 $10,359 -0.72% $10,949 0.16% $10,601
5/31/90 $10,580 2.18% $11,187 0.23% $10,625
6/30/90 $10,702 0.88% $11,286 0.54% $10,682
7/31/90 $10,855 1.48% $11,453 0.38% $10,723
8/31/90 $10,660 -1.45% $11,287 0.92% $10,822
9/30/90 $10,649 0.06% $11,294 0.84% $10,913
10/31/90 $10,743 1.81% $11,498 0.60% $10,978
11/30/90 $10,921 2.01% $11,729 0.22% $11,002
12/31/90 $10,900 0.44% $11,781 0.00% $11,002
1/31/91 $11,039 1.34% $11,939 0.60% $11,068
2/28/91 $11,081 0.87% $12,042 0.15% $11,085
3/31/91 $11,135 0.04% $12,047 0.15% $11,102
4/30/91 $11,298 1.34% $12,209 0.15% $11,118
5/31/91 $11,396 0.89% $12,317 0.30% $11,152
6/30/91 $11,441 -0.10% $12,305 0.29% $11,184
7/31/91 $11,596 1.22% $12,455 0.15% $11,201
8/31/91 $11,718 1.32% $12,620 0.29% $11,233
9/30/91 $11,886 1.30% $12,784 0.44% $11,283
10/31/91 $11,966 0.90% $12,899 0.15% $11,299
11/30/91 $12,011 0.28% $12,935 0.29% $11,332
12/31/91 $12,251 2.15% $13,213 0.07% $11,340
1/31/92 $12,217 0.23% $13,243 0.15% $11,357
2/29/92 $12,205 0.03% $13,247 0.36% $11,398
3/31/92 $12,264 0.04% $13,253 0.51% $11,456
4/30/92 $12,392 0.89% $13,370 0.14% $11,472
5/31/92 $12,581 1.18% $13,528 0.14% $11,488
6/30/92 $12,766 1.68% $13,756 0.36% $11,530
7/31/92 $13,203 3.00% $14,168 0.21% $11,554
8/31/92 $13,004 -0.98% $14,029 0.28% $11,586
9/30/92 $13,023 0.65% $14,121 0.28% $11,619
10/31/92 $12,846 -0.98% $13,982 0.35% $11,659
11/30/92 $13,158 1.79% $14,232 0.14% $11,676
12/31/92 $13,361 1.02% $14,378 -0.07% $11,667
1/31/93 $13,541 1.16% $14,544 0.49% $11,725
2/28/93 $13,934 3.62% $15,071 0.35% $11,766
3/31/93 $13,890 -1.06% $14,911 0.35% $11,807
4/30/93 $13,985 1.01% $15,062 0.28% $11,840
5/31/93 $14,067 0.56% $15,146 0.14% $11,856
6/30/93 $14,317 1.67% $15,399 0.14% $11,873
7/31/93 $14,336 0.13% $15,419 0.00% $11,873
8/31/93 $14,640 2.08% $15,740 0.28% $11,906
9/30/93 $14,801 1.14% $15,919 0.21% $11,931
10/31/93 $14,832 0.19% $15,949 0.41% $11,980
11/30/93 $14,890 -0.88% $15,809 0.07% $11,989
12/31/93 $15,134 2.11% $16,143 0.00% $11,989
1/31/94 $15,299 1.14% $16,327 0.27% $12,021
2/28/94 $15,130 -2.59% $15,904 0.34% $12,062
3/31/94 $14,677 -4.07% $15,257 0.34% $12,103
4/30/94 $14,693 0.85% $15,386 0.14% $12,120
5/31/94 $14,777 0.87% $15,520 0.07% $12,128
6/30/94 $14,807 -0.61% $15,425 0.34% $12,170
7/31/94 $15,003 1.83% $15,708 0.27% $12,202
8/31/94 $15,047 0.35% $15,763 0.40% $12,251
9/30/94 $14,937 -1.47% $15,531 0.27% $12,284
10/31/94 $14,783 -1.78% $15,255 0.07% $12,293
11/30/94 $14,546 -1.81% $14,978 0.13% $12,309
12/31/94 $14,746 2.20% $15,308 0.00% $12,309
1/31/95 $15,104 2.86% $15,746 0.40% $12,358
2/28/95 $15,479 2.91% $16,204 0.40% $12,408
3/31/95 $15,682 1.15% $16,390 0.33% $12,448
4/30/95 $15,756 0.12% $16,410 0.33% $12,490
5/31/95 $16,137 3.19% $16,933 0.20% $12,515
6/30/95 $16,152 -0.87% $16,786 0.20% $12,540
7/31/95 $16,257 0.95% $16,946 0.00% $12,540
8/31/95 $16,423 1.27% $17,161 0.26% $12,572
9/30/95 $16,558 0.63% $17,269 0.20% $12,597
10/31/95 $16,770 1.45% $17,519 0.33% $12,639
11/30/95 $16,983 1.66% $17,810 -0.07% $12,630
12/31/95 $17,151 0.96% $17,981 -0.07% $12,621
1/31/96 $17,244 0.76% $18,118 0.59% $12,696
2/29/96 $17,230 -0.68% $17,995 0.32% $12,736
3/31/96 $17,063 -1.28% $17,764 0.52% $12,803
4/30/96 $17,080 -0.28% $17,714 0.39% $12,852
5/31/96 $17,112 -0.04% $17,707 0.19% $12,877
6/30/96 $17,286 1.09% $17,900 0.06% $12,885
7/31/96 $17,414 0.91% $18,063 0.19% $12,909
8/31/96 $17,478 -0.02% $18,060 0.19% $12,934
9/30/96 $17,719 1.40% $18,313 0.32% $12,975
10/31/96 $17,945 1.13% $18,519 0.32% $13,017
11/30/96 $18,220 1.83% $18,858 0.19% $13,041
12/31/96 $18,206 -0.42% $18,779 0.00% $13,041
1/31/97 $18,257 0.19% $18,815 0.32% $13,083
2/28/97 $18,421 0.92% $18,988 0.31% $13,124
3/31/97 $18,274 -1.33% $18,735 0.25% $13,156
4/30/97 $18,419 0.84% $18,893 0.12% $13,172
5/31/97 $18,647 1.51% $19,178 -0.06% $13,164
6/30/97 $18,875 1.07% $19,383 0.12% $13,180
7/31/97 $19,358 2.77% $19,920 0.12% $13,196
8/31/97 $19,251 -0.94% $19,733 0.19% $13,221
9/30/97 $19,569 1.19% $19,968 0.25% $13,254
10/31/97 $19,701 0.64% $20,096 0.25% $13,287
11/30/97 $19,833 0.59% $20,214 -0.06% $13,279
12/31/97 $20,138 1.46% $20,509 -0.12% $13,263
1/31/98 $20,358 1.03% $20,720 0.19% $13,288
2/28/98 $20,404 0.03% $20,727 0.19% $13,314
3/31/98 $20,415 0.09% $20,745 0.19% $13,339
4/30/98 $20,407 -0.45% $20,652 0.18% $13,363
5/31/98 $20,665 1.58% $20,978 0.18% $13,387
6/30/98 $20,763 0.39% $21,060 0.12% $13,403
7/31/98 $20,789 0.25% $21,113 0.12% $13,419
8/31/98 $21,031 1.55% $21,440 0.12% $13,435
9/30/98 $21,164 1.25% $21,708 0.12% $13,451
10/31/98 $21,135 0.00% $21,708 0.24% $13,484
11/30/98 $21,070 0.35% $21,784 0.00% $13,484
12/31/98 $21,106 0.25% $21,838 -0.06% $13,476
1/31/99 $21,279 1.19% $22,098 0.24% $13,508
2/28/99 $21,292 -0.44% $22,001 0.12% $13,524
Total Return 112.92% 120.01% 35.24%
- -------------------------------------------------------------------------------
</TABLE>
CLASS C (5/1/95 - 2/28/99)
The following line graph compares the performance of the Franklin High Yield
Tax-Free Income Fund's Class C shares to that of the Lehman Brothers Municipal
Bond Index, and to the Consumer Price Index based on a $10,000 investment from
5/1/95 to 2/28/99.
<TABLE>
<CAPTION>
Date Franklin High Yield Lehman Brothers CPI
Tax-Free Income Municipal Bond
Fund-Class C Index
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
5/1/95 $ 9,899 $10,000 $10,000
5/31/95 $10,138 3.19% $10,319 0.20% $10,020
6/30/95 $10,152 -0.87% $10,229 0.20% $10,040
7/31/95 $10,221 0.95% $10,326 0.00% $10,040
8/31/95 $10,319 1.27% $10,458 0.26% $10,066
9/29/95 $10,399 0.63% $10,523 0.20% $10,086
10/31/95 $10,525 1.45% $10,676 0.33% $10,120
11/30/95 $10,662 1.66% $10,853 -0.07% $10,112
12/29/95 $10,762 0.96% $10,957 -0.07% $10,105
1/31/96 $10,814 0.76% $11,041 0.59% $10,165
2/29/96 $10,800 -0.68% $10,966 0.32% $10,198
3/29/96 $10,692 -1.28% $10,825 0.52% $10,251
4/30/96 $10,697 -0.28% $10,795 0.39% $10,291
5/31/96 $10,712 -0.04% $10,791 0.19% $10,310
6/28/96 $10,816 1.09% $10,908 0.06% $10,316
7/31/96 $10,890 0.91% $11,008 0.19% $10,336
8/30/96 $10,925 -0.02% $11,005 0.19% $10,356
9/30/96 $11,070 1.40% $11,159 0.32% $10,389
10/31/96 $11,205 1.13% $11,286 0.32% $10,422
11/29/96 $11,371 1.83% $11,492 0.19% $10,442
12/31/96 $11,357 -0.42% $11,444 0.00% $10,442
1/31/97 $11,392 0.19% $11,466 0.32% $10,475
2/28/97 $11,489 0.92% $11,571 0.31% $10,508
3/31/97 $11,392 -1.33% $11,417 0.25% $10,534
4/30/97 $11,476 0.84% $11,513 0.12% $10,547
5/31/97 $11,611 1.51% $11,687 -0.06% $10,540
6/30/97 $11,747 1.07% $11,812 0.12% $10,553
7/31/97 $12,040 2.77% $12,139 0.12% $10,565
8/31/97 $11,969 -0.94% $12,025 0.19% $10,586
9/30/97 $12,170 1.19% $12,168 0.25% $10,612
10/31/97 $12,235 0.64% $12,246 0.25% $10,639
11/30/97 $12,311 0.59% $12,318 -0.06% $10,632
12/31/97 $12,504 1.46% $12,498 -0.12% $10,619
1/31/98 $12,634 1.03% $12,627 0.19% $10,640
2/28/98 $12,657 0.03% $12,631 0.19% $10,660
3/31/98 $12,657 0.09% $12,642 0.19% $10,680
4/30/98 $12,646 -0.45% $12,585 0.18% $10,699
5/31/98 $12,799 1.58% $12,784 0.18% $10,719
6/30/98 $12,853 0.39% $12,834 0.12% $10,731
7/31/98 $12,874 0.25% $12,866 0.12% $10,744
8/31/98 $13,006 1.55% $13,065 0.12% $10,757
9/30/98 $13,082 1.25% $13,229 0.12% $10,770
10/31/98 $13,069 0.00% $13,229 0.24% $10,796
11/30/98 $13,023 0.35% $13,275 0.00% $10,796
12/31/98 $13,028 0.25% $13,308 -0.06% $10,789
1/31/99 $13,139 1.19% $13,466 0.24% $10,815
2/28/99 $13,140 -0.44% $13,407 0.12% $10,828
Total Return 31.40% 34.07% 8.28%
- -----------------------------------------------------------------------
</TABLE>
*Source: Standard and Poor's Micropal.
Past performance is not predictive of future results.
30
FRANKLIN INDIANA TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
Your Fund's Goal: Franklin Indiana Tax-Free Income Fund seeks to provide high,
current income exempt from regular federal and Indiana state personal income
taxes through a portfolio consisting primarily of Indiana municipal bonds.(1)
- --------------------------------------------------------------------------------
STATE UPDATE(2)
[MAP OF INDIANA]
Indiana's manufacturing sector continued to be a powerful economic force in the
state during the year under review. Unlike most states, which have seen a
gradual shift away from manufacturing to trade and services, manufacturing
industries made up almost 25% of Indiana's employment. Among the state's largest
employers were vehicle manufacturing companies as well as those in the steel
industry. In 1998, the state's moderate labor costs, low utility rates and
affordable cost of living tended to attract such companies.
The state is a primary beneficiary of the continued U.S. economic expansion, as
manufacturing is generally highly dependent on economic cycles. The unemployment
rate was 2.7% in October 1998, well below the national rate of 4.3%. In
addition, median household income per capita grew and the state's poverty rate
declined faster than the national average during the reporting period.
However, Indiana's strong manufacturing sector also exposed the state to
economic risks that more diversified states might not face. Auto manufacturing
and steel are highly cyclical and export oriented. If the Canadian economy
weakens, it could have a negative effect on the state, as Canada is Indiana's
primary trading partner. Furthermore, the Asian crisis dealt Indiana a double
blow, however moderate. First, Asian economies recently were importing less than
they did before the crisis and second, they exported cheaper steel and other raw
materials to many of Indiana's trading partners.
CREDIT QUALITY BREAKDOWN*
Franklin Indiana Tax-Free Income Fund
Based on Total Long-Term Investments
2/28/99
[PIE CHART]
<TABLE>
<S> <C>
AAA 48.3%
AA 8.4%
A 19.2%
BBB 24.1%
</TABLE>
*Quality breakdown may include internal ratings for bonds not rated by a
national rating agency.
(1) For investors subject to the federal alternative minimum tax, a small
portion of this income may be subject to such tax. Distributions of capital
gains and of ordinary income from accrued market discount, if any, are generally
taxable.
(2) Source: Moody's, January 1999.
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 110 of
this report.
31
DIVIDEND DISTRIBUTIONS*
Franklin Indiana
Tax-Free Income Fund
3/1/98 - 2/28/99
<TABLE>
<CAPTION>
DIVIDEND
MONTH PER SHARE
- -----------------------------
<S> <C>
March 5.3 cents
April 5.3 cents
May 5.3 cents
June 5.3 cents
July 5.3 cents
August 5.3 cents
September 5.2 cents
October 5.2 cents
November 5.2 cents
December 5.1 cents
January 5.1 cents
February 5.1 cents
- -----------------------------
TOTAL 62.7 CENTS
</TABLE>
*Assumes shares were purchased and held for the entire accrual period. Since
dividends accrue daily, your actual distributions will vary depending on the
date you purchased your shares and any account activity during the month. Income
distributions include all accrued income earned by the fund during the reporting
period.
A growing payroll allowed Indiana to improve its financial position. In fiscal
1998, Indiana had combined reserve balances of $2.06 billion. Debt ratios were
among the nation's lowest, with debt per capita, at $213, ranked 40th
nationally. Reflecting these positive trends, Standard and Poor's, a national
credit rating agency, assigned Indiana an AA+ rating.(3) These trends should
continue into 1999, making the outlook for the Hoosier State rather upbeat.
PORTFOLIO NOTES
The improving national and state environments favorably affected Franklin
Indiana Tax-Free Income Fund's performance over the reporting period. The value
of many of the portfolio's bonds increased, as interest rates generally declined
in 1998. Lower interest rates led to higher municipal bond supply as issuers
took advantage of the rate environment to issue new or refunded debt.
Nationally, issuance in 1998 topped $284 billion, far outpacing the $220 billion
issued in 1997.
Partially because of the fund's robust performance during the period, total net
assets increased 8%, from $54.6 million on February 28, 1998, to approximately
$59.0 million at the end of the reporting period, giving the fund an
increasingly stable and diversified asset base. Such diversification helped
reduce the fund's exposure to risk and volatility that may affect any one
sector. In addition, the fund's superior credit quality, with 75% of the fund
rated A or higher, further increased the fund's stability.
The fund was able to take advantage of Franklin's size during the reporting
period to structure and control issues to fit the portfolio's needs. In managing
more than $50 billion in municipal assets, Franklin has a distinct advantage
over its competitors in locating value. Consequently, the fund was able to use
the entire fund group's buying power to find and control new issues. Many
dealers, underwriters and issuers know and trust Franklin and will come to us to
help them structure and price new issues, giving Franklin Indiana Tax-Free
Income Fund more leverage in defining the marketplace. Recent fund purchases
included Indiana State Educational Facilities Authority Revenue Valparaiso
University and Indiana Health Facility Financing Authority Hospital Revenue --
Sisters of St. Francis Health.
(3) This does not indicate Standard and Poor's rating of the fund.
32
We continue to follow our strategy of investing for income, price stability and
tax efficiency. The fund should perform well into the next reporting period,
aided by stable interest rates and an ample supply of new bonds. However, the
fund's new investments in the current, historically low interest-rate
environment has increased pressure on the dividend payment. Additionally, the
fund may make another capital gain distribution in June 1999.
Please remember that this discussion reflects our views, opinions and portfolio
holdings as of February 28, 1999. However, market and economic conditions are
changing constantly, which can be expected to affect our strategies and the
fund's portfolio composition. Although historical performance is no guarantee of
future results, these insights may help you understand our investment and
management philosophy.
Franklin Indiana Tax-Free Income Fund was closed to new investors after the
close of business on January 12, 1999, when Franklin Tax-Free Trust's board of
trustees approved a proposal to merge Franklin Indiana Tax-Free Income Fund into
Franklin Federal Tax-Free Income Fund, subject to shareholder approval. If the
merger is approved, existing shareholders would benefit from the lower expenses
of the larger Franklin Federal Tax-Free Income Fund. The investment goal of
Franklin Indiana Tax-Free Income Fund is to seek a high level of current income
exempt from federal and Indiana state income taxes by investing in Indiana
municipal securities. Although Franklin Federal Tax-Free Income Fund's
investment goal is similar, it seeks income exempt only from federal income tax
by investing in municipal securities throughout the nation.
PORTFOLIO BREAKDOWN
Franklin Indiana
Tax-Free Income Fund
2/28/99
<TABLE>
<CAPTION>
% OF TOTAL
LONG-TERM
SECTOR INVESTMENTS
- ---------------------------------------------
<S> <C>
Education 25.1%
Hospitals 15.0%
Industrial 12.1%
General Obligation 11.6%
Prerefunded 9.7%
Housing 6.3%
Sales Tax 5.1%
Certificates of Participation 4.8%
Utilities 4.5%
Health Care 3.0%
Transportation 2.7%
Tax Assessment 0.1%
</TABLE>
33
FRANKLIN INDIANA
TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
CLASS A (formerly Class I):
Subject to the current, maximum 4.25% initial sales charge. Prior to July 1,
1994, fund shares were offered at a lower initial sales charge; thus actual
total returns may differ. Effective May 1, 1994, the fund eliminated the sales
charge on reinvested dividends and implemented a Rule 12b-1 plan, which affects
subsequent performance. Past expense reductions by the fund's manager increased
the fund's total returns.
- --------------------------------------------------------------------------------
(1) Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
(2) Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the current, applicable,
maximum sales charge.
(3) Distribution rate is based on an annualization of the current 5.1 cent per
share monthly dividend and the maximum offering price of $12.56 on February 28,
1999.
(4) Taxable equivalent distribution rate and yield assume the 1999 maximum
combined federal and Indiana state personal income tax bracket of 42.3%, based
on the federal income tax rate of 39.6%.
(5) Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended February 28, 1999.
- --------------------------------------------------------------------------------
Bond prices, and thus the fund's share price, generally move in the opposite
direction from interest rates. Since markets can go down as well as up,
investment return and principal value will fluctuate with market conditions, and
you may have a gain or loss when you sell your shares.
- --------------------------------------------------------------------------------
PERFORMANCE SUMMARY AS OF 2/28/99
Distributions will vary based on earnings of the fund's portfolio and any
profits realized from the sale of the portfolio's securities. Past distributions
are not indicative of future trends. All total returns include reinvested
distributions at net asset value.
PRICE AND DISTRIBUTION INFORMATION (3/1/98-2/28/99)
<TABLE>
<CAPTION>
CLASS A CHANGE 2/28/99 2/28/98
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value -$0.04 $12.03 $12.07
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTIONS
---------------------------------
<S> <C>
Dividend Income $0.6270
Long-Term Capital Gain $0.0013
Short-Term Capital Gain $0.0320
TOTAL $0.6603
</TABLE>
PERFORMANCE
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR 5-YEAR 10-YEAR (9/1/87)
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return(1) +5.25% +32.92% +112.31% +141.93%
Average Annual Total Return(2) +0.74% +4.95% +7.35% +7.58%
Distribution Rate(3) 4.87%
Taxable Equivalent Distribution Rate(4) 8.43%
30-Day Standardized Yield(5) 3.89%
Taxable Equivalent Yield(4) 6.74%
</TABLE>
Franklin Indiana Tax-Free Income Fund paid distributions derived from long-term
capital gains of 0.13 cents ($0.0013) per share in June 1998. The fund hereby
designates such distributions as capital gain dividends per Internal Revenue
Code Section 852 (b)(3).
Past performance is not predictive of future results.
34
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT
The unmanaged index differs from the fund in composition, does not pay
management fees or expenses and includes reinvested dividends. One cannot invest
directly in an index. Total return represents the change in value of an
investment over the periods shown. It includes the current, applicable, maximum
sales charge, fund expenses, account fees and reinvested distributions.
Performance of the fund's shares exceeded the rate of inflation as measured by
the Consumer Price Index (CPI).
CLASS A (3/1/89 - 2/28/99)
The following line graph compares the performance of the Franklin Indiana
Tax-Free Income Fund's Class A shares to that of the Lehman Brothers Municipal
Bond Index, and to the Consumer Price Index based on a $10,000 investment from
3/1/89 to 2/28/99.
<TABLE>
<CAPTION>
Date Franklin Indiana Lehman CPI
Tax-Free Income Brothers
Fund-Class A Municipal
Bond Index
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
3/1/89 $ 9,571 $10,000 $10,000
3/31/89 $ 9,583 -0.24% $ 9,976 0.58% $10,058
4/30/89 $ 9,752 2.37% $10,212 0.65% $10,123
5/31/89 $ 9,967 2.08% $10,425 0.57% $10,181
6/30/89 $10,109 1.36% $10,567 0.24% $10,206
7/31/89 $10,206 1.36% $10,710 0.24% $10,230
8/31/89 $10,162 -0.98% $10,605 0.16% $10,246
9/30/89 $10,127 -0.30% $10,574 0.32% $10,279
10/31/89 $10,224 1.22% $10,703 0.48% $10,329
11/30/89 $10,371 1.75% $10,890 0.24% $10,353
12/31/89 $10,499 0.82% $10,979 0.16% $10,370
1/31/90 $10,434 -0.47% $10,928 1.03% $10,477
2/28/90 $10,544 0.89% $11,025 0.47% $10,526
3/31/90 $10,537 0.03% $11,028 0.55% $10,584
4/30/90 $10,471 -0.72% $10,949 0.16% $10,601
5/31/90 $10,734 2.18% $11,187 0.23% $10,625
6/30/90 $10,859 0.88% $11,286 0.54% $10,682
7/31/90 $11,025 1.48% $11,453 0.38% $10,723
8/31/90 $10,757 -1.45% $11,287 0.92% $10,822
9/30/90 $10,752 0.06% $11,294 0.84% $10,913
10/31/90 $10,901 1.81% $11,498 0.60% $10,978
11/30/90 $11,122 2.01% $11,729 0.22% $11,002
12/31/90 $11,127 0.44% $11,781 0.00% $11,002
1/31/91 $11,330 1.34% $11,939 0.60% $11,068
2/28/91 $11,398 0.87% $12,042 0.15% $11,085
3/31/91 $11,446 0.04% $12,047 0.15% $11,102
4/30/91 $11,599 1.34% $12,209 0.15% $11,118
5/31/91 $11,679 0.89% $12,317 0.30% $11,152
6/30/91 $11,674 -0.10% $12,305 0.29% $11,184
7/31/91 $11,842 1.22% $12,455 0.15% $11,201
8/31/91 $11,967 1.32% $12,620 0.29% $11,233
9/30/91 $12,136 1.30% $12,784 0.44% $11,283
10/31/91 $12,197 0.90% $12,899 0.15% $11,299
11/30/91 $12,257 0.28% $12,935 0.29% $11,332
12/31/91 $12,485 2.15% $13,213 0.07% $11,340
1/31/92 $12,502 0.23% $13,243 0.15% $11,357
2/29/92 $12,502 0.03% $13,247 0.36% $11,398
3/31/92 $12,536 0.04% $13,253 0.51% $11,456
4/30/92 $12,650 0.89% $13,370 0.14% $11,472
5/31/92 $12,890 1.18% $13,528 0.14% $11,488
6/30/92 $13,051 1.68% $13,756 0.36% $11,530
7/31/92 $13,501 3.00% $14,168 0.21% $11,554
8/31/92 $13,350 -0.98% $14,029 0.28% $11,586
9/30/92 $13,385 0.65% $14,121 0.28% $11,619
10/31/92 $13,186 -0.98% $13,982 0.35% $11,659
11/30/92 $13,481 1.79% $14,232 0.14% $11,676
12/31/92 $13,694 1.02% $14,378 -0.07% $11,667
1/31/93 $13,861 1.16% $14,544 0.49% $11,725
2/28/93 $14,312 3.62% $15,071 0.35% $11,766
3/31/93 $14,224 -1.06% $14,911 0.35% $11,807
4/30/93 $14,366 1.01% $15,062 0.28% $11,840
5/31/93 $14,435 0.56% $15,146 0.14% $11,856
6/30/93 $14,675 1.67% $15,399 0.14% $11,873
7/31/93 $14,672 0.13% $15,419 0.00% $11,873
8/31/93 $14,951 2.08% $15,740 0.28% $11,906
9/30/93 $15,133 1.14% $15,919 0.21% $11,931
10/31/93 $15,201 0.19% $15,949 0.41% $11,980
11/30/93 $15,170 -0.88% $15,809 0.07% $11,989
12/31/93 $15,453 2.11% $16,143 0.00% $11,989
1/31/94 $15,598 1.14% $16,327 0.27% $12,021
2/28/94 $15,275 -2.59% $15,904 0.34% $12,062
3/31/94 $14,707 -4.07% $15,257 0.34% $12,103
4/30/94 $14,765 0.85% $15,386 0.14% $12,120
5/31/94 $14,848 0.87% $15,520 0.07% $12,128
6/30/94 $14,815 -0.61% $15,425 0.34% $12,170
7/31/94 $15,055 1.83% $15,708 0.27% $12,202
8/31/94 $15,088 0.35% $15,763 0.40% $12,251
9/30/94 $14,898 -1.47% $15,531 0.27% $12,284
10/31/94 $14,680 -1.78% $15,255 0.07% $12,293
11/30/94 $14,397 -1.81% $14,978 0.13% $12,309
12/31/94 $14,683 2.20% $15,308 0.00% $12,309
1/31/95 $15,024 2.86% $15,746 0.40% $12,358
2/28/95 $15,366 2.91% $16,204 0.40% $12,408
3/31/95 $15,495 1.15% $16,390 0.33% $12,448
4/30/95 $15,528 0.12% $16,410 0.33% $12,490
5/31/95 $15,875 3.19% $16,933 0.20% $12,515
6/30/95 $15,827 -0.87% $16,786 0.20% $12,540
7/31/95 $15,903 0.95% $16,946 0.00% $12,540
8/31/95 $16,090 1.27% $17,161 0.26% $12,572
9/30/95 $16,166 0.63% $17,269 0.20% $12,597
10/31/95 $16,354 1.45% $17,519 0.33% $12,639
11/30/95 $16,558 1.66% $17,810 -0.07% $12,630
12/31/95 $16,762 0.96% $17,981 -0.07% $12,621
1/31/96 $16,840 0.76% $18,118 0.59% $12,696
2/29/96 $16,776 -0.68% $17,995 0.32% $12,736
3/31/96 $16,640 -1.28% $17,764 0.52% $12,803
4/30/96 $16,619 -0.28% $17,714 0.39% $12,852
5/31/96 $16,640 -0.04% $17,707 0.19% $12,877
6/30/96 $16,807 1.09% $17,900 0.06% $12,885
7/31/96 $16,916 0.91% $18,063 0.19% $12,909
8/31/96 $16,937 -0.02% $18,060 0.19% $12,934
9/30/96 $17,150 1.40% $18,313 0.32% $12,975
10/31/96 $17,320 1.13% $18,519 0.32% $13,017
11/30/96 $17,624 1.83% $18,858 0.19% $13,041
12/31/96 $17,602 -0.42% $18,779 0.00% $13,041
1/31/97 $17,624 0.19% $18,815 0.32% $13,083
2/28/97 $17,767 0.92% $18,988 0.31% $13,124
3/31/97 $17,608 -1.33% $18,735 0.25% $13,156
4/30/97 $17,737 0.84% $18,893 0.12% $13,172
5/31/97 $17,943 1.51% $19,178 -0.06% $13,164
6/30/97 $18,119 1.07% $19,383 0.12% $13,180
7/31/97 $18,496 2.77% $19,920 0.12% $13,196
8/31/97 $18,411 -0.94% $19,733 0.19% $13,221
9/30/97 $18,603 1.19% $19,968 0.25% $13,254
10/31/97 $18,719 0.64% $20,096 0.25% $13,287
11/30/97 $18,867 0.59% $20,214 -0.06% $13,279
12/31/97 $19,096 1.46% $20,509 -0.12% $13,263
1/31/98 $19,245 1.03% $20,720 0.19% $13,288
2/28/98 $19,283 0.03% $20,727 0.19% $13,314
3/31/98 $19,304 0.09% $20,745 0.19% $13,339
4/30/98 $19,292 -0.45% $20,652 0.18% $13,363
5/31/98 $19,491 1.58% $20,978 0.18% $13,387
6/30/98 $19,582 0.39% $21,060 0.12% $13,403
7/31/98 $19,636 0.25% $21,113 0.12% $13,419
8/31/98 $19,886 1.55% $21,440 0.12% $13,435
9/30/98 $20,087 1.25% $21,708 0.12% $13,451
10/31/98 $20,024 0.00% $21,708 0.24% $13,484
11/30/98 $20,110 0.35% $21,784 0.00% $13,484
12/31/98 $20,162 0.25% $21,838 -0.06% $13,476
1/31/99 $20,366 1.19% $22,098 0.24% $13,508
2/28/99 $20,321 -0.44% $22,001 0.12% $13,524
Total Return 103.21% 120.01% 35.24%
- -------------------------------------------------------------------------------
</TABLE>
*Source: Standard and Poor's Micropal.
Past performance is not predictive of future results.
35
FRANKLIN MICHIGAN TAX-FREE INCOME FUND
CREDIT QUALITY BREAKDOWN*
Franklin Michigan Tax-Free Income Fund
Based on Total Long-Term Investments
2/28/99
[PIE CHART]
<TABLE>
<S> <C>
AAA 52.9%
AA 23.4%
A 4.9%
BBB 18.8%
</TABLE>
*Quality breakdown may include internal ratings for bonds not rated by a
national rating agency.
- --------------------------------------------------------------------------------
Your Fund's Goal: Franklin Michigan Tax-Free Income Fund seeks to provide high,
current income exempt from regular federal and Michigan state personal income
taxes through a portfolio consisting primarily of Michigan municipal bonds.(1)
- --------------------------------------------------------------------------------
STATE UPDATE
[MAP OF MICHIGAN]
Perhaps no other state has benefited more than Michigan from the nation's
prolonged economic expansion. Since July 1996, the state's unemployment rate has
been lower than the U.S. average, in contrast to the prior 15-year period, when
Michigan's rate was higher than the national average. Personal income grew 4.6%
in 1997, extending a period of strong growth that began with the end of the
recession in the early '90s. While the state is still dependent on the cyclical
auto industry, corporate restructuring and reinvestment improved the auto
companies' competitive positions, which should make them less vulnerable to
economic cycles than in the past.(2)
As a result of the healthy economic environment, the state was able to improve
its financial situation significantly. Spending in recent years was below
revenue levels, eliminating the state's once sizable deficit and allowing
Michigan to build up a large surplus. At the same time, the government went
through a period of downsizing and cost reduction and control. Furthermore,
these factors enabled the state to introduce substantial tax cuts.(3)
(1) For investors subject to the federal alternative minimum tax, a small
portion of this income may be subject to such tax. Distributions of capital
gains and of ordinary income from accrued market discount, if any, are generally
taxable.
A non-diversified fund may be subject to greater risk of adverse economic or
regulatory developments in that state than a fund with broader geographical
diversification.
(2) Source: Fitch IBCA, November 1998.
(3) Source: Moody's, November 1998.
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 113 of
this report.
36
With record low unemployment, strong personal income growth, solid financial
operations and an auto industry less susceptible to economic cycles, Michigan is
hitting on all cylinders. Reflecting the state's healthy economy, Moody's, a
national credit rating agency, rated Michigan's general obligation debt Aa1.(4)
PORTFOLIO NOTES
During the reporting period, the fund's total net assets experienced remarkable
growth of 84%, from $9.3 million on February 28, 1998, to $17.1 million on
February 28, 1999. The fund diligently sought to buy municipal securities with
the best relative value consistent with the goal of providing long-term,
tax-exempt income to shareholders. The fund purchased current coupon bonds with
at least 10-year call protection in an attempt to protect the fund's long-term
income stream. As a result, our disciplined investment approach helped protect
the fund's share value and maintain a competitive yield. The fund's share price,
as measured by net asset value, increased seven cents, from $11.02 on February
28, 1998, to $11.09 on February 28, 1999. However, due to the low interest-rate
environment, it was difficult for the fund to generate enough capital losses to
offset the gains realized from bond sales. Thus, the fund made distributions of
0.47 cents per share in long-term capital gains and 1.78 cents per share in
short-term capital gains in June.
The fund found value in and purchased several bonds including Michigan State
Building Authority Revenue; Kent County Building Authority General Obligation;
Detroit Water Supply System Revenue; Michigan State Hospital Financing Authority
Revenue for the Hospital - Charity Obligation Group and Oakland County Economic
Development Corp. for the Cranbrook Educational Community. These purchases
maintained diversification in a broad range of sectors, which helped reduce the
fund's exposure to risk and volatility that may affect any one sector.
We are closely monitoring the supply of Michigan tax-exempt municipal bonds. For
1998, the state issued a total of $9.9 billion, a remarkable 67.2% increase from
1997. Because supply outpaced demand during the period, the purchases mentioned
above were acquired at relatively attractive yields. The state's low debt burden
and growing need for new infrastructure such as highways, schools and affordable
housing should maintain the requirement for new borrowing. In addition, if
interest rates remain low,
DIVIDEND DISTRIBUTIONS*
Franklin Michigan
Tax-Free Income Fund
3/1/98 - 2/28/99
<TABLE>
<CAPTION>
DIVIDEND
MONTH PER SHARE
- -----------------------------
<S> <C>
March 4.8 cents
April 4.8 cents
May 4.8 cents
June 4.8 cents
July 4.8 cents
August 4.8 cents
September 4.8 cents
October 4.8 cents
November 4.8 cents
December 4.7 cents
January 4.7 cents
February 4.7 cents
- -----------------------------
TOTAL 57.3 CENTS
</TABLE>
*Assumes shares were purchased and held for the entire accrual period. Since
dividends accrue daily, your actual distributions will vary depending on the
date you purchased your shares and any account activity during the month. Income
distributions include all accrued income earned by the fund during the
reporting period.
(4) This does not indicate Moody's rating of the fund.
37
PORTFOLIO BREAKDOWN
Franklin Michigan
Tax-Free Income Fund
2/28/99
<TABLE>
<CAPTION>
% OF TOTAL
LONG-TERM
SECTOR INVESTMENTS
- ----------------------------------
<S> <C>
Hospitals 28.4%
Education 20.3%
Utilities 10.7%
Prerefunded 9.7%
Other Revenue 8.0%
Transportation 6.1%
Industrial 6.0%
Housing 5.4%
General Obligation 4.8%
Tax Allocation 0.6%
</TABLE>
refunding issues resulting from lower borrowing costs available to issuers could
add to the supply of new issues. Going forward, we will continue to follow our
strategy of investing for income, price stability and tax efficiency.
Please remember that this discussion reflects our views, opinions and portfolio
holdings as of February 28, 1999. However, market and economic conditions are
changing constantly, which can be expected to affect our strategies and the
fund's portfolio composition. Although historical performance is no guarantee of
future results, these insights may help you understand our investment and
management philosophy.
Franklin Michigan Tax-Free Income Fund was closed to new investors after the
close of business on January 12, 1999, when Franklin Tax-Free Trust's board of
trustees approved a proposal to merge the Franklin Michigan Tax-Free Income Fund
into Franklin Michigan Insured Tax-Free Income Fund, subject to shareholder
approval. The board of trustees believes this proposed merger would benefit
shareholders. The investment goal of both funds is to seek a high level of
current income exempt from federal and Michigan state income taxes; however,
Franklin Michigan Insured Tax-Free Income Fund invests primarily in insured
municipal securities from the state of Michigan.(5)
(5) Fund shares are not insured by any U.S. or other government agency, are
subject to market risks and will fluctuate in value. Insurance relates only to
the payment of principal and interest on the portfolio's insured securities and
the terms of the insurance as outlined in the prospectus. No representation is
made as to any insurer's ability to meet its commitments.
38
PERFORMANCE SUMMARY AS OF 2/28/99
Distributions will vary based on earnings of the fund's portfolio and any
profits realized from the sale of the portfolio's securities. Past distributions
are not indicative of future trends. All total returns include reinvested
distributions at net asset value.
PRICE AND DISTRIBUTION INFORMATION (3/1/98-2/28/99)
<TABLE>
<CAPTION>
CLASS A CHANGE 2/28/99 2/28/98
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value +$0.07 $11.09 $11.02
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTIONS
---------------------------------
<S> <C>
Dividend Income $0.5730
Long-Term Capital Gain $0.0047
Short-Term Capital Gain $0.0178
TOTAL $0.5955
</TABLE>
PERFORMANCE
<TABLE>
<CAPTION>
CLASS A 1-YEAR (7/1/96)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) +6.15% +25.80%
Average Annual Total Return(2) +1.63% +7.25%
Distribution Rate(3) 4.56%
Taxable Equivalent Distribution Rate(4) 7.90%
30-Day Standardized Yield(5) 4.55%
Taxable Equivalent Yield(4) 7.88%
</TABLE>
FRANKLIN MICHIGAN
TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
CLASS A (formerly Class I):
Subject to the maximum 4.25% initial sales charge. The fund's manager agreed in
advance to waive a portion of its management fees, which reduces operating
expenses and increases yield, distribution rate and total return to
shareholders. Without these reductions, the fund's distribution rate and total
return would have been lower, and yield for the period would have been 3.76%.
The fee waiver may be discontinued at any time upon notice to the fund's Board
of Trustees.
- --------------------------------------------------------------------------------
(1) Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
(2) Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the applicable, maximum
sales charge.
(3) Distribution rate is based on an annualization of the current 4.4 cent per
share monthly dividend and the maximum offering price of $11.58 on February 28,
1999.
(4) Taxable equivalent distribution rate and yield assume the 1999 maximum
combined federal and Michigan state personal income tax bracket of 42.3%, based
on the federal income tax rate of 39.6%.
(5). Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended February 28, 1999.
- --------------------------------------------------------------------------------
Bond prices, and thus the fund's share price, generally move in the opposite
direction from interest rates. Since markets can go down as well as up,
investment return and principal value will fluctuate with market conditions, and
you may have a gain or loss when you sell your shares.
- --------------------------------------------------------------------------------
Franklin Michigan Tax-Free Income Fund paid distributions derived from long-term
capital gains of 0.47 cents ($0.0047) per share in June 1998. The fund hereby
designates such distributions as capital gain dividends per Internal Revenue
Code Section 852 (b)(3).
Past performance is not predictive of future results.
39
FRANKLIN MICHIGAN
TAX-FREE INCOME FUND
AVERAGE ANNUAL TOTAL RETURN
2/28/99
<TABLE>
<CAPTION>
CLASS A
- ---------------------------------
<S> <C>
1-Year +1.63%
Since Inception (7/1/96) +7.25%
</TABLE>
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT
The unmanaged index differs from the fund in composition, does not pay
management fees or expenses and includes reinvested dividends. One cannot invest
directly in an index. Total return represents the change in value of an
investment over the periods shown. It includes the applicable, maximum sales
charge, fund expenses, account fees and reinvested distributions. Performance of
the fund's shares exceeded the rate of inflation as measured by the Consumer
Price Index (CPI).
CLASS A (7/1/96 - 2/28/99)
The following line graph compares the performance of the Franklin Michigan
Tax-Free Income Fund's Class A shares to that of the Lehman Brothers Municipal
Bond Index, and to the Consumer Price Index based on a $10,000 investment from
7/1/96 to 2/28/99.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Date Franklin Michigan Lehman CPI
Tax-Free Income Brothers
Fund-Class A Municipal Bond
Index
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
7/1/96 $9,579 $10,000 $10,000
7/31/96 $9,703 0.91% $10,091 0.19% $10,019
8/31/96 $9,655 -0.02% $10,089 0.19% $10,038
9/30/96 $9,856 1.40% $10,230 0.32% $10,070
10/31/96 $9,933 1.13% $10,346 0.32% $10,102
11/30/96 $10,101 1.83% $10,535 0.19% $10,122
12/31/96 $10,058 -0.42% $10,491 0.00% $10,122
1/31/97 $10,053 0.19% $10,511 0.32% $10,154
2/28/97 $10,155 0.92% $10,608 0.31% $10,185
3/31/97 $9,996 -1.33% $10,466 0.25% $10,211
4/30/97 $10,112 0.84% $10,554 0.12% $10,223
5/31/97 $10,278 1.51% $10,714 -0.06% $10,217
6/30/97 $10,404 1.07% $10,828 0.12% $10,229
7/31/97 $10,720 2.77% $11,128 0.12% $10,242
8/31/97 $10,608 -0.94% $11,024 0.19% $10,261
9/30/97 $10,746 1.19% $11,155 0.25% $10,287
10/31/97 $10,825 0.64% $11,226 0.25% $10,312
11/30/97 $10,924 0.59% $11,293 -0.06% $10,306
12/31/97 $11,135 1.46% $11,457 -0.12% $10,294
1/31/98 $11,235 1.03% $11,575 0.19% $10,313
2/28/98 $11,335 0.03% $11,579 0.19% $10,333
3/31/98 $11,343 0.09% $11,589 0.19% $10,353
4/30/98 $11,331 -0.45% $11,537 0.18% $10,371
5/31/98 $11,516 1.58% $11,719 0.18% $10,390
6/30/98 $11,579 0.39% $11,765 0.12% $10,402
7/31/98 $11,608 0.25% $11,795 0.12% $10,415
8/31/98 $11,775 1.55% $11,977 0.12% $10,427
9/30/98 $11,953 1.25% $12,127 0.12% $10,440
10/31/98 $11,897 0.00% $12,127 0.24% $10,465
11/30/98 $11,949 0.35% $12,170 0.00% $10,465
12/31/98 $11,978 0.25% $12,200 -0.06% $10,459
1/31/99 $12,115 1.19% $12,345 0.24% $10,484
2/28/99 $12,050 -0.44% $12,291 0.12% $10,496
Total Return 20.50% 22.91% 4.96%
- -----------------------------------------------------------------------------------------------
</TABLE>
*Source: Standard and Poor's Micropal.
Past performance is not predictive of future results.
40
FRANKLIN NEW JERSEY TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
Your Fund's Goal: Franklin New Jersey Tax-Free Income Fund seeks to provide
high, current income exempt from regular federal and New Jersey state personal
income taxes through a portfolio consisting primarily of New Jersey municipal
bonds.(1)
- --------------------------------------------------------------------------------
STATE UPDATE(2)
[MAP OF NEW JERSEY]
During the year under review, everything came up roses in the Garden State. The
well-diversified economy expanded beyond expectations during 1998, showing gains
of 2.3% after a 2% increase in 1997. The state's employment growth was the
region's strongest, with virtually every sector except for manufacturing
recording job gains. Unemployment continued to decline, falling to 4.8% in 1998.
Due to these factors, Moody's, a national credit rating agency, assigned New
Jersey an Aa1 rating.
New Jersey enjoyed income per capita of $32,654, second only to Connecticut. The
state's central location, modern transportation and state-of-the-art port
facilities make it an ideal location for many corporate headquarters and
international business offices. Furthermore, due to its proximity to New York
City, many professionals working in New York reside in New Jersey. As a result
of the state's growing number of citizens with incomes more than $100,000,
income tax collections have surged recently, even outpacing the state's overall
impressive economic performance.
Somewhat surprisingly, tax-supported debt has ballooned in the past few years,
growing faster than increases in population and personal income. At the end of
1998, net tax-supported debt was approximately $12.8 billion, the fourth highest
in the nation. However, a significant portion of the increase was due to the
state's emphasis on improving its transportation infrastructure and renovating
office buildings, which should support economic growth going forward. In
addition, New Jersey's debt levels remain affordable, due to its strong,
well-diversified economy.
CREDIT QUALITY BREAKDOWN*
Franklin New Jersey Tax-Free
Income Fund
Based on Total Long-Term Investments
2/28/99
[PIE CHART]
<TABLE>
<S> <C>
AAA 73.0%
AA 7.0%
A 5.7%
BBB 13.1%
Below Investment Grade 1.2%
</TABLE>
*Quality breakdown may include internal ratings for bonds not rated by a
national rating agency.
(1) For investors subject to the federal alternative minimum tax, a small
portion of this income may be subject to such tax. Distributions of capital
gains and of ordinary income from accrued market discount, if any, are generally
taxable.
(2) Source: Moody's, January 1999. This does not indicate Moody's rating of the
fund.
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 116 of
this report.
41
PORTFOLIO BREAKDOWN
Franklin New Jersey
Tax-Free Income Fund
2/28/99
<TABLE>
<CAPTION>
% OF TOTAL
LONG-TERM
SECTOR INVESTMENTS
- ---------------------------------------------
<S> <C>
Hospitals 15.9%
Utilities 15.8%
Prerefunded 15.0%
Education 12.9%
Transportation 12.8%
Housing 10.2%
Other Revenue 6.8%
General Obligation 3.5%
Health Care 3.1%
Certificates of Participation 2.9%
Industrial 1.1%
</TABLE>
New Jersey's large and broad-based economy, high levels of personal income and
strong financial operations make the outlook for 1999 quite encouraging.
PORTFOLIO NOTES
More than 50% of the municipal debt brought to market nationally in 1998 was
insured, as was the majority of the fund's purchases. Most insured bonds carry
an AAA rating, thus the percentage of the fund's AAA-rated securities increased
during the period. As of February 28, 1999, AAA-rated bonds comprised 73.0% of
the fund's total long-term investments, compared with 67.4% a year earlier.
New Jersey's 1998 issuance was 3.7% less than 1997's, which was a very strong
year. There continued to be large demand for the state's bonds, and yields
remained significantly higher compared with national yield levels. In spite of
the strong appetite for New Jersey's securities, credit spreads, the interest
rate difference between higher- and lower-quality issues, did widen toward the
close of the calendar year. Prior to the fourth quarter of 1998, speculative
bond yields were not high enough to compensate for the greater risk. We did not
buy the higher-risk issues, as we did not see the reward for the added risk the
projects involved.
Franklin New Jersey Tax-Free Income Fund's Class A share price, as measured by
net asset value, increased four cents, from $11.92 on February 28, 1998, to
$11.96 on February 28, 1999. The fund was able to purchase some attractively
yielding bonds across a variety of industries, thus maintaining the fund's
diversification. The fund's composition changed slightly during the period.
Hospitals, comprising 15.9% of total long-term investments, was the largest
sector holding, followed by utilities, which made up 15.8% of the portfolio.
During the period, Franklin New Jersey Tax-Free Income Fund purchased Rutgers
State University, New Brunswick Parking Authority Revenue, Moorestown Township
School District, New Jersey Health Care Facility Financing Authority Revenue St.
Barnabas Health and Hudson County Improvement Authority Solid Waste Systems
Revenue - Koppers Site Project.
As in the previous reporting period, many issuers took advantage of declining
interest rates to refinance outstanding debt. This increased the number of
prerefunded bonds in the fund's portfolio. When a bond is prerefunded, a new
issue is brought to market with a lower interest rate to pay off the older issue
at its first call date. In most cases, the proceeds from the sale of the new
bonds are invested in U.S. Treasury securities that mature on the first call
date of the original bonds. Because of the U.S. Treasury backing, prerefunded
bonds usually offer a substantial price increase depending on their call date.
42
Generally, we look to sell prerefunded bonds as they approach five years to
their call date. At this point, the premium on prerefunded bonds often begins to
decline rapidly to the stated call price. Our strategy aims to capture the
bond's premium, increase the fund's call protection and protect its share value.
Going forward, we believe New Jersey municipal securities will continue to be
attractive investments for individuals seeking tax-free income. However, due to
the low interest- rate environment, it may be difficult to generate enough
capital losses to offset the gains realized from prerefunded bond sales. Thus,
the fund may make a capital gain distribution in June 1999.
Please remember that this discussion reflects our views, opinions and portfolio
holdings as of February 28, 1999. However, market and economic conditions are
changing constantly, which can be expected to affect our strategies and the
fund's portfolio composition. Although historical performance is no guarantee of
future results, these insights may help you understand our investment and
management philosophy.
DIVIDEND DISTRIBUTIONS*
Franklin New Jersey Tax-Free Income Fund
3/1/98 - 2/28/99
<TABLE>
<CAPTION>
DIVIDEND PER SHARE
---------------------------
MONTH CLASS A CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C>
March 5.2 cents 4.62 cents
April 5.2 cents 4.64 cents
May 5.2 cents 4.64 cents
June 5.2 cents 4.64 cents
July 5.2 cents 4.64 cents
August 5.2 cents 4.64 cents
September 5.1 cents 4.54 cents
October 5.1 cents 4.52 cents
November 5.1 cents 4.52 cents
December 5.1 cents 4.52 cents
January 5.1 cents 4.52 cents
February 5.1 cents 4.52 cents
- --------------------------------------------------------------------------------
TOTAL 61.8 CENTS 54.96 CENTS
</TABLE>
*Assumes shares were purchased and held for the entire accrual period. Since
dividends accrue daily, your actual distributions will vary depending on the
date you purchased your shares and any account activity during the month. Income
distributions include all accrued income earned by the fund during the reporting
period.
43
FRANKLIN NEW JERSEY
TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
CLASS A (formerly Class I):
Subject to the current, maximum 4.25% initial sales charge. Prior to July 1,
1994, fund shares were offered at a lower initial sales charge; thus actual
total returns may differ. Effective May 1, 1994, the fund eliminated the sales
charge on reinvested dividends and implemented a Rule 12b-1 plan, which affects
subsequent performance.
CLASS C (formerly Class II):
Subject to 1% initial sales charge and 1% contingent deferred sales charge for
shares redeemed within 18 months of investment. These shares have higher annual
fees and expenses than Class A shares.
- --------------------------------------------------------------------------------
(1) Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
(2) Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the current, applicable,
maximum sales charge(s) for that class.
(3) Distribution rate is based on an annualization of the respective class's
current monthly dividend and the maximum offering price per share on February
28, 1999.
(4) Taxable equivalent distribution rate and yield assume the 1999 maximum
combined federal and New Jersey state personal income tax bracket of 43.4%,
based on the federal income tax rate of 39.6%.
(5) Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended February 28, 1999.
- --------------------------------------------------------------------------------
Bond prices, and thus the fund's share price, generally move in the opposite
direction from interest rates. Since markets can go down as well as up,
investment return and principal value will fluctuate with market conditions, and
you may have a gain or loss when you sell your shares.
- --------------------------------------------------------------------------------
PERFORMANCE SUMMARY AS OF 2/28/99
Distributions will vary based on earnings of the fund's portfolio and any
profits realized from the sale of the portfolio's securities. Past distributions
are not indicative of future trends. All total returns include reinvested
distributions at net asset value.
PRICE AND DISTRIBUTION INFORMATION (3/1/98-2/28/99)
<TABLE>
<CAPTION>
CLASS A CHANGE 2/28/99 2/28/98
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value +$0.04 $11.96 $11.92
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTIONS
---------------------------------
<S> <C>
Dividend Income $0.6180
</TABLE>
<TABLE>
<CAPTION>
CLASS C CHANGE 2/28/99 2/28/98
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value +$0.05 $12.03 $11.98
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTIONS
---------------------------------
<S> <C>
Dividend Income $0.5496
</TABLE>
PERFORMANCE
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR 5-YEAR 10-YEAR (5/12/88)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return(1) +5.63% +33.19% +107.84% +126.59%
Average Annual Total Return(2) +1.13% +4.99% +7.12% +7.44%
Distribution Rate(3) 4.80%
Taxable Equivalent Distribution Rate(4) 8.49%
30-Day Standardized Yield(5) 3.83%
Taxable Equivalent Yield(4) 6.77%
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS C 1-YEAR 3-YEAR (5/1/95)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) +5.09% +18.50% +28.00%
Average Annual Total Return(2) +3.06% +5.46% +6.39%
Distribution Rate(3) 4.38%
Taxable Equivalent Distribution Rate(4) 7.75%
30-Day Standardized Yield(5) 3.40%
Taxable Equivalent Yield(4) 6.01%
</TABLE>
Past performance is not predictive of future results.
44
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT
The unmanaged index differs from the fund in composition, does not pay
management fees or expenses and includes reinvested dividends. One cannot invest
directly in an index. Total return represents the change in value of an
investment over the periods shown. It includes the current, applicable, maximum
sales charge(s), fund expenses, account fees and reinvested distributions.
Performance of the fund's shares exceeded the rate of inflation as measured by
the Consumer Price Index (CPI).
CLASS A (3/1/89 - 2/28/99)
The following line graph compares the performance of the Franklin New Jersey
Tax-Free Income Fund's Class A shares to that of the Lehman Brothers Municipal
Bond Index, and to the Consumer Price Index based on a $10,000 investment from
3/1/89 to 2/28/99.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Date Franklin New Jersey Lehman CPI
Tax-Free Income Brothers
Fund-Class A Municipal
Bond
Index
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
3/1/89 $9,572 $10,000 $10,000
3/31/89 $9,568 -0.24% $9,976 0.58% $10,058
4/30/89 $9,802 2.37% $10,212 0.65% $10,123
5/31/89 $10,009 2.08% $10,425 0.57% $10,181
6/30/89 $10,135 1.36% $10,567 0.24% $10,206
7/31/89 $10,205 1.36% $10,710 0.24% $10,230
8/31/89 $10,106 -0.98% $10,605 0.16% $10,246
9/30/89 $10,035 -0.30% $10,574 0.32% $10,279
10/31/89 $10,201 1.22% $10,703 0.48% $10,329
11/30/89 $10,350 1.75% $10,890 0.24% $10,353
12/31/89 $10,412 0.82% $10,979 0.16% $10,370
1/31/90 $10,330 -0.47% $10,928 1.03% $10,477
2/28/90 $10,452 0.89% $11,025 0.47% $10,526
3/31/90 $10,437 0.03% $11,028 0.55% $10,584
4/30/90 $10,363 -0.72% $10,949 0.16% $10,601
5/31/90 $10,576 2.18% $11,187 0.23% $10,625
6/30/90 $10,691 0.88% $11,286 0.54% $10,682
7/31/90 $10,887 1.48% $11,453 0.38% $10,723
8/31/90 $10,609 -1.45% $11,287 0.92% $10,822
9/30/90 $10,624 0.06% $11,294 0.84% $10,913
10/31/90 $10,824 1.81% $11,498 0.60% $10,978
11/30/90 $11,073 2.01% $11,729 0.22% $11,002
12/31/90 $11,096 0.44% $11,781 0.00% $11,002
1/31/91 $11,275 1.34% $11,939 0.60% $11,068
2/28/91 $11,403 0.87% $12,042 0.15% $11,085
3/31/91 $11,437 0.04% $12,047 0.15% $11,102
4/30/91 $11,577 1.34% $12,209 0.15% $11,118
5/31/91 $11,675 0.89% $12,317 0.30% $11,152
6/30/91 $11,683 -0.10% $12,305 0.29% $11,184
7/31/91 $11,865 1.22% $12,455 0.15% $11,201
8/31/91 $11,971 1.32% $12,620 0.29% $11,233
9/30/91 $12,132 1.30% $12,784 0.44% $11,283
10/31/91 $12,206 0.90% $12,899 0.15% $11,299
11/30/91 $12,259 0.28% $12,935 0.29% $11,332
12/31/91 $12,478 2.15% $13,213 0.07% $11,340
1/31/92 $12,509 0.23% $13,243 0.15% $11,357
2/29/92 $12,518 0.03% $13,247 0.36% $11,398
3/31/92 $12,538 0.04% $13,253 0.51% $11,456
4/30/92 $12,649 0.89% $13,370 0.14% $11,472
5/31/92 $12,805 1.18% $13,528 0.14% $11,488
6/30/92 $12,985 1.68% $13,756 0.36% $11,530
7/31/92 $13,442 3.00% $14,168 0.21% $11,554
8/31/92 $13,278 -0.98% $14,029 0.28% $11,586
9/30/92 $13,288 0.65% $14,121 0.28% $11,619
10/31/92 $13,134 -0.98% $13,982 0.35% $11,659
11/30/92 $13,436 1.79% $14,232 0.14% $11,676
12/31/92 $13,604 1.02% $14,378 -0.07% $11,667
1/31/93 $13,732 1.16% $14,544 0.49% $11,725
2/28/93 $14,134 3.62% $15,071 0.35% $11,766
3/31/93 $14,047 -1.06% $14,911 0.35% $11,807
4/30/93 $14,141 1.01% $15,062 0.28% $11,840
5/31/93 $14,211 0.56% $15,146 0.14% $11,856
6/30/93 $14,450 1.67% $15,399 0.14% $11,873
7/31/93 $14,470 0.13% $15,419 0.00% $11,873
8/31/93 $14,734 2.08% $15,740 0.28% $11,906
9/30/93 $14,876 1.14% $15,919 0.21% $11,931
10/31/93 $14,920 0.19% $15,949 0.41% $11,980
11/30/93 $14,854 -0.88% $15,809 0.07% $11,989
12/31/93 $15,098 2.11% $16,143 0.00% $11,989
1/31/94 $15,231 1.14% $16,327 0.27% $12,021
2/28/94 $14,924 -2.59% $15,904 0.34% $12,062
3/31/94 $14,374 -4.07% $15,257 0.34% $12,103
4/30/94 $14,419 0.85% $15,386 0.14% $12,120
5/31/94 $14,527 0.87% $15,520 0.07% $12,128
6/30/94 $14,430 -0.61% $15,425 0.34% $12,170
7/31/94 $14,669 1.83% $15,708 0.27% $12,202
8/31/94 $14,727 0.35% $15,763 0.40% $12,251
9/30/94 $14,536 -1.47% $15,531 0.27% $12,284
10/31/94 $14,278 -1.78% $15,255 0.07% $12,293
11/30/94 $13,981 -1.81% $14,978 0.13% $12,309
12/31/94 $14,315 2.20% $15,308 0.00% $12,309
1/31/95 $14,730 2.86% $15,746 0.40% $12,358
2/28/95 $15,094 2.91% $16,204 0.40% $12,408
3/31/95 $15,232 1.15% $16,390 0.33% $12,448
4/30/95 $15,262 0.12% $16,410 0.33% $12,490
5/31/95 $15,659 3.19% $16,933 0.20% $12,515
6/30/95 $15,567 -0.87% $16,786 0.20% $12,540
7/31/95 $15,653 0.95% $16,946 0.00% $12,540
8/31/95 $15,822 1.27% $17,161 0.26% $12,572
9/30/95 $15,923 0.63% $17,269 0.20% $12,597
10/31/95 $16,148 1.45% $17,519 0.33% $12,639
11/30/95 $16,389 1.66% $17,810 -0.07% $12,630
12/31/95 $16,547 0.96% $17,981 -0.07% $12,621
1/31/96 $16,622 0.76% $18,118 0.59% $12,696
2/29/96 $16,513 -0.68% $17,995 0.32% $12,736
3/31/96 $16,333 -1.28% $17,764 0.52% $12,803
4/30/96 $16,309 -0.28% $17,714 0.39% $12,852
5/31/96 $16,314 -0.04% $17,707 0.19% $12,877
6/30/96 $16,493 1.09% $17,900 0.06% $12,885
7/31/96 $16,628 0.91% $18,063 0.19% $12,909
8/31/96 $16,604 -0.02% $18,060 0.19% $12,934
9/30/96 $16,843 1.40% $18,313 0.32% $12,975
10/31/96 $16,995 1.13% $18,519 0.32% $13,017
11/30/96 $17,266 1.83% $18,858 0.19% $13,041
12/31/96 $17,213 -0.42% $18,779 0.00% $13,041
1/31/97 $17,219 0.19% $18,815 0.32% $13,083
2/28/97 $17,358 0.92% $18,988 0.31% $13,124
3/31/97 $17,199 -1.33% $18,735 0.25% $13,156
4/30/97 $17,341 0.84% $18,893 0.12% $13,172
5/31/97 $17,528 1.51% $19,178 -0.06% $13,164
6/30/97 $17,686 1.07% $19,383 0.12% $13,180
7/31/97 $18,118 2.77% $19,920 0.12% $13,196
8/31/97 $17,971 -0.94% $19,733 0.19% $13,221
9/30/97 $18,174 1.19% $19,968 0.25% $13,254
10/31/97 $18,286 0.64% $20,096 0.25% $13,287
11/30/97 $18,413 0.59% $20,214 -0.06% $13,279
12/31/97 $18,650 1.46% $20,509 -0.12% $13,263
1/31/98 $18,810 1.03% $20,720 0.19% $13,288
2/28/98 $18,813 0.03% $20,727 0.19% $13,314
3/31/98 $18,847 0.09% $20,745 0.19% $13,339
4/30/98 $18,803 -0.45% $20,652 0.18% $13,363
5/31/98 $19,061 1.58% $20,978 0.18% $13,387
6/30/98 $19,160 0.39% $21,060 0.12% $13,403
7/31/98 $19,195 0.25% $21,113 0.12% $13,419
8/31/98 $19,441 1.55% $21,440 0.12% $13,435
9/30/98 $19,637 1.25% $21,708 0.12% $13,451
10/31/98 $19,687 0.00% $21,708 0.24% $13,484
11/30/98 $19,722 0.35% $21,784 0.00% $13,484
12/31/98 $19,789 0.25% $21,838 -0.06% $13,476
1/31/99 $19,955 1.19% $22,098 0.24% $13,508
2/28/99 $19,896 -0.44% $22,001 0.12% $13,524
Total Return 98.96% 120.01% 35.24%
- ------------------------------------------------------------------------------------------
</TABLE>
CLASS C (5/1/95 - 2/28/99)
The following line graph compares the performance of the Franklin New Jersey
Tax-Free Income Fund's Class C shares to that of the Lehman Brothers Municipal
Bond Index, and to the Consumer Price Index based on a $10,000 investment from
5/1/95 to 2/28/99.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Date Franklin New Jersey Lehman Brothers CPI
Tax-Free Income Municipal Bond
Fund-Class C Index
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
5/1/95 $9,904 $10,000 $10,000
5/31/95 $10,162 3.19% $10,319 0.20% $10,020
6/30/95 $10,098 -0.87% $10,229 0.20% $10,040
7/31/95 $10,157 0.95% $10,326 0.00% $10,040
8/31/95 $10,261 1.27% $10,458 0.26% $10,066
9/29/95 $10,330 0.63% $10,523 0.20% $10,086
10/31/95 $10,470 1.45% $10,676 0.33% $10,120
11/30/95 $10,620 1.66% $10,853 -0.07% $10,112
12/29/95 $10,717 0.96% $10,957 -0.07% $10,105
1/31/96 $10,769 0.76% $11,041 0.59% $10,165
2/29/96 $10,684 -0.68% $10,966 0.32% $10,198
3/29/96 $10,565 -1.28% $10,825 0.52% $10,251
4/30/96 $10,544 -0.28% $10,795 0.39% $10,291
5/31/96 $10,551 -0.04% $10,791 0.19% $10,310
6/28/96 $10,661 1.09% $10,908 0.06% $10,316
7/31/96 $10,744 0.91% $11,008 0.19% $10,336
8/30/96 $10,715 -0.02% $11,005 0.19% $10,356
9/30/96 $10,864 1.40% $11,159 0.32% $10,389
10/31/96 $10,955 1.13% $11,286 0.32% $10,422
11/29/96 $11,122 1.83% $11,492 0.19% $10,442
12/31/96 $11,080 -0.42% $11,444 0.00% $10,442
1/31/97 $11,079 0.19% $11,466 0.32% $10,475
2/28/97 $11,172 0.92% $11,571 0.31% $10,508
3/31/97 $11,066 -1.33% $11,417 0.25% $10,534
4/30/97 $11,151 0.84% $11,513 0.12% $10,547
5/31/97 $11,266 1.51% $11,687 -0.06% $10,540
6/30/97 $11,361 1.07% $11,812 0.12% $10,553
7/31/97 $11,634 2.77% $12,139 0.12% $10,565
8/31/97 $11,545 -0.94% $12,025 0.19% $10,586
9/30/97 $11,660 1.19% $12,168 0.25% $10,612
10/31/97 $11,726 0.64% $12,246 0.25% $10,639
11/30/97 $11,802 0.59% $12,318 -0.06% $10,632
12/31/97 $11,958 1.46% $12,498 -0.12% $10,619
1/31/98 $12,044 1.03% $12,627 0.19% $10,640
2/28/98 $12,050 0.03% $12,631 0.19% $10,660
3/31/98 $12,066 0.09% $12,642 0.19% $10,680
4/30/98 $12,022 -0.45% $12,585 0.18% $10,699
5/31/98 $12,191 1.58% $12,784 0.18% $10,719
6/30/98 $12,238 0.39% $12,834 0.12% $10,731
7/31/98 $12,255 0.25% $12,866 0.12% $10,744
8/31/98 $12,415 1.55% $13,065 0.12% $10,757
9/30/98 $12,534 1.25% $13,229 0.12% $10,770
10/31/98 $12,560 0.00% $13,229 0.24% $10,796
11/30/98 $12,576 0.35% $13,275 0.00% $10,796
12/31/98 $12,613 0.25% $13,308 -0.06% $10,789
1/31/99 $12,713 1.19% $13,466 0.24% $10,815
2/28/99 $12,677 -0.44% $13,407 0.12% $10,828
Total Return 26.77% 34.07% 8.28%
- -----------------------------------------------------------------------------------------------------
</TABLE>
*Source: Standard and Poor's Micropal.
Past performance is not predictive of future results.
45
FRANKLIN OREGON TAX-FREE INCOME FUND
CREDIT QUALITY BREAKDOWN*
Franklin Oregon Tax-Free Income Fund
Based on Total Long-Term Investments
2/28/99
[PIE CHART]
<TABLE>
<S> <C>
AAA 48.3%
AA 20.7%
A 18.0%
BBB 13.0%
</TABLE>
*Quality breakdown may include internal ratings for bonds not rated by a
national rating agency.
- --------------------------------------------------------------------------------
Your Fund's Goal: Franklin Oregon Tax-Free Income Fund seeks to provide high,
current income exempt from regular federal and Oregon state personal income
taxes through a portfolio consisting primarily of Oregon municipal bonds.(1)
- --------------------------------------------------------------------------------
STATE UPDATE
[MAP OF OREGON]
Oregon's economic expansion continued throughout the year under review, although
at a reduced pace, despite shocks from the Asian crisis on the state's
agriculture and timber sectors. More than half of merchandise exports were
destined for Asia, and new industries, particularly high-technology
semiconductor manufacturers, experienced setbacks. As a result, projections for
Oregon and other Pacific states allow for future growth, but at a tempered gait
below that of the nation.
Measure 5 created obstacles for the taxing arm of state and local governments.
The measure, a property tax limitation plan, required the state to indemnify
school districts for budgetary shortfalls. As a result, Oregon now finances some
40% of K-12 education, up from approximately 33% prior to Measure 5 taking
effect.(2) The state funded the increase by cutting other programs and continued
reliance on lottery revenues.
Oregon achieved solid credit ratings mainly due to sound spending practices, low
overall debt levels and general revenues that exceeded expectations.
Underscoring the state's fiscal conservatism is the so-called "2% kicker," a
direct tax-rebate initiative that takes effect when revenue growth exceeds
budget levels by more than 2%. While financially beneficial to individuals and
corporations, the "kicker" places a strain on the state's ability to add
substantially to its reserves. Balanced against this, the state
(1) For investors subject to the federal alternative minimum tax, a small
portion of this income may be subject to such tax. Distributions of capital
gains and of ordinary income from accrued market discount, if any, are generally
taxable.
(2) Moody's Investor's Service, Municipal Credit Research, February 22, 1999.
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 121 of
this report.
46
often issues general obligation (GO) debt for self-supporting projects, in
themselves a significant proportion of total state debt. So, while these types
of GO issues carry Oregon's full faith and credit, the state is somewhat
insulated because many of the projects are able to pay the debt costs without
outside assistance.
Oregon's economy continues to diversify, particularly in high technology and
international trade. Manageable debt levels, conservative finances and a growing
population base afford the state a relatively high Aa2 rating from Moody's, a
national credit rating agency.(3)
PORTFOLIO NOTES
The improving national and state environments favorably affected Franklin Oregon
Tax-Free Income Fund's performance over the reporting period. The value of many
of the portfolio's bonds increased, as interest rates generally declined.
However, the fund's Class A share price, as measured by net asset value,
decreased three cents, from $11.86 on February 28, 1998, to $11.83 on February
28, 1999, as a result of the volatility during the 12 months under review. Lower
interest rates led to higher municipal supply as issuers took advantage of the
rate environment to issue new or refunded debt. Nationally, issuance in 1998
topped $284 billion, far outpacing the $220 billion issued in 1997.
The fund's total net assets increased 17%, from $443.0 million on February 28,
1998, to approximately $516.6 million at the end of the reporting period, giving
the fund an increasingly stable and diversified asset base. Such diversification
helped reduce the fund's exposure to risk and volatility that may affect any one
sector. In addition, the fund's superior credit quality, with 69% of the fund's
securities rated AA or higher, further increased the fund's stability. The
fund's asset allocation did not change significantly in the year under review.
The hospital sector remained the fund's largest weighting, at 17.5% of total
long-term investments, followed by prerefunded securities, at 16.6%. Recent fund
purchases included Marion County Certificate of Participation -- Courthouse
Square Project and Portland International Airport Revenue.
PORTFOLIO BREAKDOWN
Franklin Oregon
Tax-Free Income Fund
2/28/99
<TABLE>
<CAPTION>
% OF TOTAL
LONG-TERM
SECTOR INVESTMENTS
- ---------------------------------------------
<S> <C>
Hospitals 17.5%
Prerefunded 16.6%
Housing 15.2%
Certificates of Participation 10.5%
Utilities 9.1%
Industrial 8.9%
General Obligation 8.0%
Transportation 7.8%
Education 3.0%
Tax Allocation 1.1%
Health Care 1.0%
Other Revenue 1.0%
Special Assessment 0.2%
Sales Tax Revenue 0.1%
</TABLE>
(3) This does not indicate Moody's rating of the fund.
47
The fund should perform well into the next reporting period, aided by stable
interest rates and ample supply of new bonds. We will continue to follow our
fiscally responsible strategy of investing for income, price stability and tax
efficiency. However, the fund's substantial new investments in the current,
historically low interest-rate environment increased pressure on the dividend
payment. If interest rates stay in the same range, it is likely that there will
be further pressure on the dividend payment in the next reporting period.
Please remember that this discussion reflects our views, opinions and portfolio
holdings as of February 28, 1999. However, market and economic conditions are
changing constantly, which can be expected to affect our strategies and the
fund's portfolio composition. Although historical performance is no guarantee of
future results, these insights may help you understand our investment and
management philosophy.
DIVIDEND DISTRIBUTIONS*
Franklin Oregon Tax-Free Income Fund
3/1/98 - 2/28/99
<TABLE>
<CAPTION>
DIVIDEND PER SHARE
--------------------------
MONTH CLASS A CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C>
March 5.2 cents 4.64 cents
April 5.2 cents 4.65 cents
May 5.2 cents 4.65 cents
June 5.2 cents 4.65 cents
July 5.2 cents 4.63 cents
August 5.2 cents 4.63 cents
September 5.1 cents 4.53 cents
October 5.1 cents 4.54 cents
November 5.1 cents 4.54 cents
December 5.0 cents 4.44 cents
January 5.0 cents 4.44 cents
February 5.0 cents 4.44 cents
- --------------------------------------------------------------------------------
TOTAL 61.5 CENTS 54.78 CENTS
</TABLE>
*Assumes shares were purchased and held for the entire accrual period. Since
dividends accrue daily, your actual distributions will vary depending on the
date you purchased your shares and any account activity during the month. Income
distributions include all accrued income earned by the fund during the reporting
period.
48
PERFORMANCE SUMMARY AS OF 2/28/99
Distributions will vary based on earnings of the fund's portfolio and any
profits realized from the sale of the portfolio's securities. Past distributions
are not indicative of future trends. All total returns include reinvested
distributions at net asset value.
PRICE AND DISTRIBUTION INFORMATION (3/1/98 - 2/28/99)
<TABLE>
<CAPTION>
CLASS A CHANGE 2/28/99 2/28/98
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value -$0.03 $11.83 $11.86
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTIONS
---------------------------------
<S> <C>
Dividend Income $0.615
</TABLE>
<TABLE>
<CAPTION>
CLASS C CHANGE 2/28/99 2/28/98
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value -$0.01 $11.91 $11.92
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTIONS
---------------------------------
<S> <C>
Dividend Income $0.5478
</TABLE>
PERFORMANCE
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR 5-YEAR 10-YEAR (9/1/87)
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return(1) +5.12% +32.39% +102.72% +125.66%
Average Annual Total Return(2) +0.62% +4.86% +6.86% +6.93%
Distribution Rate(3) 4.71%
Taxable Equivalent Distribution Rate(4) 8.57%
30-Day Standardized Yield(5) 3.86%
Taxable Equivalent Yield(4) 7.02%
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS C 1-YEAR 3-YEAR (5/1/95)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) +4.59% +17.77% +27.07%
Average Annual Total Return(2) +2.55% +5.24% +6.18%
Distribution Rate(3) 4.27%
Taxable Equivalent Distribution Rate(4) 7.77%
30-Day Standardized Yield(5) 3.44%
Taxable Equivalent Yield(4) 6.26%
</TABLE>
FRANKLIN OREGON
TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
CLASS A (formerly Class I):
Subject to the current, maximum 4.25% initial sales charge. Prior
to July 1, 1994, fund shares were offered at a lower initial sales charge; thus
actual total returns may differ. Effective May 1, 1994, the fund eliminated the
sales
charge on reinvested dividends and implemented a Rule 12b-1 plan, which affects
subsequent performance.
CLASS C (formerly Class II):
Subject to 1% initial sales charge and 1% contingent deferred sales charge for
shares redeemed within 18 months of investment. These shares have higher annual
fees and expenses than Class A shares.
- --------------------------------------------------------------------------------
(1) Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
(2) Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the current, applicable,
maximum sales charge(s) for that class.
(3) Distribution rate is based on an annualization of the respective class's
current monthly dividend and the maximum offering price per share on February
28, 1999.
(4) Taxable equivalent distribution rate and yield assume the 1999 maximum
combined federal and Oregon state personal income tax bracket of 45.0%, based on
the federal income tax rate of 39.6%.
(5) Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended February 28, 1999.
- --------------------------------------------------------------------------------
Bond prices, and thus the fund's share price, generally move in the opposite
direction from interest rates. Since markets can go down as well as up,
investment return and principal value will fluctuate with market conditions, and
you may have a gain or loss when you sell your shares.
- --------------------------------------------------------------------------------
Past performance is not predictive of future results.
49
FRANKLIN OREGON
TAX-FREE INCOME FUND
AVERAGE ANNUAL TOTAL RETURN
2/28/99
<TABLE>
<CAPTION>
CLASS A
- ---------------------------------
<S> <C>
1-Year +0.62%
5-Year +4.86%
10-Year +6.86%
Since Inception (9/1/87) +6.93%
</TABLE>
AVERAGE ANNUAL TOTAL RETURN
2/28/99
<TABLE>
<CAPTION>
CLASS C
- ---------------------------------
<S> <C>
1-Year +2.55%
3-Year +5.24%
Since Inception (5/1/95) +6.18%
</TABLE>
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT
The unmanaged index differs from the fund in composition, does not pay
management fees or expenses and includes reinvested dividends. One cannot invest
directly in an index. Total return represents the change in value of an
investment over the periods shown. It includes the
current, applicable, maximum sales charge(s), fund expenses, account fees and
reinvested distributions. Performance of the fund's shares exceeded the rate of
inflation as measured by the Consumer Price Index (CPI).
CLASS A (3/1/89 - 2/28/99)
The following line graph compares the performance of the Franklin Oregon
Tax-Free Income Fund's Class A shares to that of the Lehman Brothers Municipal
Bond Index, and to the Consumer Price Index based on a $10,000 investment from
3/1/89 to 2/28/99.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
Date Franklin Oregon Lehman CPI
Tax-Free Income Brothers
Fund-Class A Municipal
Bond
Index
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
3/1/89 $9,578 $10,000 $10,000
3/31/89 $9,549 -0.24% $9,976 0.58% $10,058
4/30/89 $9,750 2.37% $10,212 0.65% $10,123
5/31/89 $9,980 2.08% $10,425 0.57% $10,181
6/30/89 $10,110 1.36% $10,567 0.24% $10,206
7/31/89 $10,175 1.36% $10,710 0.24% $10,230
8/31/89 $10,108 -0.98% $10,605 0.16% $10,246
9/30/89 $10,041 -0.30% $10,574 0.32% $10,279
10/31/89 $10,126 1.22% $10,703 0.48% $10,329
11/30/89 $10,259 1.75% $10,890 0.24% $10,353
12/31/89 $10,345 0.82% $10,979 0.16% $10,370
1/31/90 $10,276 -0.47% $10,928 1.03% $10,477
2/28/90 $10,382 0.89% $11,025 0.47% $10,526
3/31/90 $10,381 0.03% $11,028 0.55% $10,584
4/30/90 $10,282 -0.72% $10,949 0.16% $10,601
5/31/90 $10,509 2.18% $11,187 0.23% $10,625
6/30/90 $10,628 0.88% $11,286 0.54% $10,682
7/31/90 $10,798 1.48% $11,453 0.38% $10,723
8/31/90 $10,554 -1.45% $11,287 0.92% $10,822
9/30/90 $10,533 0.06% $11,294 0.84% $10,913
10/31/90 $10,695 1.81% $11,498 0.60% $10,978
11/30/90 $10,930 2.01% $11,729 0.22% $11,002
12/31/90 $10,919 0.44% $11,781 0.00% $11,002
1/31/91 $11,095 1.34% $11,939 0.60% $11,068
2/28/91 $11,229 0.87% $12,042 0.15% $11,085
3/31/91 $11,281 0.04% $12,047 0.15% $11,102
4/30/91 $11,427 1.34% $12,209 0.15% $11,118
5/31/91 $11,522 0.89% $12,317 0.30% $11,152
6/30/91 $11,521 -0.10% $12,305 0.29% $11,184
7/31/91 $11,660 1.22% $12,455 0.15% $11,201
8/31/91 $11,788 1.32% $12,620 0.29% $11,233
9/30/91 $11,950 1.30% $12,784 0.44% $11,283
10/31/91 $12,025 0.90% $12,899 0.15% $11,299
11/30/91 $12,068 0.28% $12,935 0.29% $11,332
12/31/91 $12,298 2.15% $13,213 0.07% $11,340
1/31/92 $12,330 0.23% $13,243 0.15% $11,357
2/29/92 $12,325 0.03% $13,247 0.36% $11,398
3/31/92 $12,364 0.04% $13,253 0.51% $11,456
4/30/92 $12,448 0.89% $13,370 0.14% $11,472
5/31/92 $12,578 1.18% $13,528 0.14% $11,488
6/30/92 $12,754 1.68% $13,756 0.36% $11,530
7/31/92 $13,171 3.00% $14,168 0.21% $11,554
8/31/92 $12,994 -0.98% $14,029 0.28% $11,586
9/30/92 $13,023 0.65% $14,121 0.28% $11,619
10/31/92 $12,854 -0.98% $13,982 0.35% $11,659
11/30/92 $13,139 1.79% $14,232 0.14% $11,676
12/31/92 $13,344 1.02% $14,378 -0.07% $11,667
1/31/93 $13,503 1.16% $14,544 0.49% $11,725
2/28/93 $13,910 3.62% $15,071 0.35% $11,766
3/31/93 $13,833 -1.06% $14,911 0.35% $11,807
4/30/93 $13,934 1.01% $15,062 0.28% $11,840
5/31/93 $14,000 0.56% $15,146 0.14% $11,856
6/30/93 $14,174 1.67% $15,399 0.14% $11,873
7/31/93 $14,204 0.13% $15,419 0.00% $11,873
8/31/93 $14,417 2.08% $15,740 0.28% $11,906
9/30/93 $14,605 1.14% $15,919 0.21% $11,931
10/31/93 $14,658 0.19% $15,949 0.41% $11,980
11/30/93 $14,565 -0.88% $15,809 0.07% $11,989
12/31/93 $14,801 2.11% $16,143 0.00% $11,989
1/31/94 $14,940 1.14% $16,327 0.27% $12,021
2/28/94 $14,654 -2.59% $15,904 0.34% $12,062
3/31/94 $14,128 -4.07% $15,257 0.34% $12,103
4/30/94 $14,166 0.85% $15,386 0.14% $12,120
5/31/94 $14,256 0.87% $15,520 0.07% $12,128
6/30/94 $14,181 -0.61% $15,425 0.34% $12,170
7/31/94 $14,412 1.83% $15,708 0.27% $12,202
8/31/94 $14,465 0.35% $15,763 0.40% $12,251
9/30/94 $14,273 -1.47% $15,531 0.27% $12,284
10/31/94 $14,002 -1.78% $15,255 0.07% $12,293
11/30/94 $13,718 -1.81% $14,978 0.13% $12,309
12/31/94 $14,074 2.20% $15,308 0.00% $12,309
1/31/95 $14,470 2.86% $15,746 0.40% $12,358
2/28/95 $14,856 2.91% $16,204 0.40% $12,408
3/31/95 $14,991 1.15% $16,390 0.33% $12,448
4/30/95 $15,019 0.12% $16,410 0.33% $12,490
5/31/95 $15,397 3.19% $16,933 0.20% $12,515
6/30/95 $15,278 -0.87% $16,786 0.20% $12,540
7/31/95 $15,375 0.95% $16,946 0.00% $12,540
8/31/95 $15,568 1.27% $17,161 0.26% $12,572
9/30/95 $15,653 0.63% $17,269 0.20% $12,597
10/31/95 $15,861 1.45% $17,519 0.33% $12,639
11/30/95 $16,084 1.66% $17,810 -0.07% $12,630
12/31/95 $16,197 0.96% $17,981 -0.07% $12,621
1/31/96 $16,297 0.76% $18,118 0.59% $12,696
2/29/96 $16,216 -0.68% $17,995 0.32% $12,736
3/31/96 $16,051 -1.28% $17,764 0.52% $12,803
4/30/96 $16,054 -0.28% $17,714 0.39% $12,852
5/31/96 $16,070 -0.04% $17,707 0.19% $12,877
6/30/96 $16,244 1.09% $17,900 0.06% $12,885
7/31/96 $16,346 0.91% $18,063 0.19% $12,909
8/31/96 $16,363 -0.02% $18,060 0.19% $12,934
9/30/96 $16,553 1.40% $18,313 0.32% $12,975
10/31/96 $16,686 1.13% $18,519 0.32% $13,017
11/30/96 $16,906 1.83% $18,858 0.19% $13,041
12/31/96 $16,895 -0.42% $18,779 0.00% $13,041
1/31/97 $16,912 0.19% $18,815 0.32% $13,083
2/28/97 $17,047 0.92% $18,988 0.31% $13,124
3/31/97 $16,917 -1.33% $18,735 0.25% $13,156
4/30/97 $17,039 0.84% $18,893 0.12% $13,172
5/31/97 $17,221 1.51% $19,178 -0.06% $13,164
6/30/97 $17,358 1.07% $19,383 0.12% $13,180
7/31/97 $17,737 2.77% $19,920 0.12% $13,196
8/31/97 $17,680 -0.94% $19,733 0.19% $13,221
9/30/97 $17,849 1.19% $19,968 0.25% $13,254
10/31/97 $17,944 0.64% $20,096 0.25% $13,287
11/30/97 $18,070 0.59% $20,214 -0.06% $13,279
12/31/97 $18,288 1.46% $20,509 -0.12% $13,263
1/31/98 $18,430 1.03% $20,720 0.19% $13,288
2/28/98 $18,448 0.03% $20,727 0.19% $13,314
3/31/98 $18,451 0.09% $20,745 0.19% $13,339
4/30/98 $18,439 -0.45% $20,652 0.18% $13,363
5/31/98 $18,662 1.58% $20,978 0.18% $13,387
6/30/98 $18,728 0.39% $21,060 0.12% $13,403
7/31/98 $18,763 0.25% $21,113 0.12% $13,419
8/31/98 $19,005 1.55% $21,440 0.12% $13,435
9/30/98 $19,199 1.25% $21,708 0.12% $13,451
10/31/98 $19,152 0.00% $21,708 0.24% $13,484
11/30/98 $19,234 0.35% $21,784 0.00% $13,484
12/31/98 $19,283 0.25% $21,838 -0.06% $13,476
1/31/99 $19,462 1.19% $22,098 0.24% $13,508
2/28/99 $19,417 -0.44% $22,001 0.12% $13,524
Total Return 94.17% 120.01% 35.24%
- ---------------------------------------------------------------------------
</TABLE>
CLASS C (5/1/95 - 2/28/99)
The following line graph compares the performance of the Franklin Oregon
Tax-Free Income Fund's Class C shares to that of the Lehman Brothers Municipal
Bond Index, and to the Consumer Price Index based on a $10,000 investment from
5/1/95 to 2/28/99.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
Date Franklin Oregon Lehman Brothers CPI
Tax-Free Income Municipal Bond
Fund-Class C Index
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
5/1/95 $9,903 $10,000 $10,000
5/31/95 $10,162 3.19% $10,319 0.20% $10,020
6/30/95 $10,079 -0.87% $10,229 0.20% $10,040
7/31/95 $10,138 0.95% $10,326 0.00% $10,040
8/31/95 $10,268 1.27% $10,458 0.26% $10,066
9/29/95 $10,318 0.63% $10,523 0.20% $10,086
10/31/95 $10,450 1.45% $10,676 0.33% $10,120
11/30/95 $10,590 1.66% $10,853 -0.07% $10,112
12/29/95 $10,668 0.96% $10,957 -0.07% $10,105
1/31/96 $10,729 0.76% $11,041 0.59% $10,165
2/29/96 $10,670 -0.68% $10,966 0.32% $10,198
3/29/96 $10,560 -1.28% $10,825 0.52% $10,251
4/30/96 $10,547 -0.28% $10,795 0.39% $10,291
5/31/96 $10,562 -0.04% $10,791 0.19% $10,310
6/28/96 $10,671 1.09% $10,908 0.06% $10,316
7/31/96 $10,733 0.91% $11,008 0.19% $10,336
8/30/96 $10,739 -0.02% $11,005 0.19% $10,356
9/30/96 $10,858 1.40% $11,159 0.32% $10,389
10/31/96 $10,940 1.13% $11,286 0.32% $10,422
11/29/96 $11,089 1.83% $11,492 0.19% $10,442
12/31/96 $11,067 -0.42% $11,444 0.00% $10,442
1/31/97 $11,082 0.19% $11,466 0.32% $10,475
2/28/97 $11,165 0.92% $11,571 0.31% $10,508
3/31/97 $11,073 -1.33% $11,417 0.25% $10,534
4/30/97 $11,147 0.84% $11,513 0.12% $10,547
5/31/97 $11,261 1.51% $11,687 -0.06% $10,540
6/30/97 $11,345 1.07% $11,812 0.12% $10,553
7/31/97 $11,586 2.77% $12,139 0.12% $10,565
8/31/97 $11,553 -0.94% $12,025 0.19% $10,586
9/30/97 $11,658 1.19% $12,168 0.25% $10,612
10/31/97 $11,714 0.64% $12,246 0.25% $10,639
11/30/97 $11,780 0.59% $12,318 -0.06% $10,632
12/31/97 $11,926 1.46% $12,498 -0.12% $10,619
1/31/98 $12,013 1.03% $12,627 0.19% $10,640
2/28/98 $12,019 0.03% $12,631 0.19% $10,660
3/31/98 $12,015 0.09% $12,642 0.19% $10,680
4/30/98 $11,991 -0.45% $12,585 0.18% $10,699
5/31/98 $12,140 1.58% $12,784 0.18% $10,719
6/30/98 $12,177 0.39% $12,834 0.12% $10,731
7/31/98 $12,194 0.25% $12,866 0.12% $10,744
8/31/98 $12,345 1.55% $13,065 0.12% $10,757
9/30/98 $12,464 1.25% $13,229 0.12% $10,770
10/31/98 $12,428 0.00% $13,229 0.24% $10,796
11/30/98 $12,475 0.35% $13,275 0.00% $10,796
12/31/98 $12,501 0.25% $13,308 -0.06% $10,789
1/31/99 $12,611 1.19% $13,466 0.24% $10,815
2/28/99 $12,584 -0.44% $13,407 0.12% $10,828
Total Return 25.84% 34.07% 8.28%
- ----------------------------------------------------------------------
</TABLE>
*Source: Standard and Poor's Micropal.
Past performance is not predictive of future results.
50
FRANKLIN PENNSYLVANIA TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
Your Fund's Goal: Franklin Pennsylvania Tax-Free Income Fund seeks to provide
high, current income exempt from regular federal and Pennsylvania state personal
income taxes through a portfolio consisting primarily of Pennsylvania municipal
bonds.(1)
- --------------------------------------------------------------------------------
COMMONWEALTH UPDATE
[MAP OF PENNSYLVANIA]
Pennsylvania's economy rode the wave of the U.S. economic expansion to new
heights during the year under review. A perennial laggard to the nation, the
commonwealth's economy showed steady if not eye-popping growth, as it
diversified its economic base. Services accounted for approximately 14.5% of
employment, while the once all-important manufacturing sector accounted for 17%
of employment as of August 1998.(2) The mix of service and manufacturing jobs
more closely resembled that of the U.S., which should reduce Pennsylvania's
vulnerability to a cyclical recession. However, the shift to service jobs, which
tend to pay less than manufacturing jobs, caused personal income to grow more
slowly than the nation's.
Employment growth also trailed the national average. In 1997, total employment
increased 1.7%, compared with the national average of 2.5%, but was a good deal
stronger than the 0.9% annual growth the commonwealth experienced from 1990 to
1996. In 1998, job growth slowed to gains of slightly more than 1%, compared
with the U.S. average of 2.5%.(2)
CREDIT QUALITY BREAKDOWN*
Franklin Pennsylvania Tax-Free
Income Fund
Based on Total Long-Term Investments
2/28/99
[PIE CHART]
<TABLE>
<S> <C>
AAA 60.3%
AA 10.1%
A 8.8%
BBB 20.8%
</TABLE>
*Quality breakdown may include internal ratings for bonds not rated by a
national rating agency.
(1) For investors subject to the federal alternative minimum tax, a small
portion of this income may be subject to such tax. Distributions of capital
gains and of ordinary income from accrued market discount, if any, are generally
taxable. The fund's shares are free from Pennsylvania personal property tax and
income is free from Philadelphia School Investment Net Income Tax.
(2) Source: Fitch IBCA, August 1998.
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 126 of
this report.
51
PORTFOLIO BREAKDOWN
Franklin Pennsylvania
Tax-Free Income Fund
2/28/99
<TABLE>
<CAPTION>
% OF TOTAL
LONG-TERM
SECTOR INVESTMENTS
- ----------------------------------
<S> <C>
Prerefunded 19.6%
Utilities 17.0%
Hospitals 15.8%
Education 14.7%
Housing 8.9%
General Obligation 5.9%
Health Care 5.9%
Industrial 4.5%
Other Revenue 4.4%
Transportation 2.4%
Miscellaneous 0.9%
</TABLE>
Nevertheless, Pennsylvania boasted a strong financial condition as a result of
its sound fiscal management and greater-than-expected revenues. 1997 marked the
seventh consecutive year the commonwealth recorded a budget surplus. Earlier in
the decade, Pennsylvania eliminated its $1 billion accumulated deficit, and debt
levels, only slightly higher than the national average, continue to decline.(3)
Partially as a result of these factors, Moody's, a national credit rating
agency, assigned an Aa3 rating.(4)
PORTFOLIO NOTES
More than 50% of the municipal debt brought to market nationally in 1998 was
insured, as was the majority of the fund's purchases. Most insured bonds carry
an AAA rating, thus the percentage of AAA-rated securities in the fund increased
during the period. As of February 28, 1999, AAA-rated bonds comprised 60.3% of
the fund's total long-term investments, compared with 57.2% a year earlier.
We maintained our strategy of lowering risk by diversifying across a number of
sectors. The fund's asset allocation changed slightly over the reporting period.
On February 28, 1999, prerefunded securities comprised the largest portion of
the fund's total long-term investments, at 19.6%, followed by utilities, which
made up 17.0%. Recent purchases included Philadelphia General Obligation, Butler
Area School District, Philadelphia Parking Authority Airport Revenue, Allegheny
County IDLER Environmental Improvement - USX Corp and Montgomery County IDA
Retirement Community - ACT Retirement-Life Communities.
As in the previous reporting period, many issuers took advantage of declining
interest rates to refinance outstanding debt. This increased the number of
prerefunded bonds in the fund's portfolio. When a bond is prerefunded, a new
issue is brought to market with a lower interest rate to pay off the older issue
at its first call date. In most cases, the proceeds from the sale of the new
bonds are invested in U.S. Treasury securities that mature on the first call
date of the original bonds. Because of the U.S. Treasury backing, prerefunded
bonds usually offer a substantial price increase depending on their call date.
Generally, we look to sell prerefunded bonds as they approach five years to
their call date. At this point, the premium on prerefunded bonds often begins to
decline
(3) Source: Moody's, December 1998.
(4) This does not indicate Moody's rating of the fund.
52
rapidly to the stated call price. Our strategy aims to capture the bond's
premium, increase the fund's call protection and protect its share value.
Going forward, we believe Pennsylvania municipal securities will continue to be
attractive investments for individuals seeking tax-free income. However, due to
the low interest-rate environment, it may be difficult for the fund to generate
enough capital losses to offset the gains realized from prerefunded bond sales.
Thus, the fund may make a capital gain distribution in June 1999.
Please remember that this discussion reflects our views, opinions and portfolio
holdings as of February 28, 1999. However, market and economic conditions are
changing constantly, which can be expected to affect our strategies and the
fund's portfolio composition. Although historical performance is no guarantee of
future results, these insights may help you understand our investment and
management philosophy.
DIVIDEND DISTRIBUTIONS*
Franklin Pennsylvania Tax-Free Income Fund
3/1/98 - 2/28/99
<TABLE>
<CAPTION>
DIVIDEND PER SHARE
--------------------------
MONTH CLASS A CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C>
March 4.7 cents 4.18 cents
April 4.7 cents 4.21 cents
May 4.7 cents 4.21 cents
June 4.7 cents 4.21 cents
July 4.7 cents 4.20 cents
August 4.7 cents 4.20 cents
September 4.6 cents 4.10 cents
October 4.6 cents 4.11 cents
November 4.6 cents 4.11 cents
December 4.5 cents 4.01 cents
January 4.5 cents 4.01 cents
February 4.5 cents 4.01 cents
TOTAL 55.5 CENTS 49.56 CENTS
</TABLE>
*Assumes shares were purchased and held for the entire accrual period. Since
dividends accrue daily, your actual distributions will vary depending on the
date you purchased your shares and any account activity during the month. Income
distributions include all accrued income earned by the fund during the reporting
period.
53
FRANKLIN PENNSYLVANIA
TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
CLASS A (formerly Class I):
Subject to the current, maximum 4.25% initial sales charge. Prior to July 1,
1994, fund shares were offered at a lower initial sales charge; thus actual
total returns may differ. Effective May 1, 1994, the fund eliminated the sales
charge on reinvested dividends and implemented a Rule 12b-1 plan, which affects
subsequent performance. Past expense reductions by the fund's manager increased
the fund's total returns.
CLASS C (formerly Class II):
Subject to 1% initial sales charge and 1% contingent deferred sales charge for
shares redeemed within 18 months of investment. These shares have higher annual
fees and expenses than Class A shares.
- --------------------------------------------------------------------------------
(1) Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
(2) Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the current, applicable,
maximum sales charge(s) for that class.
(3) Distribution rate is based on an annualization of the respective class's
current monthly dividend and the maximum offering price per share on February
28, 1999.
(4) Taxable equivalent distribution rate and yield assume the 1999 maximum
combined federal and Pennsylvania state personal income tax bracket of 41.3%,
based on the federal income tax rate of 39.6%.
(5) Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended February 28, 1999.
- --------------------------------------------------------------------------------
Bond prices, and thus the fund's share price, generally move in the opposite
direction from interest rates. Since markets can go down as well as up,
investment return and principal value will fluctuate with market conditions, and
you may have a gain or loss when you sell your shares.
- --------------------------------------------------------------------------------
PERFORMANCE SUMMARY AS OF 2/28/99
Distributions will vary based on earnings of the fund's portfolio and any
profits realized from the sale of the portfolio's securities. Past distributions
are not indicative of future trends. All total returns include reinvested
distributions at net asset value.
PRICE AND DISTRIBUTION INFORMATION (3/1/98-2/28/99)
<TABLE>
<CAPTION>
CLASS A CHANGE 2/28/99 2/28/98
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value -$0.04 $10.52 $10.56
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTIONS
---------------------------------
<S> <C>
Dividend Income $0.5550
Long-Term Capital Gain $0.0137
TOTAL $0.5687
</TABLE>
<TABLE>
<CAPTION>
CLASS C CHANGE 2/28/99 2/28/98
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value -$0.04 $10.57 $10.61
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTIONS
---------------------------------
<S> <C>
Dividend Income $0.4956
Long-Term Capital Gain $0.0137
TOTAL $0.5093
</TABLE>
PERFORMANCE
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR 5-YEAR 10-YEAR (12/1/86)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return(1) +5.11% +34.83% +110.70% +132.85%
Average Annual Total Return(2) +0.63% +5.24% +7.27% +6.77%
Distribution Rate(3) 4.80%
Taxable Equivalent Distribution Rate(4) 8.18%
30-Day Standardized Yield(5) 4.03%
Taxable Equivalent Yield(4) 6.86%
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS C 1-YEAR 3-YEAR (5/1/95)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) +4.50% +18.86% +28.03%
Average Annual Total Return(2) +2.44% +5.56% +6.39%
Distribution Rate(3) 4.37%
Taxable Equivalent Distribution Rate(4) 7.44%
30-Day Standardized Yield(5) 3.61%
Taxable Equivalent Yield(4) 6.15%
</TABLE>
Franklin Pennsylvania Tax-Free Income Fund paid distributions derived from
long-term capital gains of 1.37 cents ($0.0137) per share in December 1998. The
fund hereby designates such distributions as capital gain dividends per Internal
Revenue Code Section 852 (b)(3).
54
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT
The unmanaged index differs from the fund in composition, does not pay
management fees or expenses and includes reinvested dividends. One cannot invest
directly in an index. Total return represents the change in value of an
investment over the periods shown. It includes the current, applicable, maximum
sales charge(s), fund expenses, account fees and reinvested distributions.
Performance of the fund's shares exceeded the rate of inflation as measured by
the Consumer Price Index (CPI).
CLASS A (3/1/89 - 2/28/99)
The following line graph compares the performance of the Franklin Pennsylvania
Tax-Free Income Fund's Class A shares to that of the Lehman Brothers Municipal
Bond Index, and to the Consumer Price Index based on a $10,000 investment from
3/1/89 to 2/28/99.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
Date Franklin Pennsylvania Lehman CPI
Tax-Free Income Brothers
Fund-Class A Municipal
Bond
Index
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
3/1/89 $9,577 $10,000 $10,000
3/31/89 $9,568 -0.24% $9,976 0.58% $10,058
4/30/89 $9,801 2.37% $10,212 0.65% $10,123
5/31/89 $10,015 2.08% $10,425 0.57% $10,181
6/30/89 $10,138 1.36% $10,567 0.24% $10,206
7/31/89 $10,211 1.36% $10,710 0.24% $10,230
8/31/89 $10,159 -0.98% $10,605 0.16% $10,246
9/30/89 $10,117 -0.30% $10,574 0.32% $10,279
10/31/89 $10,201 1.22% $10,703 0.48% $10,329
11/30/89 $10,339 1.75% $10,890 0.24% $10,353
12/31/89 $10,445 0.82% $10,979 0.16% $10,370
1/31/90 $10,370 -0.47% $10,928 1.03% $10,477
2/28/90 $10,456 0.89% $11,025 0.47% $10,526
3/31/90 $10,456 0.03% $11,028 0.55% $10,584
4/30/90 $10,358 -0.72% $10,949 0.16% $10,601
5/31/90 $10,599 2.18% $11,187 0.23% $10,625
6/30/90 $10,677 0.88% $11,286 0.54% $10,682
7/31/90 $10,844 1.48% $11,453 0.38% $10,723
8/31/90 $10,542 -1.45% $11,287 0.92% $10,822
9/30/90 $10,474 0.06% $11,294 0.84% $10,913
10/31/90 $10,645 1.81% $11,498 0.60% $10,978
11/30/90 $10,873 2.01% $11,729 0.22% $11,002
12/31/90 $10,850 0.44% $11,781 0.00% $11,002
1/31/91 $11,023 1.34% $11,939 0.60% $11,068
2/28/91 $11,093 0.87% $12,042 0.15% $11,085
3/31/91 $11,140 0.04% $12,047 0.15% $11,102
4/30/91 $11,316 1.34% $12,209 0.15% $11,118
5/31/91 $11,405 0.89% $12,317 0.30% $11,152
6/30/91 $11,436 -0.10% $12,305 0.29% $11,184
7/31/91 $11,610 1.22% $12,455 0.15% $11,201
8/31/91 $11,736 1.32% $12,620 0.29% $11,233
9/30/91 $11,912 1.30% $12,784 0.44% $11,283
10/31/91 $11,992 0.90% $12,899 0.15% $11,299
11/30/91 $12,059 0.28% $12,935 0.29% $11,332
12/31/91 $12,312 2.15% $13,213 0.07% $11,340
1/31/92 $12,331 0.23% $13,243 0.15% $11,357
2/29/92 $12,325 0.03% $13,247 0.36% $11,398
3/31/92 $12,356 0.04% $13,253 0.51% $11,456
4/30/92 $12,476 0.89% $13,370 0.14% $11,472
5/31/92 $12,621 1.18% $13,528 0.14% $11,488
6/30/92 $12,829 1.68% $13,756 0.36% $11,530
7/31/92 $13,269 3.00% $14,168 0.21% $11,554
8/31/92 $13,144 -0.98% $14,029 0.28% $11,586
9/30/92 $13,199 0.65% $14,121 0.28% $11,619
10/31/92 $13,060 -0.98% $13,982 0.35% $11,659
11/30/92 $13,338 1.79% $14,232 0.14% $11,676
12/31/92 $13,500 1.02% $14,378 -0.07% $11,667
1/31/93 $13,689 1.16% $14,544 0.49% $11,725
2/28/93 $14,079 3.62% $15,071 0.35% $11,766
3/31/93 $14,029 -1.06% $14,911 0.35% $11,807
4/30/93 $14,113 1.01% $15,062 0.28% $11,840
5/31/93 $14,198 0.56% $15,146 0.14% $11,856
6/30/93 $14,419 1.67% $15,399 0.14% $11,873
7/31/93 $14,410 0.13% $15,419 0.00% $11,873
8/31/93 $14,688 2.08% $15,740 0.28% $11,906
9/30/93 $14,857 1.14% $15,919 0.21% $11,931
10/31/93 $14,902 0.19% $15,949 0.41% $11,980
11/30/93 $14,851 -0.88% $15,809 0.07% $11,989
12/31/93 $15,076 2.11% $16,143 0.00% $11,989
1/31/94 $15,204 1.14% $16,327 0.27% $12,021
2/28/94 $14,951 -2.59% $15,904 0.34% $12,062
3/31/94 $14,526 -4.07% $15,257 0.34% $12,103
4/30/94 $14,542 0.85% $15,386 0.14% $12,120
5/31/94 $14,644 0.87% $15,520 0.07% $12,128
6/30/94 $14,616 -0.61% $15,425 0.34% $12,170
7/31/94 $14,834 1.83% $15,708 0.27% $12,202
8/31/94 $14,879 0.35% $15,763 0.40% $12,251
9/30/94 $14,735 -1.47% $15,531 0.27% $12,284
10/31/94 $14,544 -1.78% $15,255 0.07% $12,293
11/30/94 $14,281 -1.81% $14,978 0.13% $12,309
12/31/94 $14,579 2.20% $15,308 0.00% $12,309
1/31/95 $14,924 2.86% $15,746 0.40% $12,358
2/28/95 $15,285 2.91% $16,204 0.40% $12,408
3/31/95 $15,423 1.15% $16,390 0.33% $12,448
4/30/95 $15,456 0.12% $16,410 0.33% $12,490
5/31/95 $15,824 3.19% $16,933 0.20% $12,515
6/30/95 $15,766 -0.87% $16,786 0.20% $12,540
7/31/95 $15,861 0.95% $16,946 0.00% $12,540
8/31/95 $16,004 1.27% $17,161 0.26% $12,572
9/30/95 $16,100 0.63% $17,269 0.20% $12,597
10/31/95 $16,274 1.45% $17,519 0.33% $12,639
11/30/95 $16,513 1.66% $17,810 -0.07% $12,630
12/31/95 $16,674 0.96% $17,981 -0.07% $12,621
1/31/96 $16,756 0.76% $18,118 0.59% $12,696
2/29/96 $16,680 -0.68% $17,995 0.32% $12,736
3/31/96 $16,539 -1.28% $17,764 0.52% $12,803
4/30/96 $16,526 -0.28% $17,714 0.39% $12,852
5/31/96 $16,561 -0.04% $17,707 0.19% $12,877
6/30/96 $16,724 1.09% $17,900 0.06% $12,885
7/31/96 $16,839 0.91% $18,063 0.19% $12,909
8/31/96 $16,838 -0.02% $18,060 0.19% $12,934
9/30/96 $17,052 1.40% $18,313 0.32% $12,975
10/31/96 $17,201 1.13% $18,519 0.32% $13,017
11/30/96 $17,434 1.83% $18,858 0.19% $13,041
12/31/96 $17,417 -0.42% $18,779 0.00% $13,041
1/31/97 $17,468 0.19% $18,815 0.32% $13,083
2/28/97 $17,602 0.92% $18,988 0.31% $13,124
3/31/97 $17,432 -1.33% $18,735 0.25% $13,156
4/30/97 $17,586 0.84% $18,893 0.12% $13,172
5/31/97 $17,791 1.51% $19,178 -0.06% $13,164
6/30/97 $17,967 1.07% $19,383 0.12% $13,180
7/31/97 $18,383 2.77% $19,920 0.12% $13,196
8/31/97 $18,261 -0.94% $19,733 0.19% $13,221
9/30/97 $18,450 1.19% $19,968 0.25% $13,254
10/31/97 $18,570 0.64% $20,096 0.25% $13,287
11/30/97 $18,708 0.59% $20,214 -0.06% $13,279
12/31/97 $18,982 1.46% $20,509 -0.12% $13,263
1/31/98 $19,176 1.03% $20,720 0.19% $13,288
2/28/98 $19,172 0.03% $20,727 0.19% $13,314
3/31/98 $19,184 0.09% $20,745 0.19% $13,339
4/30/98 $19,160 -0.45% $20,652 0.18% $13,363
5/31/98 $19,375 1.58% $20,978 0.18% $13,387
6/30/98 $19,480 0.39% $21,060 0.12% $13,403
7/31/98 $19,511 0.25% $21,113 0.12% $13,419
8/31/98 $19,729 1.55% $21,440 0.12% $13,435
9/30/98 $19,945 1.25% $21,708 0.12% $13,451
10/31/98 $19,900 0.00% $21,708 0.24% $13,484
11/30/98 $19,987 0.35% $21,784 0.00% $13,484
12/31/98 $20,022 0.25% $21,838 -0.06% $13,476
1/31/99 $20,202 1.19% $22,098 0.24% $13,508
2/28/99 $20,180 -0.44% $22,001 0.12% $13,524
Total Return 101.80% 120.01% 35.24%
- ------------------------------------------------------------------------
</TABLE>
CLASS C (5/1/95 - 2/28/99)
The following line graph compares the performance of the Franklin Pennsylvania
Tax-Free Income Fund's Class C shares to that of the Lehman Brothers Municipal
Bond Index, and to the Consumer Price Index based on a $10,000 investment from
5/1/95 to 2/28/99.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Date Franklin Pennsylvania Lehman Brothers CPI
Tax-Free Income Municipal Bond
Fund-Class C Index
- --------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
5/1/95 $ 9,903 $10,000 $10,000
5/31/95 $10,140 3.19% $10,319 0.20% $10,020
6/30/95 $10,098 -0.87% $10,229 0.20% $10,040
7/31/95 $10,154 0.95% $10,326 0.00% $10,040
8/31/95 $10,241 1.27% $10,458 0.26% $10,066
9/29/95 $10,307 0.63% $10,523 0.20% $10,086
10/31/95 $10,413 1.45% $10,676 0.33% $10,120
11/30/95 $10,550 1.66% $10,853 -0.07% $10,112
12/29/95 $10,658 0.96% $10,957 -0.07% $10,105
1/31/96 $10,705 0.76% $11,041 0.59% $10,165
2/29/96 $10,651 -0.68% $10,966 0.32% $10,198
3/29/96 $10,557 -1.28% $10,825 0.52% $10,251
4/30/96 $10,543 -0.28% $10,795 0.39% $10,291
5/31/96 $10,571 -0.04% $10,791 0.19% $10,310
6/28/96 $10,659 1.09% $10,908 0.06% $10,316
7/31/96 $10,737 0.91% $11,008 0.19% $10,336
8/30/96 $10,721 -0.02% $11,005 0.19% $10,356
9/30/96 $10,852 1.40% $11,159 0.32% $10,389
10/31/96 $10,951 1.13% $11,286 0.32% $10,422
11/29/96 $11,092 1.83% $11,492 0.19% $10,442
12/31/96 $11,075 -0.42% $11,444 0.00% $10,442
1/31/97 $11,102 0.19% $11,466 0.32% $10,475
2/28/97 $11,182 0.92% $11,571 0.31% $10,508
3/31/97 $11,069 -1.33% $11,417 0.25% $10,534
4/30/97 $11,161 0.84% $11,513 0.12% $10,547
5/31/97 $11,286 1.51% $11,687 -0.06% $10,540
6/30/97 $11,391 1.07% $11,812 0.12% $10,553
7/31/97 $11,649 2.77% $12,139 0.12% $10,565
8/31/97 $11,567 -0.94% $12,025 0.19% $10,586
9/30/97 $11,680 1.19% $12,168 0.25% $10,612
10/31/97 $11,750 0.64% $12,246 0.25% $10,639
11/30/97 $11,843 0.59% $12,318 -0.06% $10,632
12/31/97 $12,010 1.46% $12,498 -0.12% $10,619
1/31/98 $12,115 1.03% $12,627 0.19% $10,640
2/28/98 $12,118 0.03% $12,631 0.19% $10,660
3/31/98 $12,120 0.09% $12,642 0.19% $10,680
4/30/98 $12,087 -0.45% $12,585 0.18% $10,699
5/31/98 $12,228 1.58% $12,784 0.18% $10,719
6/30/98 $12,288 0.39% $12,834 0.12% $10,731
7/31/98 $12,291 0.25% $12,866 0.12% $10,744
8/31/98 $12,433 1.55% $13,065 0.12% $10,757
9/30/98 $12,551 1.25% $13,229 0.12% $10,770
10/31/98 $12,529 0.00% $13,229 0.24% $10,796
11/30/98 $12,578 0.35% $13,275 0.00% $10,796
12/31/98 $12,594 0.25% $13,308 -0.06% $10,789
1/31/99 $12,701 1.19% $13,466 0.24% $10,815
2/28/99 $12,678 -0.44% $13,407 0.12% $10,828
Total Return 26.78% 34.07% 8.28%
- --------------------------------------------------------------------
</TABLE>
*Source: Standard and Poor's Micropal.
Past performance is not predictive of future results.
55
FRANKLIN PUERTO RICO TAX-FREE INCOME FUND
CREDIT QUALITY BREAKDOWN*
Franklin Puerto Rico Tax-Free
Income Fund
Based on Total Long-Term Investments
2/28/99
[PIE CHART]
<TABLE>
<S> <C>
AAA 47.0%
AA 1.9%
A 8.8
BBB 42.3%
</TABLE>
* Quality breakdown may include internal ratings for bonds not rated by a
national rating agency.
- --------------------------------------------------------------------------------
Your Fund's Goal: Franklin Puerto Rico Tax-Free Income Fund seeks to provide
high, current income exempt from regular federal and many states' personal
income taxes through a portfolio consisting primarily of Puerto Rico municipal
bonds.(1)
- --------------------------------------------------------------------------------
COMMONWEALTH UPDATE
[MAP OF PUERTO RICO GRAPHIC]
Continued spending in excess of tax-supported revenue streams are reason in part
for Puerto Rico's high overall debt levels and moderate credit ratings during
the year under review. The commonwealth continued to progress with the phaseout
of Section 936 of the IRS Code, a plan which afforded U.S. corporations in
Puerto Rico meaningful tax advantages over their mainland counterparts. The
10-year plan, initiated in 1996, could serve to weaken this moderately
diversified, island economy. The debt burden, at 46% of tax-supported debt, is
well ahead of the 1.9% U.S. median and the 10.7% rate sported by Hawaii, the
next highest contender. Total tax-supported debt through fiscal 1998 stood at a
staggering $15.6 billion, which is more than that of all but three U.S. states.
Moody's, a national credit rating agency, recently gave Puerto Rico its Baa1
rating with a near-term "stable" outlook.(2)
In 1998, Puerto Rico focused on expanding its economy, notably tourism and
general infrastructure. These efforts yielded gains so far, with hotel
reservations up 7% in fiscal 1998, while investment in highways, mass transit,
sewage and electric utilities continued at significant levels.(2) Not without
irony, further economic stimulus should come from the rebuilding effort spurred
by Hurricane Georges. In response to one of the century's most destructive
storms, FEMA aid and insurance payments introduced approximately $3 billion of
new monies into the commonwealth.
1. For investors subject to the federal alternative minimum tax, a small portion
of this income may be subject to such tax. Distributions of capital gains and of
ordinary income from accrued market discount, if any, are generally taxable.
2. Source: Moody's Investors Service, Municipal Credit Research, November 23,
1998. This does not indicate Moody's rating of the fund.
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 132 of
this report.
56
PORTFOLIO NOTES
Puerto Rico's municipal bond supply was extremely strong in 1998, reaching
approximately $5 billion, an increase of 38% over 1997's level of $3.7 billion.
This large supply was due to refundings of existing bonds as well as new bond
issuance. We took advantage of the large supply to purchase bonds at what we
felt were attractive levels. Purchases during the period included Virgin Islands
Water and Power Authority Water System Revenue, Puerto Rico Industrial Tourist
Educational Medical and Environmental Control Facilities Financing Authority
Hospital Revenue Mennonite General Hospital and Puerto Rico Industrial Tourist
Educational Medical and Environmental Control Facilities Financing Authority
Industrial Revenue Guaynabo Municipal Government.
Franklin Puerto Rico Tax-Free Income Fund's Class A share price, as measured by
net asset value, increased two cents, from $11.86 on February 28, 1998, to
$11.88 on February 28, 1999. Prerefunded securities, which increased to 19.4% of
the fund's total long-term investments on February 28, 1999, from 9.7% a year
ago, was the fund's heaviest weighting. In a declining interest-rate
environment, such as existed for much of the reporting period, issuers often
prerefunded their existing bonds. When a bond is prerefunded, a new issue is
brought to market with a lower interest rate to pay off the older issue at its
first call date. In most cases, the proceeds from the sale of the new bonds are
invested in U.S. Treasury securities that mature on the first call date of the
original bonds. Because of the U.S. Treasury backing, prerefunded bonds usually
offer a substantial price increase depending on their call date. Generally, we
look to sell prerefunded bonds as they approach five years to their call date.
At this point, the premium on prerefunded bonds often begins to decline rapidly
to the stated call price.
Going forward, the fund should continue to do well. We expect the new issue bond
supply to be much more moderate in 1999. We will continue our fiscally
responsible strategy of investing for income and share price stability. However,
please keep in
PORTFOLIO BREAKDOWN
Franklin Puerto Rico
Tax-Free Income Fund
2/28/99
<TABLE>
<CAPTION>
% OF TOTAL
LONG-TERM
SECTOR INVESTMENTS
- --------------------------------------------------------------------------------
<S> <C>
Prerefunded 19.4%
Transportation 16.2%
Utilities 15.2%
Other Revenue 13.6%
Hospitals 10.8%
Education 7.6%
Housing 7.4%
General Obligation 7.0%
Industrial 2.8%
</TABLE>
57
mind that the fund can distribute only what it earns, so dividend payments may
continue to be lower than in the past, if interest rates remain at current or
lower levels. Additionally, the fund may not be able to generate enough capital
losses to offset gains realized from prerefunded bond sales. Thus, the fund may
make a capital gain distribution in June 1999.
Please remember that this discussion reflects our views, opinions and portfolio
holdings as of February 28, 1999. However, market and economic conditions are
changing constantly, which can be expected to affect our strategies and the
fund's portfolio composition. Although historical performance is no guarantee of
future results, these insights may help you understand our investment and
management philosophy.
DIVIDEND DISTRIBUTIONS*
Franklin Puerto Rico Tax-Free Income Fund
3/1/98 - 2/28/99
<TABLE>
<CAPTION>
DIVIDEND PER SHARE
--------------------------
MONTH CLASS A CLASS C
- ----- --------- ----------
<S> <C> <C>
March 5.1 cents 4.52 cents
April 5.1 cents 4.55 cents
May 5.1 cents 4.55 cents
June 5.1 cents 4.55 cents
July 5.1 cents 4.54 cents
August 5.1 cents 4.54 cents
September 5.0 cents 4.44 cents
October 5.0 cents 4.45 cents
November 5.0 cents 4.45 cents
December 4.9 cents 4.35 cents
January 4.9 cents 4.35 cents
February 4.9 cents 4.35 cents
---------- -----------
TOTAL 60.3 CENTS 53.64 CENTS
</TABLE>
* Assumes shares were purchased and held for the entire accrual period. Since
dividends accrue daily, your actual distributions will vary depending on the
date you purchased your shares and any account activity during the month. Income
distributions include all accrued income earned by the fund during the reporting
period.
58
PERFORMANCE SUMMARY AS OF 2/28/99
Distributions will vary based on earnings of the fund's portfolio and any
profits realized from the sale of the portfolio's securities. Past distributions
are not indicative of future trends. All total returns include reinvested
distributions at net asset value.
PRICE AND DISTRIBUTION INFORMATION (3/1/98-2/28/99)
<TABLE>
<CAPTION>
CLASS A CHANGE 2/28/99 2/28/98
- ------- ------ ------- -------
<S> <C> <C> <C>
Net Asset Value +$0.02 $11.88 $11.86
DISTRIBUTIONS
-------------
Dividend Income $0.6030
Long-Term Capital Gain $0.0301
Short-Term Capital Gain $0.0077
Total $0.6408
</TABLE>
<TABLE>
<CAPTION>
CLASS C CHANGE 2/28/99 2/28/98
- ------- ------ ------- -------
<S> <C> <C> <C>
Net Asset Value +$0.02 $11.89 $11.87
DISTRIBUTIONS
-------------
Dividend Income $0.5364
Long-Term Capital Gain $0.0301
Short-Term Capital Gain $0.0077
Total $0.5742
</TABLE>
PERFORMANCE
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR 5-YEAR 10-YEAR (4/3/85)
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) +5.68% +34.65% +107.89% +186.69%
Average Annual Total Return(2) +1.16% +5.20% +7.12% +7.53%
Distribution Rate(3) 4.59%
Taxable Equivalent Distribution Rate(4) 7.60%
30-Day Standardized Yield(5) 3.80%
Taxable Equivalent Yield(4) 6.29%
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS C 1-YEAR 3-YEAR (5/1/95)
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) +5.09% +19.62% +28.26%
Average Annual Total Return(2) +3.04% +5.79% +6.44%
72
Distribution Rate(3) 4.18%
Taxable Equivalent Distribution Rate(4) 6.92%
30-Day Standardized Yield(5) 3.37%
Taxable Equivalent Yield(4) 5.58%
</TABLE>
Franklin Puerto Rico Tax-Free Income Fund paid distributions derived from
long-term capital gains totaling 3.01 cents ($0.0301) per share in June and
December 1998. The fund hereby designates such distributions as capital gain
dividends per Internal Revenue Code Section 852 (b)(3).
FRANKLIN PUERTO RICO
TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
CLASS A (formerly Class I):
Subject to the current, maximum 4.25% initial sales charge. Prior to July 1,
1994, fund shares were offered at a lower initial sales charge; thus actual
total returns may differ. Effective May 1, 1994, the fund eliminated the sales
charge on reinvested dividends and implemented a Rule 12b-1 plan, which affects
subsequent performance. Past expense reductions by the fund's manager increased
the fund's total returns.
CLASS C (formerly Class II):
Subject to 1% initial sales charge and 1% contingent deferred sales charge for
shares redeemed within 18 months of investment. These shares have higher annual
fees and expenses than Class A shares.
- --------------------------------------------------------------------------------
(1) Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
(2) Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the current, applicable,
maximum sales charge(s) for that class.
(3) Distribution rate is based on an annualization of the respective class's
current monthly dividend and the maximum offering price per share on February
28, 1999.
(4) Taxable equivalent distribution rate and yield assume the 1999 maximum
federal income tax rate of 39.6%.
(5) Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended February 28, 1999. Bond prices, and thus
the fund's share price, generally move in the opposite direction from interest
rates. Since markets can go down as well as up, investment return and principal
value will fluctuate with market conditions, and you may have a gain or loss
when you sell your shares.
- --------------------------------------------------------------------------------
Bond prices, and thus the fund's share price, generally move in the opposite
direction from interest rates. Since markets can go down as well as up,
investment return and principal value will fluctuate with market conditions, and
you may have a gain or loss when you sell your shares.
- --------------------------------------------------------------------------------
Past performance is not predictive of future results.
59
FRANKLIN PUERTO RICO
TAX-FREE INCOME FUND
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT
The unmanaged index differs from the fund in composition, does not pay
management fees or expenses and includes reinvested dividends. One cannot invest
directly in an index. Total return represents the change in value of an
investment over the periods shown. It includes the current, applicable, maximum
sales charge(s), fund expenses, account fees and reinvested distributions.
Performance of the fund's shares exceeded the rate of inflation as measured by
the Consumer Price Index (CPI).
AVERAGE ANNUAL TOTAL RETURN
2/28/99
<TABLE>
<CAPTION>
CLASS A
- -------
<S> <C>
1-Year +1.16%
5-Year +5.20%
10-Year +7.12%
Since Inception (4/3/85) +7.53%
</TABLE>
The following line graph compares the performance of the Franklin Puerto Rico
Tax-Free Income Fund's Class A shares to that of the Lehman Brothers Municipal
Bond Index, and to the Consumer Price Index based on a $10,000 investment from
3/1/89 to 2/28/99.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
Date Franklin Puerto Rico Lehman Brothers CPI
Tax-Free Income Municipal Bond
Fund-Class A Index
- ---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
3/1/89 $9,573 $10,000 $10,000
3/31/89 $9,547 -0.24% $9,976 0.58% $10,058
4/30/89 $9,777 2.37% $10,212 0.65% $10,123
5/31/89 $9,980 2.08% $10,425 0.57% $10,181
6/30/89 $10,111 1.36% $10,567 0.24% $10,206
7/31/89 $10,214 1.36% $10,710 0.24% $10,230
8/31/89 $10,158 -0.98% $10,605 0.16% $10,246
9/30/89 $10,092 -0.30% $10,574 0.32% $10,279
10/31/89 $10,168 1.22% $10,703 0.48% $10,329
11/30/89 $10,310 1.75% $10,890 0.24% $10,353
12/31/89 $10,406 0.82% $10,979 0.16% $10,370
1/31/90 $10,339 -0.47% $10,928 1.03% $10,477
2/28/90 $10,455 0.89% $11,025 0.47% $10,526
3/31/90 $10,445 0.03% $11,028 0.55% $10,584
4/30/90 $10,386 -0.72% $10,949 0.16% $10,601
5/31/90 $10,602 2.18% $11,187 0.23% $10,625
6/30/90 $10,701 0.88% $11,286 0.54% $10,682
7/31/90 $10,871 1.48% $11,453 0.38% $10,723
8/31/90 $10,660 -1.45% $11,287 0.92% $10,822
9/30/90 $10,610 0.06% $11,294 0.84% $10,913
10/31/90 $10,762 1.81% $11,498 0.60% $10,978
11/30/90 $11,007 2.01% $11,729 0.22% $11,002
12/31/90 $10,965 0.44% $11,781 0.00% $11,002
1/31/91 $11,151 1.34% $11,939 0.60% $11,068
2/28/91 $11,264 0.87% $12,042 0.15% $11,085
3/31/91 $11,306 0.04% $12,047 0.15% $11,102
4/30/91 $11,463 1.34% $12,209 0.15% $11,118
5/31/91 $11,547 0.89% $12,317 0.30% $11,152
6/30/91 $11,558 -0.10% $12,305 0.29% $11,184
7/31/91 $11,707 1.22% $12,455 0.15% $11,201
8/31/91 $11,814 1.32% $12,620 0.29% $11,233
9/30/91 $11,965 1.30% $12,784 0.44% $11,283
10/31/91 $12,052 0.90% $12,899 0.15% $11,299
11/30/91 $12,117 0.28% $12,935 0.29% $11,332
12/31/91 $12,311 2.15% $13,213 0.07% $11,340
1/31/92 $12,329 0.23% $13,243 0.15% $11,357
2/29/92 $12,326 0.03% $13,247 0.36% $11,398
3/31/92 $12,367 0.04% $13,253 0.51% $11,456
4/30/92 $12,463 0.89% $13,370 0.14% $11,472
5/31/92 $12,617 1.18% $13,528 0.14% $11,488
6/30/92 $12,805 1.68% $13,756 0.36% $11,530
7/31/92 $13,188 3.00% $14,168 0.21% $11,554
8/31/92 $13,072 -0.98% $14,029 0.28% $11,586
9/30/92 $13,092 0.65% $14,121 0.28% $11,619
10/31/92 $12,929 -0.98% $13,982 0.35% $11,659
11/30/92 $13,204 1.79% $14,232 0.14% $11,676
12/31/92 $13,410 1.02% $14,378 -0.07% $11,667
1/31/93 $13,560 1.16% $14,544 0.49% $11,725
2/28/93 $13,910 3.62% $15,071 0.35% $11,766
3/31/93 $13,813 -1.06% $14,911 0.35% $11,807
4/30/93 $13,916 1.01% $15,062 0.28% $11,840
5/31/93 $14,009 0.56% $15,146 0.14% $11,856
6/30/93 $14,198 1.67% $15,399 0.14% $11,873
7/31/93 $14,196 0.13% $15,419 0.00% $11,873
8/31/93 $14,447 2.08% $15,740 0.28% $11,906
9/30/93 $14,638 1.14% $15,919 0.21% $11,931
10/31/93 $14,670 0.19% $15,949 0.41% $11,980
11/30/93 $14,630 -0.88% $15,809 0.07% $11,989
12/31/93 $14,885 2.11% $16,143 0.00% $11,989
1/31/94 $15,018 1.14% $16,327 0.27% $12,021
2/28/94 $14,765 -2.59% $15,904 0.34% $12,062
3/31/94 $14,248 -4.07% $15,257 0.34% $12,103
4/30/94 $14,320 0.85% $15,386 0.14% $12,120
5/31/94 $14,417 0.87% $15,520 0.07% $12,128
6/30/94 $14,323 -0.61% $15,425 0.34% $12,170
7/31/94 $14,549 1.83% $15,708 0.27% $12,202
8/31/94 $14,622 0.35% $15,763 0.40% $12,251
9/30/94 $14,451 -1.47% $15,531 0.27% $12,284
10/31/94 $14,200 -1.78% $15,255 0.07% $12,293
11/30/94 $13,925 -1.81% $14,978 0.13% $12,309
12/31/94 $14,247 2.20% $15,308 0.00% $12,309
1/31/95 $14,585 2.86% $15,746 0.40% $12,358
2/28/95 $15,004 2.91% $16,204 0.40% $12,408
3/31/95 $15,093 1.15% $16,390 0.33% $12,448
4/30/95 $15,168 0.12% $16,410 0.33% $12,490
5/31/95 $15,567 3.19% $16,933 0.20% $12,515
6/30/95 $15,385 -0.87% $16,786 0.20% $12,540
7/31/95 $15,500 0.95% $16,946 0.00% $12,540
8/31/95 $15,671 1.27% $17,161 0.26% $12,572
9/30/95 $15,773 0.63% $17,269 0.20% $12,597
10/31/95 $15,986 1.45% $17,519 0.33% $12,639
11/30/95 $16,186 1.66% $17,810 -0.07% $12,630
12/31/95 $16,318 0.96% $17,981 -0.07% $12,621
1/31/96 $16,422 0.76% $18,118 0.59% $12,696
2/29/96 $16,303 -0.68% $17,995 0.32% $12,736
3/31/96 $16,198 -1.28% $17,764 0.52% $12,803
4/30/96 $16,205 -0.28% $17,714 0.39% $12,852
5/31/96 $16,211 -0.04% $17,707 0.19% $12,877
6/30/96 $16,418 1.09% $17,900 0.06% $12,885
7/31/96 $16,524 0.91% $18,063 0.19% $12,909
8/31/96 $16,543 -0.02% $18,060 0.19% $12,934
9/30/96 $16,781 1.40% $18,313 0.32% $12,975
10/31/96 $16,932 1.13% $18,519 0.32% $13,017
11/30/96 $17,187 1.83% $18,858 0.19% $13,041
12/31/96 $17,140 -0.42% $18,779 0.00% $13,041
1/31/97 $17,146 0.19% $18,815 0.32% $13,083
2/28/97 $17,286 0.92% $18,988 0.31% $13,124
3/31/97 $17,111 -1.33% $18,735 0.25% $13,156
4/30/97 $17,253 0.84% $18,893 0.12% $13,172
5/31/97 $17,502 1.51% $19,178 -0.06% $13,164
6/30/97 $17,646 1.07% $19,383 0.12% $13,180
7/31/97 $18,077 2.77% $19,920 0.12% $13,196
8/31/97 $17,971 -0.94% $19,733 0.19% $13,221
9/30/97 $18,173 1.19% $19,968 0.25% $13,254
10/31/97 $18,268 0.64% $20,096 0.25% $13,287
11/30/97 $18,410 0.59% $20,214 -0.06% $13,279
12/31/97 $18,647 1.46% $20,509 -0.12% $13,263
1/31/98 $18,774 1.03% $20,720 0.19% $13,288
2/28/98 $18,807 0.03% $20,727 0.19% $13,314
3/31/98 $18,872 0.09% $20,745 0.19% $13,339
4/30/98 $18,841 -0.45% $20,652 0.18% $13,363
5/31/98 $19,099 1.58% $20,978 0.18% $13,387
6/30/98 $19,163 0.39% $21,060 0.12% $13,403
7/31/98 $19,197 0.25% $21,113 0.12% $13,419
8/31/98 $19,426 1.55% $21,440 0.12% $13,435
9/30/98 $19,654 1.25% $21,708 0.12% $13,451
10/31/98 $19,621 0.00% $21,708 0.24% $13,484
11/30/98 $19,687 0.35% $21,784 0.00% $13,484
12/31/98 $19,716 0.25% $21,838 -0.06% $13,476
1/31/99 $19,913 1.19% $22,098 0.24% $13,508
2/28/99 $19,902 -0.44% $22,001 0.12% $13,524
Total Return 99.02% 120.01% 35.24%
- ---------------------------------------------------------------------
</TABLE>
AVERAGE ANNUAL TOTAL RETURN
2/28/99
<TABLE>
<CAPTION>
CLASS C
- -------
<S> <C>
1-Year +3.04%
3-Year +5.79%
Since Inception (5/1/95) +6.44%
</TABLE>
The following line graph compares the performance of the Franklin Puerto Rico
Tax-Free Income Fund's Class C shares to that of the Lehman Brothers Municipal
Bond Index, and to the Consumer Price Index based on a $10,000 investment from
5/1/95to 2/28/99.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
Date Franklin Puerto Rico Lehman Brothers CPI
Tax-Free Income Municipal Bond
Fund-Class C Index
- ----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
5/1/95 $ 9,904 $10,000 $10,000
5/31/95 $10,155 3.19% $10,319 0.20% $10,020
6/30/95 $10,031 -0.87% $10,229 0.20% $10,040
7/31/95 $10,110 0.95% $10,326 0.00% $10,040
8/31/95 $10,216 1.27% $10,458 0.26% $10,066
9/29/95 $10,277 0.63% $10,523 0.20% $10,086
10/31/95 $10,410 1.45% $10,676 0.33% $10,120
11/30/95 $10,543 1.66% $10,853 -0.07% $10,112
12/29/95 $10,615 0.96% $10,957 -0.07% $10,105
1/31/96 $10,686 0.76% $11,041 0.59% $10,165
2/29/96 $10,603 -0.68% $10,966 0.32% $10,198
3/29/96 $10,521 -1.28% $10,825 0.52% $10,251
4/30/96 $10,530 -0.28% $10,795 0.39% $10,291
5/31/96 $10,520 -0.04% $10,791 0.19% $10,310
6/28/96 $10,648 1.09% $10,908 0.06% $10,316
7/31/96 $10,712 0.91% $11,008 0.19% $10,336
8/30/96 $10,730 -0.02% $11,005 0.19% $10,356
9/30/96 $10,870 1.40% $11,159 0.32% $10,389
10/31/96 $10,962 1.13% $11,286 0.32% $10,422
11/29/96 $11,112 1.83% $11,492 0.19% $10,442
12/31/96 $11,076 -0.42% $11,444 0.00% $10,442
1/31/97 $11,084 0.19% $11,466 0.32% $10,475
2/28/97 $11,169 0.92% $11,571 0.31% $10,508
3/31/97 $11,031 -1.33% $11,417 0.25% $10,534
4/30/97 $11,127 0.84% $11,513 0.12% $10,547
5/31/97 $11,282 1.51% $11,687 -0.06% $10,540
6/30/97 $11,370 1.07% $11,812 0.12% $10,553
7/31/97 $11,642 2.77% $12,139 0.12% $10,565
8/31/97 $11,569 -0.94% $12,025 0.19% $10,586
9/30/97 $11,693 1.19% $12,168 0.25% $10,612
10/31/97 $11,749 0.64% $12,246 0.25% $10,639
11/30/97 $11,825 0.59% $12,318 -0.06% $10,632
12/31/97 $11,981 1.46% $12,498 -0.12% $10,619
1/31/98 $12,057 1.03% $12,627 0.19% $10,640
2/28/98 $12,072 0.03% $12,631 0.19% $10,660
3/31/98 $12,118 0.09% $12,642 0.19% $10,680
4/30/98 $12,093 -0.45% $12,585 0.18% $10,699
5/31/98 $12,242 1.58% $12,784 0.18% $10,719
6/30/98 $12,278 0.39% $12,834 0.12% $10,731
7/31/98 $12,294 0.25% $12,866 0.12% $10,744
8/31/98 $12,445 1.55% $13,065 0.12% $10,757
9/30/98 $12,574 1.25% $13,229 0.12% $10,770
10/31/98 $12,548 0.00% $13,229 0.24% $10,796
11/30/98 $12,594 0.35% $13,275 0.00% $10,796
12/31/98 $12,607 0.25% $13,308 -0.06% $10,789
1/31/99 $12,717 1.19% $13,466 0.24% $10,815
2/28/99 $12,702 -0.44% $13,407 0.12% $10,828
Total Return 27.02% 34.07% 8.28%
- -----------------------------------------------------------------
</TABLE>
*Source: Standard and Poor's Micropal.
Past performance is not predictive of future results.
60
MUNICIPAL BOND RATINGS
MOODY'S
Aaa: Best quality. They carry the smallest degree of investment risk and
generally are referred to as "gilt-edged." Interest payments are protected by a
large or exceptionally stable margin, and principal is secure. Although the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
Aa: High quality by all standards. Together with the Aaa group, they comprise
what generally are known as high-grade bonds. Aa bonds are rated lower than Aaa
because margins of protection may not be as large, fluctuation of protective
elements may be of greater amplitude, or there may be other elements which make
the long-term risks appear larger.
A: Possess many favorable investment attributes and are considered upper
medium-grade obligations. Factors giving security to principal and interest are
considered adequate, but elements may be present which suggest a susceptibility
to impairment sometime in the future.
Baa: Medium-grade obligations, i.e., they are neither highly protected nor
poorly secured. Interest payments and principal security appear adequate for the
present, but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time.
Ba: Contain speculative elements. Often the protection of interest and principal
payments may be very moderate and, thereby, not well safeguarded during both
good and bad times over the future. Uncertainty of position characterizes bonds
in this class.
B: Generally lack characteristics of the desirable investment. Assurance of
interest and principal payments or of maintenance of other terms of the contract
over any long period of time may be small.
Caa: Poor standing. Such issues may be in default, or elements of danger with
respect to principal or interest may be present.
61
Ca: Obligations that are highly speculative. Such issues are often in default or
have other marked shortcomings.
C: Lowest-rated class of bonds. Issues rated C can be regarded as having
extremely poor prospects of ever attaining any real investment standing.
S&P(R)
AAA: The highest rating assigned by S&P to a debt obligation and indicates the
ultimate degree of protection as to principal and interest.
AA: Also qualify as high-grade obligations, and, in the majority of instances,
differ from AAA issues only in a small degree.
A: Generally regarded as upper medium-grade. They have considerable investment
strength but are not entirely free from adverse effects of changes in economic
and trade conditions. Interest and principal are regarded as safe.
BBB: Regarded as having an adequate capacity to pay principal and interest.
Whereas they normally exhibit adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a weakened
capacity to pay principal and interest for bonds in this category than for bonds
in the A category.
BB, B, CCC, CC: Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds likely will have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C: Reserved for income bonds on which no interest is being paid.
D: Debt rated "D" is in default and payment of interest and/or repayment of
principal is in arrears.
62
FRANKLIN TAX-FREE TRUST
Financial Highlights
<TABLE>
<CAPTION>
FRANKLIN ARIZONA TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28,
--------------------------------------------------------------------------------
CLASS A 1999 1998 1997 1996(1) 1995
- --------------------------------------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 11.44 $ 11.24 $ 11.34 $ 11.11 $ 11.58
----------- ----------- ------------ ------------ ------------
Income from investment operations:
Net investment income ...................... .59 .61 .62 .64 .65
Net realized and unrealized gains (losses) . (.01) .29 (.04) .36 (.48)
----------- ----------- ------------ ------------ ------------
Total from investment operations ............ .58 .90 .58 1.00 .17
----------- ----------- ------------ ------------ -------------
Less distributions from:
Net investment income ...................... (.59)(2) (.61) (.63) (.65) (.64)
In excess of net investment income ......... -- (.01) -- -- --
Net realized gains ......................... (.05) (.08) (.05) (.12) --
----------- ----------- ------------ ------------ ------------
Total distributions ......................... (.64) (.70) (.68) (.77) (.64)
----------- ----------- ------------ ------------ ------------
Net asset value, end of year ................ $ 11.38 $ 11.44 $ 11.24 $ 11.34 $ 11.11
============ ============ ============ ============ ============
Total return* ............................... 5.17% 8.23% 5.33% 9.24% 1.63%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $ 861,020 $ 810,250 $ 752,335 $ 750,797 $ 720,801
Ratios to average net assets:
Expenses ................................... .63% .63% .62% .62% .60%
Net investment income ...................... 5.11% 5.40% 5.59% 5.67% 5.86%
Portfolio turnover rate ..................... 14.11% 20.02% 16.57% 25.12% 18.65%
</TABLE>
<TABLE>
<CAPTION>
CLASS C
- -------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 11.51 $ 11.30 $ 11.38 $ 11.15
----------- ----------- ----------- ------------
Income from investment operations:
Net investment income ...................... .52 .56 .57 .49
Net realized and unrealized gains (losses) . (.01) .29 (.03) .34
----------- ----------- ----------- ------------
Total from investment operations ............ .51 .85 .54 .83
----------- ----------- ----------- ------------
Less distributions from:
Net investment income ...................... (.52)(3) (.56) (.57) (.48)
Net realized gains ......................... (.05) (.08) (.05) (.12)
----------- ----------- ----------- ------------
Total distributions ......................... (.57) (.64) (.62) (.60)
----------- ----------- ----------- ------------
Net asset value, end of year ................ $ 11.45 $ 11.51 $ 11.30 $ 11.38
=========== =========== =========== ============
Total return* ............................... 4.54% 7.67% 4.89% 7.60%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $ 23,871 $ 14,537 $ 5,486 $ 1,892
Ratios to average net assets:
Expenses ................................... 1.19% 1.19% 1.19% 1.20%**
Net investment income ...................... 4.55% 4.82% 5.01% 5.05%**
Portfolio turnover rate ..................... 14.11% 20.02% 16.57% 25.12%
</TABLE>
* Total return does not reflect sales commissions or the contingent
deferred sales charge, and is not annualized for periods less than one
year. Prior to May 1, 1994, dividends from net investment income were
reinvested at the offering price.
** Annualized
(1) For the period May 1, 1995 (effective date) to February 29, 1996 for
Class C.
(2) Includes distributions in excess of net investment income in the amount
of $.002.
(3) Includes distributions in excess of net investment income in the amount
of $.001.
See notes to financial statements.
63
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN ARIZONA TAX-FREE INCOME FUND AMOUNT VALUE
- ------------------------------------- ----------- -----------
<S> <C> <C>
(a) LONG TERM INVESTMENTS 98.9%
Apache Junction Water Utilities Community, 5.80%, 7/01/17 ...................................... $ 1,200,000 $ 1,294,296
Arizona Educational Loan Marketing Corp. Revenue,
Senior Series, 6.375%, 9/01/05 ............................................................... 10,000,000 10,559,500
Series B, MBIA Insured, 7.00%, 3/01/03 ....................................................... 1,000,000 1,076,310
Series B, MBIA Insured, 7.35%, 9/01/04 ....................................................... 1,000,000 1,032,840
Series B, MBIA Insured, 7.00%, 3/01/05 ....................................................... 1,000,000 1,076,310
Series B, MBIA Insured, 7.375%, 9/01/05 ...................................................... 775,000 800,079
Sub Series, 6.625%, 9/01/05 .................................................................. 1,000,000 1,071,210
Arizona Health Facilities Authority Hospital System Revenue,
Northern Arizona Healthcare System, AMBAC Insured, 5.00%, 10/01/23 ........................... 1,500,000 1,479,060
Northern Arizona Healthcare System, Refunding, AMBAC Insured, 4.75%, 10/01/30 ................ 2,000,000 1,887,660
Phoenix Baptist Hospital, ETM, MBIA Insured, 6.25%, 9/01/11 .................................. 2,000,000 2,172,300
Arizona Health Facilities Authority Revenue, Arizona Voluntary Hospital,
Hospital Federal Pooled Loan Revenue, Series B, FGIC Insured, Pre-Refunded, 7.75%, 10/01/07 .. 770,000 787,002
Series B, FGIC Insured, 7.25%, 10/01/13 ...................................................... 5,000,000 5,150,450
Arizona State COP,
FSA Insured, 6.625%, 9/01/08 ................................................................. 5,000,000 5,367,050
Refunding, Series B, AMBAC Insured, 6.25%, 9/01/10 ........................................... 5,000,000 5,409,600
Arizona State Municipal Financing Program COP,
Dysart School, ETM, Series 22, BIG Insured, 7.875%, 8/01/05 .................................. 1,350,000 1,647,459
ETM, Series 20, BIG Insured, 7.625%, 8/01/06 ................................................. 3,250,000 3,790,248
Peoria School, ETM, Series 19, BIG Insured, 7.75%, 8/01/04 ................................... 500,000 594,410
Series 25, BIG Insured, 7.875%, 8/01/14 ...................................................... 500,000 673,320
Series 29, BIG Insured, Pre-Refunded, 7.125%, 8/01/14 ........................................ 2,500,000 2,566,900
Arizona State Wastewater Management Authority Wastewater Financial Assistance Revenue,
6.80%, 7/01/11 ............................................................................... 4,000,000 4,397,120
Series A, AMBAC Insured, 5.625%, 7/01/15 ..................................................... 1,000,000 1,078,540
Arizona Water Infrastructure Financial Authority Revenue, Water Quality Financial Assistance,
Series A, 5.00%, 7/01/17 ..................................................................... 1,670,000 1,669,883
Bullhead City Municipal Property Corp., Municipal Facilities Revenue, MBIA Insured,
Pre-Refunded, 7.20%, 7/01/09 ................................................................. 2,125,000 2,175,108
Casa Grande Excise Tax Revenue, 6.20%, 4/01/15 ................................................. 930,000 1,022,024
Casa Grande IDA,
IDR, Frito Lay/PepsiCo, 6.65%, 12/01/14 ...................................................... 500,000 552,435
PCR, Frito Lay/PepsiCo, 6.60%, 12/01/10 ...................................................... 1,800,000 1,986,354
Chandler GO, FGIC Insured,
Pre-Refunded, 6.80%, 7/01/13 ................................................................. 1,750,000 2,010,698
Pre-Refunded, 6.85%, 7/01/14 ................................................................. 1,625,000 1,870,960
Refunding, 7.00%, 7/01/12 .................................................................... 1,000,000 1,075,090
Chandler IDA, MFHR, Hacienda Apartments Project, Refunding, Series A, GNMA Secured,
6.05%, 7/20/30 ............................................................................... 4,055,000 4,246,558
Chandler Street and Highway Revenue, MBIA Insured, Pre-Refunded, 6.85%, 7/01/13 ................ 1,250,000 1,439,200
Chandler Water and Sewer Revenue, Refunding, FGIC Insured,
7.00%, 7/01/12 ............................................................................... 6,715,000 7,219,229
6.25%, 7/01/13 ............................................................................... 2,165,000 2,352,467
5.25%, 7/01/15 ............................................................................... 2,270,000 2,342,935
Coconino County Flagstaff USD, No. 1, AMBAC Insured, 6.20%, 7/01/06 ............................ 1,095,000 1,139,928
Coconino County PCR,
Arizona Public Service Co., Refunding, Series A, MBIA Insured, 5.875%, 8/15/28 ............... 5,275,000 5,606,903
Nevada Power Co., 6.375%, 10/01/36 ........................................................... 3,500,000 3,790,640
Nevada Power Co., Refunding, Series E, 5.35%, 10/01/22 ....................................... 7,265,000 7,206,953
Nevada Power Co., Series B, 5.80%, 11/01/32 .................................................. 6,500,000 6,593,210
Eloy Municipal Property Corp. Facilities Revenue, 7.80%, 7/01/09 ............................... 1,475,000 1,542,245
Gila County IDAR, Asarco Inc., Refunding, 5.55%, 1/01/27 ....................................... 45,900,000 45,003,573
Gilbert ID No. 11, FGIC Insured, 7.60%, 1/01/05 ................................................ 1,500,000 1,549,875
Gilbert Water and Sewer Revenue, Refunding, FGIC Insured, 6.50%,
7/01/12 ...................................................................................... 1,500,000 1,678,890
7/01/22 ...................................................................................... 3,250,000 3,612,895
Glendale IDA,
Educational Facilities Revenue, American Graduate School International, Connie Lee Insured,
Pre-Refunded, 7.00%, 7/01/14 ................................................................. 1,000,000 1,177,030
Educational Facilities Revenue, American Graduate School International, Connie Lee Insured,
Pre-Refunded, 7.125%, 7/01/20 ................................................................ 1,250,000 1,479,963
Educational Facilities Revenue, American Graduate School International, Refunding,
Connie Lee Insured, 5.875%, 7/01/15 ........................................................ 2,200,000 2,401,322
</TABLE>
64
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN ARIZONA TAX-FREE INCOME FUND AMOUNT VALUE
- ------------------------------------- ---------- ----------
<S> <C> <C>
(a) LONG TERM INVESTMENTS (CONT.)
Glendale IDA, (cont.)
Midwestern University, Series A, 6.00%, 5/15/16 .......................................... $ 455,000 $ 499,599
Midwestern University, Series A, 5.375%, 5/15/28 ......................................... 15,000,000 14,835,150
Midwestern University, Series A, Connie Lee Insured, 6.00%, 5/15/26 ...................... 340,000 377,536
Midwestern University, Series A, Pre-Refunded, 6.00%, 5/15/16 ............................ 1,485,000 1,691,445
Midwestern University, Series A, Pre-Refunded, 6.00%, 5/15/26 ............................ 1,660,000 1,890,773
Glendale Municipal Property Corp., Refunding, MBIA Insured, 7.00%, 7/01/09 ................... 2,400,000 2,448,696
Guam Power Authority Revenue, Series A, 6.30%,
10/01/12 ................................................................................. 3,630,000 3,928,059
10/01/22 ................................................................................. 4,000,000 4,311,840
Lake Havasu City Wastewater COP, FGIC Insured, 7.00%, 6/01/05 ................................ 2,700,000 2,894,292
Marana Municipal Property Corp. Municipal Facilities Revenue, Refunding, MBIA Insured,
5.25%, 7/01/22 ........................................................................... 1,170,000 1,190,920
Maricopa County COP, 6.00%, 6/01/04 .......................................................... 8,000,000 8,444,480
Maricopa County GO,
Hospital District No. 1, AMBAC Insured, 5.00%, 6/01/21 .................................. 2,000,000 1,970,800
School District No. 4, Mesa Unified, FGIC Insured, Pre-Refunded, 5.65%, 7/01/11 ......... 1,500,000 1,669,350
School District No. 4, Mesa Unified, FGIC Insured, Pre-Refunded, 5.70%, 7/01/12 ......... 2,000,000 2,231,360
School District No. 8, Osborn, Refunding, Series A, FGIC Insured, 5.875%, 7/01/14 ....... 3,500,000 3,831,765
School District No. 8, Osborn, School Improvement Project, Series B, Pre-Refunded,
7.10%, 7/01/05 .......................................................................... 500,000 511,545
School District No. 8, Osborn, School Improvement Project, Series B, Pre-Refunded,
7.15%, 7/01/07 .......................................................................... 1,075,000 1,099,994
School District No. 8, Osborn, School Improvement Project, Series B, Pre-Refunded,
7.20%, 7/01/09 .......................................................................... 1,885,000 1,929,128
School District No. 11, Peoria Unified, Refunding, AMBAC Insured, 6.10%, 7/01/10 ........ 6,300,000 6,919,353
School District No. 11, Peoria Unified, Refunding, MBIA Insured, 7.00%, 7/01/10 ......... 2,800,000 3,014,144
School District No. 28, Kyrene Elementary, Series B, FGIC Insured, 6.00%, 7/01/14 ....... 2,000,000 2,152,340
School District No. 98, Fountain Hills Unified, 6.625%, 7/01/10 ......................... 475,000 507,956
School District No. 98, Fountain Hills Unified, Pre-Refunded, 6.625%, 7/01/10 ........... 825,000 890,678
UHSD No. 210, Series A, Pre-Refunded, 5.70%, 7/01/15 .................................... 500,000 552,440
UHSD No. 210, Series B, Pre-Refunded, 5.50%, 7/01/17 .................................... 9,050,000 9,941,787
USD No. 41, Gilbert, 6.25%, 7/01/15 ..................................................... 2,000,000 2,167,320
USD No. 41, Gilbert, Project of 1993, Series F, FSA Insured, 5.125%, 7/01/18 ............ 2,555,000 2,565,169
USD No. 65, Littleton School Improvement, Series B, FGIC Insured, 6.40%, 7/01/14 ........ 1,175,000 1,295,402
USD No. 66, Roosevelt Elementary Project, Series B, FGIC Insured, 5.25%, 7/01/17 ........ 2,500,000 2,549,700
USD No. 69, Paradise Valley, Series A, Pre-Refunded, 7.10%, 7/01/05 ..................... 1,000,000 1,155,970
USD No. 80, Chandler, FGIC Insured, Pre-Refunded, 6.00%, 7/01/13 ........................ 1,600,000 1,799,232
USD No. 89, Dysart, Refunding and Improvement, FGIC Insured, 6.70%, 7/01/05 ............. 240,000 251,292
USD No. 89, Dysart, Refunding and Improvement, FGIC Insured, 6.75%, 7/01/06 ............. 1,760,000 1,844,638
USD No. 214, Tolleson GO, FGIC Insured, Pre-Refunded, 5.75%, 7/01/14 .................... 1,000,000 1,110,630
Maricopa County Hospital Revenue, Sun Health Corp., Refunding,
5.80%, 4/01/08 .......................................................................... 3,870,000 4,169,615
5.90%, 4/01/09 .......................................................................... 2,120,000 2,292,186
6.125%, 4/01/18 ......................................................................... 15,650,000 16,824,533
Maricopa County IDA,
(b) Health Facilities Revenue, Catholic Healthcare West Project, Refunding, Series A,
5.00%, 7/01/16 .......................................................................... 6,000,000 5,870,340
Health Facilities Revenue, Catholic Healthcare West Project, Refunding, Series A,
5.00%, 7/01/21 .......................................................................... 17,600,000 16,890,016
Hospital Facility Revenue, FSA Insured, 7.50%, 12/01/13 1,445,000 1,563,158
Hospital Facility Revenue, FSA Insured, Pre-Refunded, 7.50%, 12/01/13 ................... 1,305,000 1,421,732
Hospital Facility Revenue, Mayo Clinic Hospital, 5.25%, 11/15/37 ........................ 30,000,000 29,751,900
Hospital Facility Revenue, Samaritan Health
Service Hospital, Refunding, Series A, MBIA Insured, 7.00%, 12/01/16 .................... 1,890,000 2,369,663
Hospital Facility Revenue, Samaritan Hospital Health Services, Refunding, Series A,
MBIA Insured, 7.00%, 12/01/13 ........................................................... 17,800,000 19,106,698
IDR, Citizens Utilities Co. Project, 6.20%, 5/01/30 ..................................... 5,000,000 5,369,400
MFHR, Madera Pointe Apartments Project, Refunding, FSA Insured, 5.90%, 6/01/26 .......... 2,105,000 2,227,700
MFHR, National Health Facilities II Project, Series A, FSA Insured, 5.10%, 1/01/33 ...... 12,500,000 12,419,250
MFHR, Stanford Court Apartments Project, Series A, MBIA Insured, 5.30%, 7/01/28 ......... 1,235,000 1,251,710
Water System Revenue, Improvement, Chaparral Water Co., Series A, AMBAC Insured,
5.40%, 12/01/22 ......................................................................... 1,000,000 1,021,180
Maricopa County IDAR,
Mercy Health System, Series A, MBIA Insured, Pre-Refunded, 7.125%, 7/01/07 .............. 1,585,000 1,630,585
SFMR, GNMA Secured, 8.00%, 9/01/09 ...................................................... 685,000 704,570
Maricopa County Stadium District Revenue, MBIA Insured, 5.75%, 7/01/16 ....................... 3,000,000 3,223,920
Mesa Arizona IDAR, Lutheran Health Systems, Refunding, Series A-1, MBIA Insured,
5.00%, 1/01/19 .......................................................................... 6,000,000 5,947,440
</TABLE>
65
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN ARIZONA TAX-FREE INCOME FUND AMOUNT VALUE
- ------------------------------------- ----------- -----------
<S> <C> <C>
(a) LONG TERM INVESTMENTS (CONT.)
Mesa GO, FGIC Insured, 5.00%, 7/01/18 .......................................................... $ 1,000,000 $ 991,370
Mesa Utility System Revenue, FGIC Insured, 5.375%, 7/01/17 ..................................... 15,500,000 16,026,535
Mohave County Hospital District No. 1, Kingman Regional Medical Center Project,
FGIC Insured, 6.50%, 6/01/15 ................................................................. 1,500,000 1,621,350
Pre-Refunded, 8.375%, 6/01/15 ................................................................ 6,350,000 6,848,920
Mohave County IDA,
Health Care Revenue, Refunding, GNMA Secured, 6.375%, 11/01/31 ............................... 1,585,000 1,730,868
Hospital Systems Revenue, Baptist Hospital, MBIA Insured, 5.50%, 9/01/21 ..................... 1,500,000 1,558,440
Hospital Systems Revenue, Baptist Hospital, MBIA Insured, 5.75%, 9/01/26 ..................... 4,675,000 5,047,457
Hospital Systems Revenue, Medical Environments Inc., Phoenix Hospital and Medical Center,
ETM, 5.80%, 7/01/99 .......................................................................... 1,595,000 1,609,610
IDR, Citizens Utilities Co. Project, 6.60%, 5/01/29 .......................................... 4,100,000 4,462,563
IDR, Citizens Utilities Co. Project, Series A, 7.15%, 2/01/26 ................................ 10,000,000 10,398,000
IDR, Citizens Utilities Co. Project, Series B, 7.15%, 2/01/26 ................................ 5,000,000 5,199,000
Mohave County USD No. 1, Lake Havasu, 5.00%, 7/01/14 ........................................... 1,075,000 1,090,727
Navajo County PCR, Arizona Public Service Co., Series A,
MBIA Insured, 5.875%, 8/15/28 ................................................................ 3,000,000 3,188,760
Refunding, 5.875%, 8/15/28 ................................................................... 54,500,000 56,492,509
Nogales Municipal Development Authority Inc. Municipal Facilities Revenue, Refunding,
MBIA Insured, 7.20%, 6/01/08 ................................................................. 6,350,000 6,831,076
Northern Arizona University System Revenue,
Pre-Refunded, 7.50%, 6/01/06 ................................................................. 3,700,000 3,740,367
Refunding, FGIC Insured, 6.40%, 6/01/07 ...................................................... 2,750,000 2,956,388
Northern Mariana Islands Commonwealth Ports Authority Seaport Revenue,
Series A, 6.40%, 3/15/28 ..................................................................... 8,885,000 8,665,274
Oro Valley Municipal Property Corp. Revenue, Municipal Water System, MBIA Insured,
5.55%, 7/01/17 ............................................................................... 1,150,000 1,230,512
5.75%, 7/01/17 ............................................................................... 1,000,000 1,087,710
5.375%, 7/01/26 .............................................................................. 1,000,000 1,022,500
Peoria Municipal Development Authority Water and Sewer Revenue, Refunding, FGIC Insured,
6.625%, 7/01/06 .............................................................................. 1,000,000 1,043,160
Phoenix Airport Revenue, MBIA Insured,
Refunding, Series B, 6.20%, 7/01/10 .......................................................... 700,000 772,429
Refunding, Series C, 6.30%, 7/01/10 .......................................................... 1,680,000 1,844,858
Refunding, Series C, 6.40%, 7/01/11 .......................................................... 1,785,000 1,964,053
Refunding, Series C, 6.40%, 7/01/12 .......................................................... 570,000 631,754
Series D, 6.30%, 7/01/10 ..................................................................... 1,800,000 1,976,634
Series D, 6.40%, 7/01/11 ..................................................................... 3,825,000 4,208,686
Series D, 6.40%, 7/01/12 ..................................................................... 820,000 908,839
Phoenix Civic Improvement Corp. Airport Terminal Excise Tax Revenue, Refunding, senior lien,
5.00%, 7/01/14 ............................................................................... 1,245,000 1,245,909
Phoenix Civic Improvement Corp. Municipal Facilities Excise Tax Revenue, MBIA Insured,
Pre-Refunded, 6.90%, 7/01/21 ................................................................. 1,000,000 1,161,900
Phoenix Civic Improvement Corp. Water System Revenue,
junior lien, MBIA Insured, 5.375%, 7/01/22 ................................................... 8,130,000 8,312,762
Pre-Refunded, 5.95%, 7/01/15 ................................................................. 1,090,000 1,223,776
Pre-Refunded, 5.95%, 7/01/16 ................................................................. 3,665,000 4,114,805
Pre-Refunded, 6.00%, 7/01/19 ................................................................. 3,000,000 3,377,640
Phoenix Civic Plaza Building Corp., 6.00%, 7/01/14 ............................................. 4,300,000 4,654,277
Phoenix GO,
5.25%, 7/01/20 ............................................................................... 2,000,000 2,043,040
Refunding, 6.375%, 7/01/13 ................................................................... 5,000,000 5,467,000
Refunding, Series A, 5.50%, 7/01/15 .......................................................... 5,000,000 5,280,100
Refunding, Series A, 5.00%, 7/01/19 .......................................................... 3,500,000 3,508,260
(b) Series 1999, 4.75%, 7/01/23 .............................................................. 2,000,000 1,935,420
Series B, 5.25%, 7/01/15 ..................................................................... 2,775,000 2,867,824
Phoenix HFC, Mortgage Revenue,
Project A, Refunding, MBIA Insured, 6.50%, 7/01/24 ........................................... 2,750,000 2,880,020
Section 8 Project, Refunding, Series A, MBIA Insured, 6.90%, 1/01/23 ......................... 1,750,000 1,836,870
Section 8 Project, Refunding, Series A, MBIA Insured, 7.25%, 1/01/23 ......................... 2,260,000 2,338,490
Phoenix IDA,
Hospital Revenue, Refunding, Series B, Connie Lee Insured, 5.75%, 12/01/16 ................... 3,500,000 3,806,950
SFMR, FNMA Insured, 6.30%, 12/01/12 .......................................................... 755,000 802,233
SFMR, Statewide, Series C, GNMA Secured, 5.30%, 4/01/20 ...................................... 2,000,000 2,012,320
Phoenix Municipal Housing Revenue, Fillmore Gardens Project, Refunding, 6.30%, 6/01/09 ......... 1,500,000 1,616,985
</TABLE>
66
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN ARIZONA TAX-FREE INCOME FUND AMOUNT VALUE
- ------------------------------------- ----------- ----------
<S> <C> <C>
(a) LONG TERM INVESTMENTS (CONT.)
Phoenix Street and Highway Revenue,
ETM, 6.80%, 7/01/03 .......................................................................... $ 1,000,000 $ 1,120,730
Refunding, 6.60%, 7/01/07 .................................................................... 5,000,000 5,468,900
Pima County IDA,
Health Care Corp. Revenue, Carondelet St. Joseph's and St. Mary's Hospital, BIG Insured,
8.00%, 7/01/13 ............................................................................... 65,000 66,476
Health Care Corp. Revenue, Carondelet St. Joseph's and St. Mary's Hospital, MBIA Insured,
6.75%, 7/01/10 ............................................................................... 2,250,000 2,419,785
MFR, Series A, 6.00%, 12/01/21 ............................................................... 2,720,000 2,875,938
SFMR, GNMA Secured, 6.40%, 11/01/09 .......................................................... 795,000 841,142
SFMR, GNMA Secured, 8.125%, 9/01/20 .......................................................... 1,115,000 1,138,382
SFMR, GNMA Secured, 6.75%, 11/01/27 .......................................................... 3,555,000 3,779,285
SFMR, Refunding, Series A, 7.625%, 2/01/12 ................................................... 2,975,000 3,104,085
SFMR, Refunding, Series A, 6.50%, 2/01/17 .................................................... 705,000 745,122
Pima County IDAR,
MFHR, Housing Ria Nova and Villa Projects, GNMA Secured, 5.20%, 12/20/31 ..................... 2,370,000 2,355,022
Refunding, Series A, MBIA Insured, 5.625%, 4/01/14 ........................................... 2,250,000 2,415,465
Pima County Sewer Revenue, Refunding, FGIC Insured, 6.75%, 7/01/15 ............................. 1,410,000 1,514,975
Pima County USD, Tucson Project No. 1, FGIC Insured, 5.875%, 7/01/14 ........................... 21,000,000 22,715,490
Pinal County USD No. 43, Apache Junction Improvement,
FGIC Insured, Pre-Refunded, 7.15%, 7/01/05 ................................................... 500,000 510,790
FGIC Insured, Pre-Refunded, 7.20%, 7/01/07 ................................................... 700,000 716,506
Series A, FGIC Insured, 5.85%, 7/01/15 ....................................................... 2,500,000 2,716,775
Puerto Rico Commonwealth Aqueduct and Sewer Authority Revenue, Series A, FSA Insured,
Pre-Refunded, 9.00%, 7/01/09 ................................................................. 75,000 92,932
Puerto Rico Commonwealth GO,
Pre-Refunded, 6.50%, 7/01/23 ................................................................. 4,850,000 5,548,061
Public Improvement, 5.00%, 7/01/28 ........................................................... 10,000,000 9,818,100
Public Improvement, Refunding, 5.375%, 7/01/25 ............................................... 1,975,000 2,035,652
Puerto Rico Commonwealth Highway and Transportation Authority Revenue, Series Y,
5.00%, 7/01/36 ............................................................................... 9,000,000 8,954,100
Puerto Rico Commonwealth IDC, General Purpose Revenue, Series B, 5.375%, 7/01/16 ............... 2,800,000 2,918,132
Puerto Rico Commonwealth Infrastructure Financing Authority, Special Tax Revenue, Series A,
7.75%, 7/01/08 ............................................................................... 1,550,000 1,584,813
7.50%, 7/01/09 ............................................................................... 335,000 342,440
Puerto Rico Electric Power Authority Revenue,
Refunding, Series N, 7.00%, 7/01/07 .......................................................... 745,000 765,905
Refunding, Series N, 7.125%, 7/01/14 ......................................................... 2,205,000 2,267,754
Refunding, Series O, 7.125%, 7/01/14 ......................................................... 1,510,000 1,552,975
Series X, 6.125%, 7/01/21 .................................................................... 25,720,000 29,380,985
Puerto Rico HFC Revenue,
MF Mortgage, Portfolio A-I, 7.50%, 4/01/22 ................................................... 1,215,000 1,262,409
Sixth Portfolio, Section 8 Assisted, FHA Mortgage Insured, Pre-Refunded, 7.75%, 12/01/26 ..... 40,000 48,806
Puerto Rico HFC, SFMR, Portfolio No. 1, Series B, GNMA Secured, 7.65%, 10/15/22 ................ 490,000 513,775
Puerto Rico Industrial Tourist Educational Medical and Environmental Control Facilities
Financing Authority Hospital Revenue,
Dr. Pila Hospital, Refunding, 5.875%, 8/01/12 ................................................ 5,225,000 5,637,462
Hospital Auxilio Mutuo Obligation, Series A, 6.25%, 7/01/24 .................................. 1,950,000 2,162,726
Puerto Rico Public Finance Corp. Commonwealth Appropriation, Series A, 5.00%, 6/01/26 .......... 6,000,000 5,851,320
Salt River Project Agricultural Improvement and Power District Electric System Revenue,
Refunding, Series A, 5.75%, 1/01/13 .......................................................... 2,435,000 2,607,666
Refunding, Series A, 5.00%, 1/01/20 .......................................................... 7,500,000 7,480,200
Series A, 6.00%, 1/01/31 ..................................................................... 4,600,000 4,753,732
Series A, MBIA Insured, 6.00%, 1/01/31 ....................................................... 1,845,000 1,902,712
Series C, 6.20%, 1/01/12 ..................................................................... 5,925,000 6,354,326
Series C, 6.25%, 1/01/19 ..................................................................... 9,975,000 10,713,749
Series D, 6.25%, 1/01/27 ..................................................................... 4,890,000 5,250,784
San Luis Municipal Property Corp. Municipal Facilities Revenue, 8.125%, 7/01/19 ................ 3,160,000 3,242,602
Santa Cruz County IDAR, Citizens Utilities Co. Project, 6.60%, 5/01/29 ......................... 8,000,000 8,707,440
Scottsdale IDA Hospital Revenue, Scottsdale Memorial Hospital, Refunding, Series A,
AMBAC Insured, 5.70%, 9/01/15 ................................................................ 1,250,000 1,298,575
9/01/18 ...................................................................................... 4,045,000 4,202,189
</TABLE>
67
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN ARIZONA TAX-FREE INCOME FUND AMOUNT VALUE
- ------------------------------------- ----------- ------------
<S> <C> <C>
(a) LONG TERM INVESTMENTS (CONT.)
Sedona Sewer Sales Tax Revenue, Refunding,
6.75%, 7/01/07 ............................................................................. $ 3,800,000 $ 4,261,396
7.00%, 7/01/12 ............................................................................. 5,000,000 5,463,850
Tucson Airport Authority Revenue, MBIA Insured,
Series A, 6.875%, 6/01/20 .................................................................. 1,090,000 1,145,732
Series B, 7.125%, 6/01/15 .................................................................. 1,175,000 1,244,525
Series B, 7.25%, 6/01/20 ................................................................... 1,125,000 1,192,545
Tucson GO, Series A, 5.375%, 7/01/20 ......................................................... 1,800,000 1,857,762
Tucson IDA, MFR,
La Entrada, Refunding, 7.40%, 7/01/26 ...................................................... 1,830,000 1,933,340
Los Portales Apartments, Refunding, 5.90%, 12/20/31 ........................................ 2,000,000 2,103,100
Tucson Water Revenue, Refunding,
FGIC Insured, 5.00%, 7/01/19 ............................................................... 2,100,000 2,083,977
FGIC Insured, 5.125%, 7/01/20 .............................................................. 4,000,000 4,014,520
FGIC Insured, 5.125%, 7/01/21 .............................................................. 9,030,000 9,056,639
MBIA Insured, 7.00%, 7/01/10 ............................................................... 2,250,000 2,304,428
University of Arizona System Revenue,
6.25%, 6/01/11 ............................................................................. 1,000,000 1,129,300
6.35%, 6/01/14 ............................................................................. 1,300,000 1,474,200
Virgin Islands PFA Revenue, senior lien, Fund Loan Notes, Refunding, Series A, 5.50%,
10/01/13 ................................................................................... 2,500,000 2,562,325
10/01/22 ................................................................................... 3,750,000 3,762,563
Virgin Islands Water and Power Authority Electric System Revenue, Refunding,
5.30%, 7/01/18 2,475,000 2,471,832
Virgin Islands Water and Power Authority
Water System Revenue, Refunding, 5.50%, 7/01/17 1,500,000 1,477,755
Yavapai County GO, USD No. 22 Humboldt, Project of 1995, Series B, MBIA Insured,
5.60%, 7/01/14 ............................................................................. 1,825,000 1,957,459
Yavapai County IDA,
Hospital Facility Revenue, Yavapai Regional Medical Center, Series A, FSA Insured,
5.125%, 12/01/13 ........................................................................... 2,000,000 2,053,600
IDR, Citizens Utilities Co. Project, 5.45%, 6/01/33 ........................................ 6,000,000 6,079,380
Yuma County GO,
Elementary School District No. 1, MBIA Insured, 5.50%, 7/01/14 ............................. 2,000,000 2,132,640
Elementary School District No. 1, Series A, MBIA Insured, 5.75%, 7/01/14 ................... 1,500,000 1,628,625
Yuma IDA,
Hospital Revenue, Regency Apartments, Refunding, Series A, GNMA Secured, 5.50%, 12/20/32 ... 2,000,000 2,027,540
Hospital Revenue, Yuma Regional Medical Center, Refunding, MBIA Insured, 5.50%, 8/01/17 .... 4,000,000 4,203,720
MFHR, Alexandrite Sands Apartments Project, FHA Insured, 7.60%, 12/01/15 ................... 1,000,000 1,036,060
MFHR, Alexandrite Sands Apartments Project, FHA Insured, 7.70%, 12/01/29 ................... 2,000,000 2,094,520
-----------
TOTAL LONG TERM INVESTMENTS (COST $825,524,466) ............................................. 875,335,864
-----------
(a) SHORT TERM INVESTMENTS .7%
Apache County IDA, IDR, Tucson Electric Power Co. Project, Springerville Project,
Series A, Weekly VRDN and Put, 3.00%, 12/15/18 ............................................. 3,000,000 3,000,000
Maricopa County IDA, Hospital Facility Revenue, Samaritan Health Service Hospital,
Series B, 2, MBIA Insured, Daily VRDN and Put, 3.25%, 12/01/08 ............................. 1,600,000 1,600,000
Maricopa County PCC, PCR, Arizona Public Service Co., Refunding,
Series A, Daily VRDN and Put, 3.20%, 5/01/29 ............................................... 250,000 250,000
Series D, Daily VRDN and Put, 3.10%, 5/01/29 ............................................... 500,000 500,000
Pinal County IDA,,
DATES, Magma-Copper/Newmont Mining Corp., Daily VRDN and Put, 3.20%, 12/01/09 .............. 200,000 200,000
Magma-Copper/Newmont Mining Corp., Daily VRDN and Put, 3.20%, 12/01/09 ..................... 200,000 200,000
------------
TOTAL SHORT TERM INVESTMENTS (COST $5,750,000) .............................................. 5,750,000
------------
TOTAL INVESTMENTS (COST $831,274,466) 99.6% ................................................. 881,085,864
OTHER ASSETS, LESS LIABILITIES .4% .......................................................... 3,805,022
------------
NET ASSETS 100.0% ........................................................................... $884,890,886
============
</TABLE>
See glossary of terms on page 134.
(a) Variable rate demand notes (VRDNs) are tax-exempt obligations which
contain a floating or variable interest rate adjustment formula and an
unconditional right of demand to receive payment of the principal
balance plus accrued interest at specified dates.
(b) Sufficient collateral has been segregated for securities traded on a
when-issued or delayed delivery basis.
See notes to financial statements.
68
FRANKLIN TAX-FREE TRUST
Financial Highlights
<TABLE>
<CAPTION>
FRANKLIN COLORADO TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28,
-----------------------------------------------------------------------------------
CLASS A 1999 1998 1997 1996(1) 1995
- --------------------------------------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 12.11 $ 11.80 $ 11.84 $ 11.38 $ 11.94
----------- ----------- ----------- ----------- -----------
Income from investment operations:
Net investment income ...................... .60 .63 .66 .67 .67
Net realized and unrealized gains (losses) . .02 .39 (.04) .45 (.57)
----------- ----------- ----------- ----------- -----------
Total from investment operations ............ .62 1.02 .62 1.12 .10
----------- ----------- ----------- ----------- -----------
Less distributions from:
Net investment income ...................... (.60) (.64) (.66) (.66) (.66)
Net realized gains ......................... (.08) (.07) -- -- --
----------- ----------- ----------- ----------- -----------
Total distributions ......................... (.68) (.71) (.66) (.66) (.66)
----------- ----------- ----------- ----------- -----------
Net asset value, end of year ................ $ 12.05 $ 12.11 $ 11.80 $ 11.84 $ 11.38
=========== =========== =========== =========== ===========
Total return* ............................... 5.24% 8.86% 5.44% 10.12% 1.05%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $ 301,381 $ 266,599 $ 236,609 $ 215,609 $ 194,564
Ratios to average net assets:
Expenses ................................... .70% .71% .71% .71% .70%
Net investment income ...................... 4.93% 5.28% 5.59% 5.73% 5.94%
Portfolio turnover rate ..................... 12.60% 22.97% 14.13% 17.58% 28.83%
</TABLE>
<TABLE>
<CAPTION>
CLASS C
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................. $ 12.17 $ 11.84 $ 11.87 $ 11.40
---------- ---------- ---------- ----------
Income from investment operations:
Net investment income ............................. .54 .57 .59 .50
Net realized and unrealized gains (losses) ........ .02 .40 (.02) .46
---------- ---------- ---------- ----------
Total from investment operations ................... .56 .97 .57 .96
---------- ---------- ---------- ----------
Less distributions from:
Net investment income ............................. (.54) (.57) (.60) (.49)
Net realized gains ................................ (.08) (.07) -- --
---------- ---------- ---------- ----------
Total distributions ................................ (.62) (.64) (.60) (.49)
---------- ---------- ---------- ----------
Net asset value, end of year ....................... $ 12.11 $ 12.17 $ 11.84 $ 11.87
============ ========== ========== ==========
Total return* ...................................... 4.63% 8.39% 4.93% 8.57%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................... $ 21,899 $ 10,855 $ 5,654 $ 1,656
Ratios to average net assets:
Expenses .......................................... 1.26% 1.27% 1.28% 1.29%**
Net investment income ............................. 4.38% 4.72% 4.99% 5.12%**
Portfolio turnover rate ............................ 12.60% 22.97% 14.13% 17.58%
</TABLE>
* Total return does not reflect sales commissions or the contingent
deferred sales charge, and is not annualized for periods less than one
year. Prior to May 1, 1994, dividends from net investment income were
reinvested at the offering price.
** Annualized
(1) For the period May 1, 1995 (effective date) to February 29, 1996 for
Class C.
See notes to financial statements.
69
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN COLORADO TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------- ----------- -----------
<S> <C> <C>
(a) LONG TERM INVESTMENTS 97.7%
Adams County PCR, Public Service Co. of Colorado Project,
Refunding, AMBAC Insured, 5.10%, 1/01/19 ..................................................... $ 3,500,000 $ 3,482,465
Series A, Pre-Refunded, 7.375%, 11/01/09 ..................................................... 770,000 770,639
Adams County School No.12 GO, FGIC Insured, 5.40%, 12/15/14 ...................................... 1,000,000 1,051,910
Arapahoe County Capital Improvements Transportation Fund Highway Revenue,
Vehicle Registration, Series A, MBIA Insured,
6.15%, 8/31/26 ................................................................................ 8,000,000 8,882,320
Arapahoe County COP, Refunding, FSA Insured, 6.625%, 12/01/16 .................................... 805,000 883,214
Arapahoe County School District No. 2, Refunding, MBIA Insured, 5.70%, 6/01/19 ................... 2,200,000 2,346,256
Arvada IDR, Wanco Inc. Project,
5.25%, 12/01/07 .............................................................................. 100,000 101,816
5.80%, 12/01/17 .............................................................................. 480,000 489,178
Arvada MFHR, Springwood Community Project, Refunding, 6.35%, 8/20/16 ............................. 1,000,000 1,052,900
Auraria Higher Education Center Colorado COP, Administrative Office Facility Project,
AMBAC Insured, 5.125%, 5/01/18 ............................................................... 1,000,000 1,003,920
Aurora COP, Refunding, 6.25%, 12/01/09 ........................................................... 2,850,000 3,117,302
Bayfield School District No. 10, MBIA Insured, Pre-Refunded, 6.65%, 6/01/15 ...................... 1,000,000 1,148,050
Boulder County Hospital Revenue, Longmont United Hospital Project,
5.50%, 12/01/12 .............................................................................. 1,000,000 1,024,370
5.80%, 12/01/13 .............................................................................. 2,000,000 2,060,760
5.60%, 12/01/17 .............................................................................. 3,385,000 3,447,623
5.875%, 12/01/20 ............................................................................. 1,285,000 1,326,197
Pre-Refunded, 8.20%, 12/01/20 ................................................................ 3,000,000 3,272,610
Boulder GO, Refunding, 7.20%, 8/15/13 ............................................................ 1,250,000 1,280,788
Boulder, Larimer and Weld Counties GO, Vrain Valley School District RE1J, Series A, FGIC Insured,
5.00%, 12/15/18 .............................................................................. 1,000,000 997,430
12/15/22 ..................................................................................... 7,000,000 6,951,350
Castle Pines Metropolitan District GO, Refunding and Improvement, FSA Insured,
5.25%, 12/01/15 .............................................................................. 1,900,000 1,964,277
Colorado Health Facilities Authority Revenue,
Birchwood Manor Project, Series A, GNMA Secured, 7.625%, 4/01/26 ............................. 1,615,000 1,661,254
Boulder Community Hospital, Refunding, Series B, MBIA Insured, 5.875%, 10/01/23 .............. 1,500,000 1,605,630
Catholic Health Initiatives, Series A, 5.00%, 12/01/28 ....................................... 1,800,000 1,743,012
Children's Hospital Association Project, MBIA Insured, 5.25%, 10/01/26 ....................... 1,000,000 1,015,000
Community Provider Pooled Loan Program, FSA Insured, 6.75%, 7/15/17 .......................... 954,000 1,022,135
Community Provider Pooled Loan Program, Series A, FSA Insured, 7.25%, 7/15/17 ................ 6,570,000 7,099,936
Covenant Retirement Communities, 6.75%, 12/01/15 ............................................. 1,750,000 1,952,685
Covenant Retirement Communities, 6.75%, 12/01/25 ............................................. 4,950,000 5,514,251
Kaiser Permanente, Series A, 5.35%, 11/01/16 ................................................. 8,000,000 8,067,040
Mercy Medical Center Durango, 6.20%, 11/15/15 ................................................ 1,250,000 1,341,463
National Benevolent Association, Refunding, Series A, 5.20%, 1/01/18 ......................... 700,000 685,958
National Benevolent Association, Refunding, Series A, 5.25%, 1/01/27 ......................... 1,180,000 1,149,603
National Benevolent Association, Series B, 5.25%, 2/01/18 .................................... 750,000 739,358
National Benevolent Association, Series B, 5.25%, 2/01/28 .................................... 2,500,000 2,434,600
Oakbrook Manor, Series A, GNMA Secured, 7.25%, 4/01/11 ....................................... 375,000 389,359
Oakbrook Manor, Series A, GNMA Secured, 7.625%, 4/01/26 ...................................... 885,000 910,346
Parkview Medical Center Inc. Project, 5.25%, 9/01/18 ......................................... 1,660,000 1,630,203
Parkview Medical Center Inc. Project, 5.30%, 9/01/25 ......................................... 1,615,000 1,581,247
PSL Health System Project, Series B, Pre-Refunded, 8.50%, 2/15/21 ............................ 1,000,000 1,114,140
Sisters of Charity Leavenworth, 5.125%, 12/01/18 ............................................. 1,000,000 1,003,480
Colorado HFA,
GO, Series A, 7.50%, 5/01/29 ................................................................. 1,000,000 1,046,630
MF, Series A, 6.80%, 8/01/14 ................................................................. 3,550,000 3,750,540
MF, Series A, 6.85%, 8/01/24 ................................................................. 5,790,000 6,111,113
MF, Series A, 6.875%, 8/01/30 ................................................................ 2,300,000 2,427,121
MF, Series A-2, 6.00%, 10/01/28 .............................................................. 1,000,000 1,054,060
MF, Series A-2, FHA Insured, 5.45%, 10/01/29 ................................................. 1,000,000 1,005,540
SF Program, Refunding, Series A-2, MBIA Insured, 5.625%, 11/01/23 ............................ 4,000,000 4,100,040
SF Program, Series A-1, 8.00%, 8/01/17 ....................................................... 145,000 148,945
SF Program, Series A-2, 7.70%, 2/01/23 ....................................................... 445,000 464,411
SF Program, Series A-3, 7.90%, 8/01/21 ....................................................... 165,000 170,567
</TABLE>
70
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN COLORADO TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------- ---------- -----------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
Colorado HFA, (cont.)
SF Program, Series C-2, 7.375%, 8/01/10 .................................................... $ 815,000 $ 847,127
SF Program, Series C-2, 7.85%, 2/01/21 ..................................................... 125,000 128,243
Colorado Public Highway Authority Revenue, Highway E-470, Refunding, Senior Series A,
MBIA Insured,
5.25%, 9/01/18 ............................................................................. 3,795,000 3,856,213
5.00%, 9/01/21 ............................................................................. 2,000,000 1,960,300
Colorado Springs Airport Revenue, Series A, MBIA Insured, 5.25%, 1/01/22 ....................... 2,500,000 2,554,525
Colorado Springs Hospital Revenue, Refunding, MBIA Insured, 6.00%,
12/15/15 ................................................................................... 5,575,000 6,165,393
12/15/24 ................................................................................... 10,955,000 12,067,590
Colorado Springs Utilities Revenue,
Refunding and Improvement, Series A, 5.25%, 11/15/22 ....................................... 2,000,000 2,023,520
Refunding and Improvement, Series A, 5.375%, 11/15/26 ...................................... 3,340,000 3,401,256
Series A, 5.75%, 11/15/23 .................................................................. 1,450,000 1,518,672
Series A, Pre-Refunded, 6.10%, 11/15/24 .................................................... 9,000,000 10,156,950
System Improvement, Subordinate Lien, Series A, 5.00%, 11/15/27 ............................ 5,000,000 4,880,500
Colorado State Board of Agriculture COP, MBIA Insured, 5.35%, 5/01/18 .......................... 1,000,000 1,025,840
Colorado State Board of Agriculture State University Revenue, Refunding,
5.125%, 3/01/17 ............................................................................ 1,000,000 1,014,750
Colorado State Board of
Community Colleges and Occupational Education Revenue, Red Rocks Community
College Project, AMBAC Insured, Pre-Refunded,
6.00%, 11/01/19 ............................................................................ 1,090,000 1,179,871
Colorado Water Resource and Power Authority Drinking Water Revenue,
Series A, 5.30%, 9/01/18 ...................................................................... 875,000 885,535
Colorado Water Resource and Power Development Authority, Stagecoach Project,
Pre-Refunded, 8.00%, 11/01/17 .............................................................. 65,000 67,107
Colorado Water Resource and Power Development Authority Clean Water Revenue, Series A,
6.15%, 9/01/11 ............................................................................. 1,765,000 1,892,574
6.30%, 9/01/14 ............................................................................. 1,000,000 1,084,890
5.80%, 9/01/17 ............................................................................. 2,000,000 2,153,120
Colorado Water Resource and Power Development Authority Small Water Resource Revenue,
Series A, FGIC Insured, 6.70%, 11/01/12 .................................................... 750,000 827,685
Denver City and County Airport Revenue,
Series A, 5.60%, 11/15/20 .................................................................. 3,200,000 3,349,952
Series A, 7.50%, 11/15/23 .................................................................. 3,315,000 3,806,979
Series A, 8.50%, 11/15/23 .................................................................. 3,645,000 3,945,093
Series A, Pre-Refunded, 7.50%, 11/15/12 .................................................... 3,000,000 3,448,620
Series A, Pre-Refunded, 7.50%, 11/15/23 .................................................... 685,000 816,993
Series A, Pre-Refunded, 8.50%, 11/15/23 .................................................... 355,000 391,022
Series D, 7.75%, 11/15/13 .................................................................. 1,000,000 1,265,650
Series E, MBIA Insured, 5.50%, 11/15/25 .................................................... 3,750,000 3,875,325
Denver City and County IDR, University of Denver Project, 7.50%, 3/01/11 ....................... 1,880,000 2,006,317
Denver City and County MFHR, The Boston Lofts Project, Series A, 5.75%, 10/01/27 ............... 1,500,000 1,540,590
Denver City and County Revenue,
Children's Hospital Association Project, FGIC Insured, 6.00%, 10/01/15 ..................... 3,150,000 3,389,337
St. Anthony's Hospital, Sisters of Charity Health Care System, Series A, MBIA Insured,
Pre-Refunded, 7.75%, 5/01/14 ............................................................... 150,000 152,630
Denver City and County School District No.1 GO, FGIC Insured, 5.00%, 12/01/23 .................. 6,475,000 6,393,027
Denver City and County Special Facilities Airport Revenue, United Airlines Inc. Project,
Series A, 6.875%, 10/01/32 ................................................................ 2,000,000 2,150,780
Donala Water and Sanitary District GO, Improvement, Series B, 6.50%, 12/01/14 .................. 995,000 1,052,481
Douglas County MFR, Housing Mortgage, Parker Hilltop Project, FHA Insured, 5.45%, 8/01/28 ...... 2,000,000 2,023,640
Douglas County School District No. 1 GO, Douglas and Elbert Counties, Improvement, Series A,
MBIA Insured, 6.50%, 12/15/16 .............................................................. 230,000 257,446
Pre-Refunded, 6.50%, 12/15/16 .............................................................. 2,000,000 2,288,340
Englewood COP, Civic Center Project, MBIA Insured, 5.10%,
6/01/18 .................................................................................... 2,000,000 1,975,700
6/01/23 .................................................................................... 3,200,000 3,151,584
Fort Collins PCR, Anheuser-Busch Co. Project, Refunding, 6.00%, 9/01/31 ........................ 5,000,000 5,310,600
Fremont County COP, Lease Purchase, MBIA Insured, 5.30%, 12/15/17 .............................. 1,570,000 1,619,455
Frisco Fire Protection District, Refunding and Improvement, 7.20%, 12/01/05 .................... 250,000 257,658
Greeley MFR, Housing Mortgage, Creek Stone Project, FHA Insured, 5.95%, 7/01/28 ................ 1,000,000 1,038,200
</TABLE>
71
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN COLORADO TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------- ------------ ------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
Guam Airport Authority Revenue,
Refunding, Series A, 6.375%, 10/01/10 .................................................... $ 400,000 $ 435,140
Series A, 6.50%, 10/01/23 ................................................................ 800,000 871,592
Guam Power Authority Revenue, Series A, 6.375%, 10/01/08 ..................................... 1,000,000 1,086,310
Jefferson County District Wide Sales Tax Revenue, Local ID, MBIA Insured,
6.30%, 6/01/22 .......................................................................... 7,450,000 7,933,133
Jefferson County GO, School District No R-001, Series A, FGIC Insured,
5.00%, 12/15/17 ......................................................................... 5,000,000 4,999,600
Jefferson County SFMR, Refunding, Series A, MBIA Insured,
8.875%, 10/01/13 ........................................................................ 280,000 296,181
Lakewood MFHR Mortgage, FHA Insured Mortgage,
6.65%, 10/01/25 .......................................................................... 1,235,000 1,335,418
6.70%, 10/01/36 .......................................................................... 3,025,000 3,261,767
Larimer County COP, School District No. R1, Poudre, MBIA Insured,
5.65%, 12/01/16 .......................................................................... 2,300,000 2,461,782
Las Animas County School District No. 1, Refunding,
6.15%, 12/01/08 .......................................................................... 1,000,000 1,077,580
6.20%, 12/01/10 .......................................................................... 935,000 1,010,754
Left Hand Water District Revenue, MBIA Insured, 5.70%, 11/15/15 .............................. 1,400,000 1,500,674
Logan County SFMR, Refunding, Series A, 8.50%, 11/01/11 ...................................... 235,000 246,962
Metex Metropolitan District GO, Refunding, Series A, MBIA Insured,
5.80%, 12/01/16 ............................................................................. 500,000 542,355
Montrose County COP, 6.35%, 6/15/06 .......................................................... 1,850,000 2,021,088
Mountain College Residence Hall Revenue Authority, MBIA Insured,
5.75%, 6/01/23 .............................................................................. 3,000,000 3,187,710
Municipal Subdistrict of Northern Colorado Water Conservancy District Revenue, Series G,
5.25%, 12/01/15 ......................................................................... 2,000,000 2,084,960
Platte River Power Authority Revenue, Refunding, Series D-2, MBIA Insured,
5.375%, 6/01/17 ......................................................................... 5,490,000 5,742,650
Postsecondary Educational Facilities Authority Revenue,
Auraria Foundation Project, FSA Insured, 6.00%, 9/01/15 .................................. 1,000,000 1,090,120
University of Denver Project, Refunding and Improvement, MBIA Insured,
5.375%, 3/01/18 ......................................................................... 2,500,000 2,581,875
Pueblo County, MBIA Insured, 6.00%, 6/01/16 .................................................. 4,395,000 4,742,029
Pueblo County COP, Public Parking, 6.90%, 7/01/15 ............................................ 510,000 534,531
Pueblo County School District No. 70 GO, Pueblo Rural, AMBAC Insured, Pre-Refunded,
6.40%, 12/01/14 ......................................................................... 1,000,000 1,132,980
Pueblo Urban Renewal Authority Tax Increment Revenue, Refunding, AMBAC Insured,
6.10%, 12/01/15 ......................................................................... 1,000,000 1,087,300
Puerto Rico Commonwealth Aqueduct and Sewer Authority Revenue, Series A, FSA Insured,
Pre-Refunded, 9.00%, 7/01/09 ............................................................ 55,000 68,150
Puerto Rico Commonwealth Highway and Transportation Authority Revenue, Series A,
5.00%, 7/01/38 .......................................................................... 7,000,000 6,800,220
Puerto Rico Electric Power Authority Revenue, Refunding, Series N, 7.125%, 7/01/14 ........... 155,000 159,411
Puerto Rico Industrial Tourist Educational Medical and Environmental Control Facilities
Financing Authority Industrial Revenue,
Guaynabo Municipal Government, 5.625%, 7/01/22 ............................................... 1,335,000 1,376,412
Regional Transportation District Sales Tax Revenue, FGIC Insured, 6.25%, 11/01/12 ............ 160,000 173,408
Southwestern SFMR, Refunding, Series A, 7.375%, 9/01/11 ...................................... 435,000 452,491
Stonegate Village Metropolitan District, Refunding and Improvement, Series A, FSA Insured,
5.60%, 12/01/25 ......................................................................... 4,500,000 4,731,525
Summit County SFMR, Series A, 7.50%, 12/01/11 ................................................ 135,000 140,415
Summit County Sports Facilities Revenue, Keystone Resorts Project, Ralston Purina Co.,
Refunding, 7.875%, 9/01/08 .............................................................. 2,750,000 3,348,840
University of Colorado Hospital Authority Revenue, Refunding, Series A, AMBAC Insured,
5.20%, 11/15/17 .......................................................................... 1,000,000 1,013,030
5.25%, 11/15/22 .......................................................................... 4,000,000 4,071,840
University of Northern Colorado Authority Facilities System Revenue, MBIA Insured,
5.60%, 6/01/24 .......................................................................... 2,000,000 2,109,120
Virgin Islands PFA Revenue, senior lien, Fund Loan Notes, Refunding, Series A,
5.40%, 10/01/12 .......................................................................... 2,500,000 2,556,075
5.50%, 10/01/22 .......................................................................... 2,500,000 2,508,375
Westminster City Sales and Use Tax Revenue,
Refunding and Improvement, FGIC Insured, 7.00%, 12/01/08 ................................. 2,000,000 2,123,160
Storm Project, Refunding and Improvement, Series A, 5.60%, 12/01/16 ...................... 1,500,000 1,594,515
Westminster COP, Ice Centre Project, AMBAC Insured, 5.40%, 1/15/23 ........................... 4,400,000 4,483,020
Widefield Water and Sanitary District Water and Sewage Revenue, Refunding and Improvement,
Series A, MBIA Insured, 5.70%, 12/01/16 ................................................. 2,000,000 2,163,540
-----------
TOTAL LONG TERM INVESTMENTS (COST $297,658,251) ............................................. 315,932,160
-----------
</TABLE>
72
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN COLORADO TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------- ------------ ------------
<S> <C> <C>
(a) SHORT TERM INVESTMENTS .8%
Colorado Health Facilities Authority Revenue,
Catholic Health Initiatives, Series B, Weekly VRDN and Put, 3.00%, 12/01/25 ........ $ 1,600,000 $ 1,600,000
North Colorado Medical Center, Weekly VRDN and Put, 3.00%, 5/15/20 ................. 1,100,000 1,100,000
------------
TOTAL SHORT TERM INVESTMENTS (COST $2,700,000) ........................................ 2,700,000
------------
TOTAL INVESTMENTS (COST $300,358,251) 98.5% ........................................... 318,632,160
OTHER ASSETS, LESS LIABILITIES 1.5% ................................................... 4,647,905
------------
NET ASSETS 100.0% ..................................................................... $323,280,065
------------
</TABLE>
See glossary of terms on page 134.
(a) Variable rate demand notes (VRDNs) are tax-exempt obligations which
contain a floating or variable interest rate adjustment formula and an
unconditional right of demand to receive payment of the principal
balance plus accrued interest at specified dates.
See notes to financial statements.
73
FRANKLIN TAX-FREE TRUST
Financial Highlights
FRANKLIN CONNECTICUT TAX-FREE INCOME FUND
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28,
CLASS A 1999 1998 1997 1996(1) 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 11.23 $ 10.92 $ 10.96 $ 10.64 $ 11.23
-------------------------------------------------------------------------------
Income from investment operations:
Net investment income ...................... .58 .60 .61 .62 .62
Net realized and unrealized gains (losses) . .04 .32 (.02) .32 (.60)
-------------------------------------------------------------------------------
Total from investment operations ............ .62 .92 .59 .94 .02
-------------------------------------------------------------------------------
Less distributions from:
Net investment income ...................... (.58)(2) (.60) (.63) (.62) (.61)
In excess of net investment income ......... -- (.01) -- -- --
-------------------------------------------------------------------------------
Total distributions ......................... (.58) (.61) (.63) (.62) (.61)
-------------------------------------------------------------------------------
Net asset value, end of year ................ $ 11.27 $ 11.23 $ 10.92 $ 10.96 $ 10.64
-------------------------------------------------------------------------------
Total return* ............................... 5.62% 8.62% 5.52% 9.04% .37%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $245,016 $203,643 $183,649 $167,045 $155,623
Ratios to average net assets:
Expenses ................................... .72% .73% .72% .73% .71%
Net investment income ...................... 5.08% 5.41% 5.62% 5.70% 5.83%
Portfolio turnover rate ..................... 5.87% 18.54% 14.53% 3.88% 75.72%
CLASS C
- ----------------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 11.26 $ 10.94 $ 10.97 $ 10.65
------------------------------------------------------------
Income from investment operations:
Net investment income ...................... .52 .55 .60 .47
Net realized and unrealized gains (losses) . .03 .31 (.07) .31
------------------------------------------------------------
Total from investment operations ............ .55 .86 .53 .78
------------------------------------------------------------
Less distributions from net investment income (.51)(2) (.54) (.56) (.46)
------------------------------------------------------------
Net asset value, end of year ................ $ 11.30 $ 11.26 $ 10.94 $ 10.97
------------------------------------------------------------
Total return* ............................... 5.02% 8.08% 5.03% 7.45%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $ 23,443 $ 8,636 $ 4,149 $ 1,656
Ratios to average net assets:
Expenses ................................... 1.28% 1.29% 1.29% 1.30%**
Net investment income ...................... 4.53% 4.85% 5.01% 5.12%**
Portfolio turnover rate ..................... 5.87% 18.54% 14.53% 3.88%
</TABLE>
(*) Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year. Prior
to May 1, 1994, dividends from net investment income were reinvested at the
offering price.
(**) Annualized 1For the period May 1, 1995 (effective date) to February 29,
1996 for Class C.
(2) Includes distributions in excess of net investment income in the amount of
$.002.
See notes to financial statements.
74
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN CONNECTICUT TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS 97.7%
Bridgeport GO,
Series A, 7.25%, 6/01/00 ........................................................... $ 300,000 $ 312,663
Series B, 7.55%, 11/15/00 .......................................................... 1,375,000 1,453,403
Series B, Pre-Refunded, 7.75%, 11/15/10 ............................................ 3,750,000 4,094,325
Unlimited Tax, ETM, Series A, 7.30%, 3/01/99 ....................................... 750,000 750,000
Connecticut State Development Authority First Mortgage Revenue, Health Care Project,
Church Homes Inc., Refunding, 5.80%, 4/01/21 ....................................... 1,000,000 1,022,150
Elim Park Baptist Home, Refunding, Series A, 5.375%, 12/01/18 ...................... 1,100,000 1,088,692
Connecticut State Development Authority PCR, New England Power Co., 7.25%, 10/15/15 ... 750,000 784,260
Connecticut State Development Authority Revenue, Life Care Facilities, Seabury Project,
Refunding, Asset Guaranty, 5.00%, 9/01/21 .......................................... 3,840,000 3,758,784
Connecticut State Development Authority Solid Waste Disposal Facilities Revenue, Pfizer
Inc. Project, 7.00%, 7/01/25 ....................................................... 2,000,000 2,289,580
Connecticut State Development Authority Water Facility Revenue, Bridgeport
Hydraulic Co. Project, 6.15%, 4/01/35 ............................................... 1,000,000 1,082,080
6.00%, 9/01/36 ..................................................................... 10,000,000 10,670,700
Refunding, 7.25%, 6/01/20 .......................................................... 1,000,000 1,055,630
Connecticut State Health and Educational Facilities Authority Revenue,
Abbot Terrace Health Center Project, Series A, 6.00%, 11/01/14 ..................... 2,000,000 2,234,720
Capital Assets, ETM, Series B, 7.00%, 1/01/00 ...................................... 635,000 655,314
Capital Assets, Series C, MBIA Insured, 7.00%, 1/01/20 ............................. 1,265,000 1,354,448
Capital Assets, Series C, MBIA Insured,Pre-Refunded, 7.00%, 1/01/20 ................ 200,000 216,590
Choate Rosemary Hall, Series A, MBIA Insured, Pre-Refunded, 7.00%, 7/01/25 ......... 1,500,000 1,741,710
Greenwich Hospital, Series A, MBIA Insured, 5.75%, 7/01/16 ......................... 1,000,000 1,083,160
Greenwich Hospital, Series A, MBIA Insured, 5.80%, 7/01/26 ......................... 2,500,000 2,674,375
Hartford University, Series C, Pre-Refunded, 8.00%, 7/01/18 ........................ 1,300,000 1,456,546
Hartford University, Series D, 6.80%, 7/01/22 ...................................... 5,000,000 5,278,200
Hebrew Home and Hospital, Series A, 7.00%, 8/01/30 ................................. 1,170,000 1,183,022
Hebrew Home and Hospital, Series B, FHA Insured, 5.15%, 8/01/28 .................... 3,800,000 3,726,470
Hospital for Special Care, Refunding, Series B, 5.375%, 7/01/17 .................... 7,205,000 7,252,697
Hospital for Special Care, Refunding, Series B, 5.50%, 7/01/27 ..................... 17,000,000 17,118,490
Lutheran General Health Care System, ETM, 7.375%, 7/01/19 .......................... 500,000 620,620
New Britain Memorial Hospital, Series A, Pre-Refunded, 7.75%, 7/01/22 .............. 1,000,000 1,146,740
New Horizons Village Project, 7.30%, 11/01/16 ...................................... 2,905,000 3,377,847
Quinnipiac College, Series E, FSA Insured, 4.75%, 7/01/24 .......................... 2,000,000 1,925,720
Quinnipiac College, Refunding, Series E, FSA Insured, 4.75%, 7/01/28 ............... 2,500,000 2,400,500
Quinnipiac College, Series C, Pre-Refunded, 7.75%, 7/01/20 ......................... 960,000 1,034,026
Sacred Heart University, Refunding, Series C, 6.50%, 7/01/16 ....................... 1,000,000 1,137,350
Sacred Heart University, Refunding, Asset Guaranty, Series E, 5.00%, 7/01/28 ....... 7,000,000 6,851,880
Sacred Heart University, Series C, 6.625%, 7/01/26 ................................. 7,000,000 8,077,370
Sacred Heart University, Series D, Pre-Refunded, 6.20%, 7/01/27 .................... 1,700,000 1,967,308
St. Mary's Hospital, Refunding, Series E, 5.50%, 7/01/20 ........................... 4,615,000 4,702,039
St. Mary's Hospital, Refunding, Series E, 5.875%, 7/01/22 .......................... 3,510,000 3,680,024
St. Mary's Hospital, Series C, Pre-Refunded, 7.375%, 7/01/20 ....................... 1,000,000 1,072,960
Taft School, Series A, Pre-Refunded, 7.375%, 7/01/20 ............................... 1,000,000 1,072,280
Taft School, Series C, Pre-Refunded, 6.00%, 7/01/16 ................................ 2,500,000 2,690,375
Taft School, Series C, Pre-Refunded, 5.75%, 7/01/26 ................................ 3,325,000 3,563,635
Trinity College, Series E, MBIA Insured, 5.875%, 7/01/26 ........................... 2,200,000 2,381,258
Trinity College, Series F, MBIA Insured, 5.00%, 7/01/28 ............................ 2,000,000 1,984,640
Veterans Memorial Medical Center, Series A, MBIA Insured, 5.50%, 7/01/26 ........... 4,210,000 4,377,811
Windham Community Memorial Hospital, Series C, 6.00%, 7/01/20 ...................... 8,000,000 8,292,080
Yale New Haven Hospital, Refunding, Series H, MBIA Insured, 5.70%, 7/01/25 ......... 4,500,000 4,797,855
Yale New Haven Hospital, Series F, MBIA Insured, Pre-Refunded, 7.10%, 7/01/25 ...... 7,000,000 7,485,940
Connecticut State HFA, Housing Mortgage Finance Program,
Series B, 6.75%, 11/15/23 .......................................................... 14,705,000 16,006,098
Series C-1, 6.60%, 11/15/23 ........................................................ 500,000 537,465
Series C-2, 6.25%, 11/15/18 ........................................................ 1,500,000 1,627,395
Series C-2, 6.70%, 11/15/22 ........................................................ 3,765,000 4,004,266
Series E, 6.30%, 5/15/17 ........................................................... 3,670,000 3,951,562
Sub Series B-1, 6.30%, 5/15/25 ..................................................... 700,000 748,881
Sub Series B-1, 5.30%, 11/15/28 .................................................... 1,700,000 1,715,589
Sub Series C-2, 5.85%, 11/15/28 .................................................... 1,495,000 1,560,122
Sub Series D-1, 5.55%, 11/15/28 .................................................... 1,000,000 1,023,410
</TABLE>
75
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN CONNECTICUT TAX-FREE INCOME FUND AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
Connecticut State HFA, Housing Mortgage Finance Program, (cont.)
Sub Series E-1, 5.125%, 5/15/21 ..................................................... $ 1,255,000 $ 1,257,460
Sub Series E-2, 5.20%, 11/15/21 ..................................................... 1,840,000 1,847,342
Sub Series G-1, 6.20%, 11/15/16 ..................................................... 1,335,000 1,393,980
Sub Series G-1, 5.20%, 11/15/28 ..................................................... 5,960,000 6,001,124
Connecticut State Higher Education Supplemental Loan Authority, Series A,
7.00%, 11/15/05 ..................................................................... 755,000 798,360
7.20%, 11/15/10 ..................................................................... 230,000 242,979
7.50%, 11/15/10 ..................................................................... 375,000 385,181
Connecticut State Resource Recovery Authority Revenue, Bridgeport Resco Ltd. Partnership
Project, Series A, 7.625%, 1/01/09 .................................................. 835,000 856,009
East Haven Bank Qualified GO, Pre-Refunded, 7.00%, 9/15/07 ............................. 200,000 207,156
Eastern Connecticut Resource Recovery Authority Solid Waste Revenue, Wheelabrator
Lisbon Project, Series A, 5.50%, 1/01/15 ............................................ 8,000,000 8,026,960
Griswold GO, AMBAC Insured, 7.50%, 4/01/06 ............................................. 200,000 241,674
Guam Airport Authority Revenue, Series B,
6.60%, 10/01/10 ..................................................................... 250,000 274,260
6.70%, 10/01/23 ..................................................................... 1,300,000 1,426,932
Guam Power Authority Revenue, Series A, 6.75%, 10/01/24 ................................ 5,500,000 6,132,225
New Haven GO, Series A, Pre-Refunded, 7.40%, 3/01/12 ................................... 4,545,000 5,119,761
Plainfield GO,
Series 1988, 7.30%, 9/01/10 ......................................................... 150,000 164,849
Series 1991, 7.25%, 9/01/05 ......................................................... 335,000 367,766
Series 1991, 7.30%, 9/01/07 ......................................................... 335,000 368,162
Series 1991, 7.30%, 9/01/09 ......................................................... 335,000 368,162
Puerto Rico Commonwealth GO, Public Improvement, 5.00%, 7/01/28 ........................ 5,000,000 4,909,050
(b) Puerto Rico Commonwealth Highway and Transportation Authority Revenue, Series A,
5.00%, 7/01/38 ...................................................................... 4,210,000 4,089,847
Puerto Rico Electric Power Authority Revenue,
Series P, Pre-Refunded, 7.00%, 7/01/21 .............................................. 2,450,000 2,693,849
Series T, Pre-Refunded, 6.375%, 7/01/24 ............................................. 5,000,000 5,710,250
Puerto Rico HFC, SFMR, Portfolio No. 1, Series C, GNMA Secured, 6.85%, 10/15/23 ........ 775,000 817,059
Puerto Rico Industrial Tourist Educational Medical and Environmental Control Facilities,
Guaynabo Warehouse, Series A,
5.15%, 7/01/19 ...................................................................... 4,845,000 4,808,469
Puerto Rico Municipal Finance Agency GO, Series A, 6.50%, 7/01/19 ...................... 5,000,000 5,588,350
Stratford GO, Unlimited Tax, Pre-Refunded, 7.30%, 3/01/12 .............................. 1,130,000 1,235,418
Virgin Islands PFA Revenue, senior lien, Fund Loan Notes, Refunding, Series A, 5.50%,
10/01/13 ............................................................................ 2,500,000 2,562,325
10/01/22 ............................................................................ 2,500,000 2,508,375
Virgin Islands Water and Power Authority Electric System Revenue,
Refunding, 5.30%, 7/01/18 ........................................................... 1,500,000 1,498,080
Refunding, 5.30%, 7/01/21 ........................................................... 1,000,000 992,160
Series A, Pre-Refunded, 7.40%, 7/01/11 .............................................. 6,065,000 6,616,305
Waterbury GO, Pre-Refunded,
7.25%, 3/01/03 ...................................................................... 785,000 857,479
7.25%, 3/01/04 ...................................................................... 785,000 857,479
7.50%, 3/01/07 ...................................................................... 780,000 855,746
TOTAL LONG TERM INVESTMENTS (COST $247,013,211) ........................................ 262,233,638
------------
(a) SHORT TERM INVESTMENTS 1.2%
Connecticut State Health and Educational Facilities Authority Revenue, Yale University,
Series T-1, Weekly VRDN and Put,
2.85%, 7/01/29 ...................................................................... 2,900,000 2,900,000
Connecticut State Special Tax Obligation Revenue, Weekly VRDN and Put, 2.70%, 12/01/10 . 400,000 400,000
------------
TOTAL SHORT TERM INVESTMENTS (COST $3,300,000) ......................................... 3,300,000
------------
TOTAL INVESTMENTS (COST $250,313,211) 98.9% ............................................ 265,533,638
OTHER ASSETS, LESS LIABILITIES 1.1% .................................................... 2,925,407
------------
NET ASSETS 100.0% ...................................................................... $268,459,045
------------
</TABLE>
See glossary of terms on page 134.
(a) Variable rate demand notes (VRDNs) are tax-exempt obligations which contain
a floating or variable interest rate adjustment formula and an unconditional
right of demand to receive payment of the principal balance plus accrued
interest at specified dates.
(b) Sufficient collateral has been segregated for securities traded on a
when-issued or delayed delivery basis.
See notes to financial statements.
76
FRANKLIN TAX-FREE TRUST
Financial Highlights
FRANKLIN FEDERAL INTERMEDIATE-TERM TAX-FREE INCOME FUND
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28,
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................. $ 11.25 $ 10.94 $ 10.95 $ 10.48 $ 10.80
------------------------------------------------------------------
Income from investment operations:
Net investment income ............................. .51 .53 .55 .55 .54
Net realized and unrealized gains (losses) ........ .06 .33 (.01) .47 (.33)
------------------------------------------------------------------
Total from investment operations ................... .57 .86 .54 1.02 .21
------------------------------------------------------------------
Less distributions from net investment income ...... (.52) (.55) (.55) (.55) (.53)
------------------------------------------------------------------
Net asset value, end of year ....................... $ 11.30 $ 11.25 $ 10.94 $ 10.95 $ 10.48
------------------------------------------------------------------
Total return* ...................................... 5.17% 8.02% 5.12% 9.93% (.20%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................... $195,598 $139,545 $104,715 $85,967 $73,977
Ratios to average net assets:
Expenses .......................................... .75% .75% .68% .65% .56%
Expenses excluding waiver and payments by affiliate .78% .82% .84% .85% .84%
Net investment income ............................. 4.53% 4.83% 5.16% 5.12% 5.25%
Portfolio turnover rate ............................ 16.57% 23.32% 22.54% 3.35% 38.46%
</TABLE>
(*) Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year. Prior
to May 1, 1994, dividends from net investment income were reinvested at the
offering price.
See notes to financial statements.
77
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN FEDERAL INTERMEDIATE-TERM TAX-FREE INCOME FUND AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS 98.2%
BONDS 97.1%
ALABAMA .6%
Morgan County Decatur Health Care Authority Hospital Revenue, Refunding, Connie Lee
Insured, 5.80%, 3/01/04 .................................................................... $1,000,000 $ 1,084,050
-----------
ALASKA .3%
Alaska State HFC, Collateral, Veteran's Mortgage Program, First Series, 5.80%, 6/01/04 ...... 445,000 470,232
Anchorage Parking Authority Revenue, 5th Avenue Garage Lease Project, Refunding, 6.50%,
12/01/02 ................................................................................... 170,000 182,187
-----------
652,419
-----------
ARIZONA 1.0%
Maricopa County COP, 5.625%, 6/01/00 ........................................................ 640,000 652,461
Maricopa County GO, School District No. 40, Glendale Improvement, 6.10%, 7/01/08 ............ 1,000,000 1,099,950
Mohave County IDA, Hospital Systems Revenue, Medical Environments Inc., Phoenix Hospital
and Medical Center, Refunding, ETM, 6.00%, 7/01/00 ......................................... 200,000 207,212
Phoenix HFC, Mortgage Revenue, Project A, Refunding, MBIA Insured, 6.00%, 7/01/02 ........... 40,000 41,782
-----------
2,001,405
-----------
CALIFORNIA 7.4%
ABAG Finance Corp. COP, ABAG XXVI, Series B, 6.30%, 10/01/02 ................................ 100,000 107,765
Bakersfield PFA Revenue, Refunding, Series A, 5.80%, 9/15/05 ................................ 3,000,000 3,198,120
California Educational Facilities Authority Revenue, Pooled College and University Financing,
Refunding, Series B, 5.90%, 6/01/03 ........................................................ 1,500,000 1,610,130
California Statewide CDA Revenue, COP, Health Facilities, Barton Memorial Hospital,
Refunding, Series B, 6.40%, 12/01/05 ....................................................... 300,000 322,338
California Statewide Communities Development Corp. COP, Pacific Homes, Series A, 5.90%,
4/01/09 .................................................................................... 1,000,000 1,077,210
Coastside County Water District 1915 Act GO, Crystal Springs Project, Refunding,
5.10%, 9/02/03 ........................................................................... 500,000 513,115
5.30%, 9/02/05 ........................................................................... 625,000 633,200
Fresno Joint Powers Financing Authority Local Agency Revenue, Refunding, Series A, 6.00%,
9/02/01 .................................................................................. 1,000,000 1,029,110
Los Angeles County Transport Commission COP, Series B, 5.90%, 7/01/00 ....................... 100,000 103,570
San Diego Port Facilities Revenue, National Steel and Shipbuilding Co., Refunding, 6.60%,
12/01/02 ................................................................................. 100,000 104,975
San Francisco City and County RDA, Mortgage Revenue, Refunding, Series A, MBIA Insured,
6.125%, 7/01/02 .......................................................................... 50,000 50,377
San Francisco Downtown Parking Corp. Parking Revenue, 6.25%, 4/01/04 ........................ 200,000 222,174
San Joaquin County COP, General Hospital Project, 5.90%, 9/01/03 ............................ 200,000 215,576
San Ramon Valley USD, COP, Measure A, Capital Project, Series A, 5.95%, 10/01/01 ............ 1,535,000 1,570,305
Santa Clara 1915 Act, Reassessment District 187, Refunding, Series 1,
5.00%, 9/02/06 ........................................................................... 465,000 468,469
5.25%, 9/02/11 ........................................................................... 1,000,000 999,090
Snowline Joint USD, COP, ETM,
5.60%, 7/01/01 ........................................................................... 260,000 273,281
5.70%, 7/01/02 ........................................................................... 275,000 293,835
5.80%, 7/01/03 ........................................................................... 290,000 315,340
Solano County COP, Justice Facility and Public Building Project, Refunding, 5.875%, 10/01/05 400,000 421,292
Southern California Rapid Transit District Revenue, Special Benefit AD A2, 6.00%, 9/01/02 ... 100,000 106,798
Susanville PFA Revenue, Series A, AMBAC Insured,
5.90%, 9/01/02 ........................................................................... 25,000 26,398
6.00%, 9/01/03 ........................................................................... 100,000 105,810
Tahoe City PUD, COP, Capital Facilities Project, Series B, 6.05%, 6/01/01 ................... 500,000 523,950
Tuolumne County COP, Multiple Facilities Project, 6.00%, 6/01/99 ............................ 100,000 100,680
14,392,908
-----------
COLORADO 3.9%
Adams County School No 12 COP, Adams Twelve Five Star Schools, MBIA Insured, 4.90%, 12/15/13 2,400,000 2,379,912
Denver City and County Airport Revenue,
Series A, 7.00%, 11/15/99 ................................................................ 3,000,000 3,071,760
Series C, 6.25%, 11/15/00 ................................................................ 335,000 348,085
Montrose County COP, 6.20%, 6/15/03 ......................................................... 1,500,000 1,609,680
Summit County Recreational Facilities Revenue, Copper Mountain, Mandatory put, 10/01/99,
Refunding, 5.90%, 4/01/17 .................................................................. 255,000 258,374
-----------
7,667,811
-----------
</TABLE>
78
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN FEDERAL INTERMEDIATE-TERM TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS
BONDS (CONT.)
CONNECTICUT 3.9%
Connecticut State Health and Educational Facilities Authority Revenue, Sacred Heart
University, Refunding, Series C, 6.00%, 7/01/05 ............................................. $ 560,000 $ 608,339
Connecticut State HFA, Housing Mortgage Finance Program, Series C-2, 6.00%, 11/15/10 ......... 2,000,000 2,151,980
Stamford Housing Authority MFR, Fairfield Apartments Project, 4.75%, 12/01/28 ................ 5,000,000 4,957,150
-----------
7,717,469
-----------
FLORIDA 7.9%
Alachua County Health Facilities Authority Revenue, Santa Fe Health Systems Project,
Pre-Refunded, 6.875%, 11/15/02 .............................................................. 100,000 104,852
Gateway Services District Revenue, Transportation Roadway Service Charges, 8.50%, 5/01/04 .... 1,240,000 1,375,693
Meadow Pointe II CDD, Capital Improvement Revenue,
6.00%, 7/01/01 ............................................................................ 1,750,000 1,772,138
Series A, 5.25%, 8/01/03 .................................................................. 2,445,000 2,414,633
Nassau County PCR, ITT Rayonier Inc. Project, Refunding, 6.25%, 6/01/10 ...................... 1,000,000 1,061,700
Northern Palm Beach County Water Control District Revenue, Unit Development No. 31,
Program 1, Refunding, 6.60%, 11/01/03 ..................................................... 405,000 432,998
Program 2, Refunding, 6.60%, 11/01/03 ..................................................... 320,000 342,122
Palm Beach County IDR, Lourdes-Noreen Mckeen Residence, Geriatric Care Inc. Project,
6.20%, 12/01/08 ........................................................................... 275,000 293,406
6.30%, 12/01/09 ........................................................................... 580,000 619,771
(c) Palm Beach County Solid Waste IDR, Okeelanta Power and Light Co. Project, Series A,
6.375%, 2/15/07 ........................................................................... 1,400,000 1,092,000
Pembroke Pines Special Assessment, No. 9, 5.75%, 11/01/05 .................................... 785,000 839,950
Port Saint Lucie Special Assessment Revenue, Utility Service Area No. 3 and 4-A, MBIA
Insured, 5.00%, 10/01/13 .................................................................... 5,000,000 5,136,300
-----------
15,485,563
-----------
GEORGIA 2.9%
Baldwin County Hospital Authority Revenue, Oconee Regional Medical Center, 5.30%, 12/01/13 ... 1,020,000 1,021,683
Fulton County Development Authority Special Facilities Revenue, Delta Airlines Inc. Project,
Refunding, 6.85%, 11/01/07 .................................................................. 100,000 108,200
Macon-Bibb County Urban Development Authority Revenue, MF Housing, Refunding, Series
A, MBIA Insured, 5.00%, 1/01/07 ............................................................. 1,290,000 1,326,081
Wayne County Development Authority PCR, ITT Rayonier Inc. Project, Refunding, 6.10%, 11/01/07 3,105,000 3,308,781
-----------
5,764,745
-----------
HAWAII 2.8%
Hawaii State Department of Budget and Finance Special Purpose Revenue,
Kaiser Permanente, Series A, 5.10%, 3/01/14 ............................................... 5,000,000 4,963,750
Kapi'Olani Health Obligation, 5.60%, 7/01/06 ................................................. 500,000 537,850
-----------
5,501,600
-----------
ILLINOIS 3.1%
Chicago O'Hare International Airport Special Facilities Revenue, United Air Lines Project,
Refunding, Series A, 5.35%, 9/01/16 ......................................................... 2,000,000 1,993,240
Illinois Educational Facilities Authority Revenue, Columbia College, 5.875%, 12/01/03 ........ 850,000 907,596
Illinois HDA Revenue, Homeowner Mortgage, Sub Series A-1, 6.10%, 2/01/05 ..................... 360,000 383,821
Illinois Health Facilities Authority Revenue,
St. Elizabeth's Hospital, 6.00%, 7/01/05 .................................................. 425,000 458,040
Victory Health Services, Series A, 5.25%, 8/15/09 ......................................... 1,170,000 1,204,211
Metropolitan Pier and Exposition Authority Hospitality Facilities Revenue, McCormick Place
Convention Center, 5.75%, 7/01/06 ........................................................... 1,000,000 1,070,840
-----------
6,017,748
-----------
INDIANA 3.1%
Franklin EDR, Hoover Universal Inc. Project, Johnson Controls, Refunding, 6.10%, 12/01/04 .... 2,000,000 2,179,240
Indianapolis Local Public Improvement Bond, Refunding, Series D, 6.10%, 2/01/02 .............. 100,000 106,562
Sullivan PCR, Indiana-Michigan Power Co. Project, Refunding, Series C, 5.95%, 5/01/09 ........ 3,500,000 3,685,535
-----------
5,971,337
-----------
IOWA .1%
Iowa State Financial Authority Hospital Facilities Revenue, Trinity Regional Hospital Project,
Refunding, ETM, 6.50%, 7/01/00 .............................................................. 200,000 206,028
-----------
KANSAS .8%
Kansas State Development Finance Authority Hospital Revenue, Susan B. Allen Memorial
Hospital, Series Z, 4.70%, 12/15/09 ......................................................... 1,635,000 1,622,607
-----------
</TABLE>
79
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN FEDERAL INTERMEDIATE-TERM TAX-FREE INCOME FUND AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
KENTUCKY 1.4%
Kenton County Airport Board Revenue, Special Facilities, Delta Airlines Inc. Project, Series
A, 6.75%, 2/01/02 ........................................................................ $ 100,000 $ 106,182
Kentucky Economic Development Finance Authority Hospital System Revenue, Appalachian
Regional Health Center Facility, Refunding and Improvement,
5.70%, 10/01/10 ......................................................................... 1,000,000 1,052,850
5.75%, 10/01/11 ......................................................................... 1,500,000 1,579,080
----------
2,738,112
----------
LOUISIANA 3.1%
Calcasieu Parish Public Trust Authority Mortgage Revenue, Refunding, Series B, 6.375%,
11/01/02 ................................................................................ 15,000 15,789
Louisiana Public Facilities Authority Revenue, Student Loan, Refunding, Series A-1,
6.20%, 3/01/01 .......................................................................... 80,000 83,030
Louisiana State Offshore Terminal Authority Deepwater Port Revenue, First Stage, Loop Inc.,
Refunding, Series B, 6.20%, 9/01/03 ....................................................... 100,000 107,605
St. John's Baptist Parish EDR, USX Corp. Project, Refunding, 5.35%, 12/01/13 ............... 6,000,000 5,951,160
----------
6,157,584
----------
MARYLAND .1%
Baltimore Economic Development Lease Revenue, Armistead Partnership, Refunding,
Series A, 6.75%, 8/01/02 .................................................................. 160,000 171,990
----------
MASSACHUSETTS 4.5%
Massachusetts State Industrial Finance Agency Resource Recovery Revenue, Ogden Haverhill
Project, Refunding, Series A,
4.95%, 12/01/06 ......................................................................... 2,500,000 2,541,625
5.15%, 12/01/07 ......................................................................... 2,000,000 2,006,120
5.20%, 12/01/08 ......................................................................... 2,000,000 2,006,360
Massachusetts State Industrial Finance Agency Revenue, Youville Senior Care, Series D,
5.50%, 10/01/12 ......................................................................... 1,745,000 1,795,692
New England Educational Loan Marketing Corp. Student Loan Revenue, Refunding, Series
B, 5.60%, 6/01/02 ....................................................................... 415,000 432,679
----------
8,782,476
----------
MICHIGAN 1.2%
Chippewa County Hospital Financing Authority Revenue, Chippewa County War Memorial
Hospital, Refunding, Series B,
5.30%, 11/01/07 ......................................................................... 815,000 839,466
5.625%, 11/01/14 ........................................................................ 350,000 356,293
Detroit GO, Refunding, Series B, 6.375%, 4/01/06 ........................................... 1,000,000 1,110,830
----------
2,306,589
----------
MINNESOTA .1%
Minneapolis CDA, Supported Development Revenue, Common Bond Fund, Series 91-5A,
7.20%, 12/01/04 ............................................................................ 200,000 216,504
----------
MISSISSIPPI .4%
Mississippi Development Bank Special Obligation, Oktibbeha County Hospital Revenue
Project, Refunding, 5.65%, 7/01/06 ........................................................ 725,000 765,847
----------
MISSOURI 3.2%
Lake of the Ozarks Community Bridge Corp. Bridge System Revenue, Refunding, 5.00%, 12/01/08 3,000,000 2,976,960
Missouri State Health and Educational Facilities Authority Health Facilities Revenue, Park
Lane Medical Center, Series A, 4.70%, 1/01/04 ............................................. 1,200,000 1,239,144
Taney County IDA, Hospital Revenue, The Skaggs Community Hospital Association, 5.10%,
5/15/10 .................................................................................. 1,420,000 1,442,933
West Plains IDA, Hospital Revenue, Ozarks Medical Center Project, Refunding, 5.00%, 11/15/04 560,000 571,928
----------
6,230,965
----------
NEBRASKA .8%
Omaha Stadium Facilities Corp. Lease Revenue, Rosenblatt Stadium Project, Series A,
4.90%, 11/01/13 .......................................................................... 1,100,000 1,107,711
Wayne State College Revenue, Student Fees and Facilities, Refunding, MBIA Insured,
5.05%, 7/01/10 ........................................................................... 365,000 372,132
----------
1,479,843
----------
NEVADA 1.9%
Clark County Nevada PCR, Nevada Power Co. Project, Refunding, Series D, 5.30%, 10/01/11 .... 1,500,000 1,512,585
Sparks RDA, Tax Allocation Revenue, Refunding, Asset Guaranty, 5.15%, 1/15/08 .............. 2,110,000 2,199,844
----------
3,712,429
----------
</TABLE>
80
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN FEDERAL INTERMEDIATE-TERM TAX-FREE INCOME FUND AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
NEW HAMPSHIRE 2.3%
New Hampshire Higher Education and Health Facilities Authority Revenue, New Hampshire
Catholic Charities, Refunding, Series A,
5.10%, 8/01/04 ........................................................................... $1,385,000 $ 1,404,529
New Hampshire State Business Finance Authority PCR, United Illumination, Mandatory put,
2/01/04, Refunding, Series A,
4.55%, 7/01/27 ........................................................................... 3,000,000 2,984,250
-----------
4,388,779
-----------
NEW JERSEY 1.1%
Hudson County Improvement Authority Solid Waste Systems Revenue, Refunding, Series 1,
5.90%, 1/01/15 ........................................................................... 1,000,000 995,830
New Jersey EDA Revenue, Economic Growth, 2nd Series F-1, 6.00%, 12/01/02 ................. 70,000 73,403
New Jersey Health Care Facilities Financing Authority Revenue, Monmouth Medical Center,
Refunding, ETM, Series C, FSA Insured,
5.80%, 7/01/04 .......................................................................... 1,000,000 1,098,110
-----------
2,167,343
-----------
NEW YORK 10.1%
Metropolitan Transportation Authority Commuter Facilities Revenue, Services Contract,
Refunding, Series R, 5.50%, 7/01/11 ..................................................... 2,215,000 2,368,721
New York City GO,
ETM, Series B, 6.25%, 10/01/01 ........................................................ 25,000 26,712
Pre-Refunded, 6.50%, 8/01/04 .......................................................... 105,000 115,726
Refunding, Series H, 5.90%, 8/01/09 ................................................... 500,000 555,695
Refunding, Series J, 6.00%, 8/01/08 ................................................... 3,000,000 3,370,830
Series B, 6.25%, 10/01/01 ............................................................. 75,000 79,925
Series C, 6.50%, 8/01/04 .............................................................. 410,000 449,389
Series C, 6.50%, 8/01/07 .............................................................. 1,515,000 1,647,850
Series C, Pre-Refunded, 6.50%, 8/01/07 ................................................ 335,000 369,220
Series H, 7.00%, 2/01/05 .............................................................. 30,000 32,911
Series H, Pre-Refunded, 7.00%, 2/01/05 ................................................ 220,000 243,463
Series J, 6.00%, 2/15/04 .............................................................. 1,000,000 1,087,580
New York City Health and Hospital Corp. Revenue, Refunding, Series A, 6.00%, 2/15/06 ..... 2,500,000 2,664,950
New York City IDA, Civic Facility Revenue, New York Blood Center Inc. Project, ETM,
6.80%, 5/01/02 ........................................................................ 90,000 95,311
New York State Dormitory Authority Revenue, Mental Health Services Facilities Improvement,
Refunding, Series D, 5.60%, 2/15/07 ..................................................... 140,000 152,044
New York State HFAR, Health Facilities, New York City, Refunding, Series A, 5.90%, 5/01/05 1,000,000 1,084,040
New York State Tollway Authority Service Contract Revenue, Local Highway and Bridge,
5.75%, 4/01/08 ........................................................................ 500,000 547,040
5.75%, 4/01/09 ........................................................................ 1,150,000 1,248,659
Pre-Refunded, 5.90%, 4/01/08 ............................................................. 1,000,000 1,120,180
Oneida-Herkimer Solid Waste Management Authority Solid Waste Systems Revenue, Refunding,
ETM, 6.20%, 4/01/00 ..................................................................... 100,000 103,150
Port Authority of New York and New Jersey Special Obligation Revenue, 3rd Installment,
7.00%, 10/01/07 .......................................................................... 1,000,000 1,161,550
Ulster County Resource Recovery Agency Solid Waste System Revenue, 5.90%, 3/01/07 ........ 1,100,000 1,171,225
-----------
19,696,171
-----------
OHIO .9%
Franklin County Health Care Facilities Revenue, Presbyterian Retirement Services,
Refunding,
5.25%, 7/01/08 ........................................................................ 575,000 572,027
5.40%, 7/01/10 ........................................................................ 775,000 768,467
5.50%, 7/01/11 ........................................................................ 500,000 497,745
-----------
1,838,239
-----------
OKLAHOMA 1.5%
Jackson County Memorial Hospital Authority Revenue, Jackson County Memorial Hospital
Project, Refunding, 6.75%, 8/01/04 ...................................................... 1,775,000 1,878,358
Valley View Hospital Authority Revenue, Valley View Regional Medical Center, Refunding,
5.75%, 8/15/06 ......................................................................... 1,000,000 1,039,210
-----------
2,917,568
-----------
OREGON 1.1%
Clackamas County Hospital Facilities Authority Revenue, Willamette View Inc. Project,
Refunding, 6.00%, 11/01/06 .............................................................. 500,000 522,720
Hillsborough Hospital Facilities Authority Revenue, Refunding, 5.75%, 10/01/12 ........... 1,000,000 1,057,110
Port Umpqua PCR, International Paper Co. Project, Refunding, Series A, 5.05%, 6/01/09 .... 500,000 517,355
-----------
2,097,185
-----------
</TABLE>
81
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN FEDERAL INTERMEDIATE-TERM TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS
BONDS (CONT.)
PENNSYLVANIA 3.1%
Cambria County Hospital Development Authority Revenue, Conemaugh Valley Memorial Hospital,
Refunding and Improvement,
Series B, Connie Lee Insured, 5.90%, 7/01/03 ................................................. $ 100,000 $ 108,758
Chartiers Valley Industrial and Commercial Development Authority Revenue, First Mortgage,
Asbury Place Project, 6.25%, 2/01/06 ........................................................ 270,000 285,306
Clarion County Hospital Authority Revenue, Clarion Hospital Project, Refunding, 5.40%, 7/01/07 1,135,000 1,154,704
Northeastern Hospital and Educational Authority College Revenue, Kings College Project,
Refunding, Series B, 5.60%, 7/15/03 ......................................................... 410,000 430,492
Philadelphia Gas Works Revenue,
First Series C, FSA Insured, 5.00%, 7/01/13 ............................................... 1,680,000 1,707,451
Refunding, Series A, 5.70%, 7/01/00 ....................................................... 300,000 307,137
Refunding, Series A, 5.80%, 7/01/01 ....................................................... 300,000 312,819
Schuylkill County IDA, Resource Recovery Revenue, Schuylkill Energy Resources Inc.,
Pre-Refunded, 6.50%, 1/01/10 ................................................................ 1,685,000 1,732,399
-----------
6,039,066
-----------
SOUTH CAROLINA .5%
Charleston County Resource Recovery Revenue, Foster Wheeler Charleston, Refunding, AMBAC
Insured, 5.25%, 1/01/10 .................................................................... 1,000,000 1,055,750
-----------
SOUTH DAKOTA .5%
South Dakota HDA Revenue, Homeownership Mortgage, Series D, 6.05%, 5/01/04 ................... 990,000 1,057,082
TENNESSEE .9%
Memphis-Shelby County Airport Authority Special Facilities and Project Revenue, Federal
Express Corp., Refunding, 5.35%, 9/01/12 .................................................... 1,000,000 1,041,030
Metropolitan Government of Nashville and Davidson County IDBR, Osco Treatment Inc.,
Refunding and Improvement, 6.00%, 5/01/03 ................................................... 750,000 783,810
-----------
1,824,840
-----------
TEXAS 4.0%
Abilene Higher Educational Facilities Corp.,
ETM, 5.90%, 10/01/05 ...................................................................... 65,000 72,277
Higher Education Revenue, Abilene Christian, Refunding and Improvement, 5.90%, 10/01/05 ... 720,000 781,078
Houston Airport System Revenue, sub. lien, Series B, 4.80%, 7/01/13 .......................... 2,000,000 1,971,360
Houston ISD, Refunding, 5.50%, 8/15/09 ....................................................... 1,000,000 1,044,400
North Central Health Facility Development Corp. Revenue, C.C. Young Memorial Home Project,
Refunding, Series C, 6.10%, 2/15/06 ......................................................... 400,000 431,144
Port Corpus Christi Nueces County General Revenue, Union Pacific, Refunding, 5.35%, 11/01/10 . 2,500,000 2,559,550
Travis County GO, Refunding, 5.00%, 3/01/11 .................................................. 1,000,000 1,029,110
-----------
7,888,919
-----------
US TERRITORIES 6.3%
District of Columbia GO,
ETM, Series A, 5.875%, 6/01/05 ............................................................ 30,000 32,992
Refunding, Series A, 5.875%, 6/01/05 ...................................................... 670,000 719,989
Puerto Rico Electric Power Authority Revenue,
Refunding, Series Q, 5.90%, 7/01/01 ....................................................... 100,000 105,223
Series T, 6.00%, 7/01/04 .................................................................. 1,345,000 1,476,904
Virgin Islands PFA Revenue, senior lien, Fund Loan Notes, Refunding, Series A, 5.30%, 10/01/11 5,000,000 5,082,050
Virgin Islands Water and Power Authority Water System Revenue, Refunding,
5.00%, 7/01/03 ............................................................................ 500,000 509,505
4.875%, 7/01/06 ........................................................................... 2,000,000 2,007,820
5.00%, 7/01/09 ............................................................................ 2,400,000 2,394,096
-----------
12,328,579
-----------
UTAH .5%
Salt Lake County College Revenue, Westminster College Project, 5.50%, 10/01/12 ............... 340,000 347,344
Utah State HFA, SFM, Refunding, 5.85%, 7/01/08 ............................................... 575,000 614,129
-----------
961,473
-----------
VIRGINIA 4.8%
Covington-Alleghany County IDA, PCR, Westvaco Corp. Project, Refunding, 5.85%, 9/01/04 ....... 2,800,000 3,028,872
Virginia State GO, 5.00%, 6/01/09 ............................................................ 1,000,000 1,061,640
</TABLE>
82
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN FEDERAL INTERMEDIATE-TERM TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
VIRGINIA (CONT.)
Virginia State HDA,
Commonwealth Mortgage, Sub Series C-7, 5.60%, 1/01/03 ................................. $ 1,695,000 $ 1,776,157
Commonwealth Mortgage, Sub Series C-7, 5.70%, 1/01/04 ................................. 1,475,000 1,554,680
MF Housing, Series B, 5.15%, 11/01/12 ................................................. 1,905,000 1,938,311
------------
9,359,660
------------
WASHINGTON 3.6%
(b) Grant County PUD No. 2, Priest Rapids Hydroelectric Revenue, Second Series, Series A,
MBIA Insured, 5.00%, 1/01/14 ............................................................ 1,095,000 1,075,805
Marysville Water and Sewer Revenue, Refunding, MBIA Insured, 5.75%, 12/01/05 ............. 600,000 645,192
Spokane Downtown Foundation Parking Revenue, River Park Square Project, Asset Guaranty
Insured, 5.00%, 8/01/08 ................................................................. 3,000,000 3,095,340
Washington State Public Power Supply System Revenue,
Nuclear Project No. 1, Refunding, Series A, AMBAC Insured, 5.70%, 7/01/09 ............. 1,000,000 1,092,510
Nuclear Project No. 2, Refunding, Series A, 5.375%, 7/01/10 ........................... 1,000,000 1,040,110
------------
6,948,957
------------
WEST VIRGINIA .8%
West Virginia Public Energy Authority Energy Revenue, Morgantown Association Project,
Series A, 5.05%, 7/01/08 ............................................................... 1,500,000 1,535,595
------------
WISCONSIN .6%
Wisconsin State GO, Refunding, Series 1, 5.50%, 5/01/10 .................................. 1,000,000 1,078,230
-----------
TOTAL BONDS .............................................................................. 189,831,465
------------
(d) ZERO COUPON BONDS 1.1%
CALIFORNIA
San Joaquin Hills Transportation Corridor Agency Toll Road Revenue, senior lien,
Refunding, Series A, 1/15/17 ............................................................ 3,000,000 2,101,590
------------
TOTAL LONG TERM INVESTMENTS (COST $184,761,831) .......................................... 191,933,055
------------
(a) SHORT TERM INVESTMENTS 1.3%
Hawaii State Housing Finance and Development Corp. Revenue, Rental Housing System,
Series A, Weekly VRDN and Put,
3.00%, 7/01/24 ........................................................................... 300,000 300,000
Irvine 1915 Act, AD No. 93, Daily VRDN and Put, 2.75%, 9/02/23 ........................... 1,200,000 1,200,000
Lake Charles Harbor and Terminal District Revenue Updates, Reynolds Metal Company Project,
Weekly VRDN and Put, 2.20%, 5/01/06 ..................................................... 100,000 100,000
North Carolina Medical Care Commission Revenue, Carol Woods Project, Daily VRDN and
Put, 3.00%, 4/01/21 ..................................................................... 700,000 700,000
Perry County PCR, Leaf River Forest Project, Refunding, Daily VRDN and Put, 3.20%, 3/01/02 300,000 300,000
------------
TOTAL SHORT TERM INVESTMENTS (COST $2,600,000) ........................................... 2,600,000
------------
TOTAL INVESTMENTS (COST $187,361,831) 99.5% .............................................. 194,533,055
OTHER ASSETS, LESS LIABILITIES .5% ....................................................... 1,065,313
------------
NET ASSETS 100.0% ........................................................................ $195,598,368
------------
</TABLE>
See glossary of terms on page 134.
(a) Variable rate demand notes (VRDNs) are tax-exempt obligations which contain
a floating or variable interest rate adjustment formula and an unconditional
right of demand to receive payment of the principal balance plus accrued
interest at specified dates.
(b) Sufficient collateral has been segregated for securities traded on a
when-issued or delayed delivery basis.
(c) See Note 6 regarding defaulted securities.
(d) Zero coupon/step-up bonds. The current effective yield may vary. The
original accretion rate will remain constant.
See notes to financial statements.
83
FRANKLIN TAX-FREE TRUST
Financial Highlights
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28,
CLASS A 1999(2) 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................... $ 11.68 $ 11.21 $ 11.19 $ 10.74 $ 11.25
------------------------------------------------------------------------
Income from investment operations:
Net investment income ............................... .66 .69 .71 .74 .74
Net realized and unrealized gains (losses) .......... (.18) .47 .04 .45 (.51)
------------------------------------------------------------------------
Total from investment operations ..................... .48 1.16 .75 1.19 .23
------------------------------------------------------------------------
Less distributions from:
Net investment income ............................... (.65) (.68) (.73)(1) (.74) (.74)
In excess of net investment income .................. -- (.01) -- -- --
Net realized gains .................................. (.02) -- -- -- --
------------------------------------------------------------------------
Total distributions .................................. (.67) (.69) (.73) (.74 (.74)
------------------------------------------------------------------------
Net asset value, end of year ......................... $ 11.49 $ 11.68 $ 11.21 $ 11.19 $ 10.74
------------------------------------------------------------------------
Total return* ........................................ 4.21% 10.64% 7.01% 11.35 2.28%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ...................... $5,988,204 $5,742,939 $4,505,258 $3,787,147 $3,287,270
Ratios to average net assets:
Expenses ............................................ .62% .61% .62% .61 .60%
Net investment income ............................... 5.64% 5.98% 6.41% 6.68 6.92%
Portfolio turnover rate .............................. 18.55% 15.84% 6.98% 9.23 15.89%
CLASS B
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ................. $11.51
-------
Income from investment operations-net investment
income ............................................. .11
Less distributions from net investment income ........ (.10)
-------
Net asset value, end of period ....................... $11.52
-------
Total return* ........................................ .96%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $15,487 Ratios
to average net assets:
Expenses ............................................ 1.18%**
Net investment income ............................... 5.06%**
Portfolio turnover rate .............................. 18.55%
</TABLE>
(*) Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year. Prior
to May 1, 1994, dividends from net investment income were reinvested at the
offering price.
(**) Annualized.
(1) Includes distributions in excess of net investment income in
the amount of $.008.
(2) For the period January 1, 1999 (effective date) to February 28, 1999 for
Class B.
84
FRANKLIN TAX-FREE TRUST
Financial Highlights (continued)
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND (CONT.)
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28,
CLASS C 1999 1998 1997 1996(1)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ........ $ 11.75 $ 11.26 $ 11.24 $ 10.81
--------------------------------------------------------------
Income from investment operations:
Net investment income .................... .60 .63 .66 .56
Net realized and unrealized gains (losses) (.18) .48 .03 .42
--------------------------------------------------------------
Total from investment operations .......... .42 1.11 .69 .98
--------------------------------------------------------------
Less distributions from:
Net investment income .................... (.59) (.62) (.67)(2) (.55)
Net realized gains ....................... (.02) -- -- --
--------------------------------------------------------------
Total distributions ....................... (.61) (.62) (.67) (.55)
--------------------------------------------------------------
Net asset value, end of year .............. $ 11.56 $ 11.75 $ 11.26 $ 11.24
--------------------------------------------------------------
Total return* ............................. 3.69% 10.15% 6.36% 9.27%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ........... $631,974 $423,264 $194,400 $48,163
Ratios to average net assets:
Expenses ................................. 1.18% 1.18% 1.18% 1.18%**
Net investment income .................... 5.07% 5.38% 5.78% 6.07%**
Portfolio turnover rate ................... 18.55% 15.84% 6.98% 9.23%
</TABLE>
(*) Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year. Prior
to May 1, 1994, dividends from net investment income were reinvested at the
offering price.
(**) Annualized
(1) For the period May 1, 1995 (effective date) to February 29, 1996 for Class
C.
(2) Includes distributions in excess of net investment income in the amount of
$.003.
See notes to financial statements.
85
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS 98.1%
BONDS 94.6%
ALABAMA 1.2%
Alabama State IDA, Solid Waste Disposal Revenue, Pine City Fiber Co., Boise Cascade
Corp., 6.45%, 12/01/23 .................................................................... $20,400,000 $ 21,822,288
Jefferson County Sewer Revenue, wts., Series D, FGIC Insured, 5.75%,
2/01/22 ............................................................................... 7,500,000 8,097,825
2/01/27 ............................................................................... 18,535,000 19,999,636
Marshall County Health Care Authority Hospital Revenue, Boaz-Albertville Medical Center,
Refunding, 6.20%, 1/01/08 ................................................................. 3,300,000 3,455,364
Mcintosh IDB, Environmental Improvement Revenue, CIBA Specialty, Refunding, Series
C, 5.375%, 6/01/28 ....................................................................... 3,000,000 3,033,840
Mobile IDB, Solid Waste Disposal Revenue, Mobile Energy Service Co. Project, Refunding,
6.95%, 1/01/20 ............................................................................ 46,500,000 24,645,000
------------
81,053,953
------------
ALASKA .9%
Alaska Industrial Development and Export Authority Power Revenue, Upper Lynn Canal
Regional Power,
5.70%, 1/01/12 .......................................................................... 2,000,000 2,024,000
5.80%, 1/01/18 .......................................................................... 1,245,000 1,254,848
5.875%, 1/01/32 ......................................................................... 3,600,000 3,621,132
Alaska Industrial Development and Export Authority Revenue, American President Lines
Project, Refunding, 8.00%, 11/01/09 ...................................................... 4,000,000 4,158,640
Alaska Industrial Development and Export Authority, Revolving Fund, Series A, 6.20%, 4/01/10 815,000 874,283
Alaska State HFC,
Refunding, Series A, 6.10%, 12/01/37 .................................................... 22,000,000 23,109,020
Refunding, Series A, MBIA Insured, 6.00%, 12/01/15 ...................................... 3,655,000 3,886,435
Refunding, Series A, MBIA Insured, 5.875%, 12/01/24 ..................................... 5,000,000 5,212,850
Refunding, Series A, MBIA Insured, 5.875%, 12/01/30 ..................................... 12,475,000 12,961,775
Series A, MBIA Insured, 5.85%, 12/01/15 ................................................. 4,670,000 4,887,389
------------
61,990,372
------------
ARIZONA 5.3%
Apache County IDA, PCR, Tucson Electric Power Co. Project,
Series A, 5.85%, 3/01/28 ................................................................ 49,150,000 48,810,374
Series B, 5.875%, 3/01/33 ............................................................... 54,450,000 54,251,258
Series C, 5.85%, 3/01/26 ................................................................ 16,500,000 16,389,120
Arizona Health Facilities Authority Revenue, Bethesda Foundation Project, Series A,
6.375%, 8/15/15 ......................................................................... 400,000 423,608
6.40%, 8/15/27 .......................................................................... 3,000,000 3,158,700
Coconino County PCR, Tucson Electric Power Navajo, Refunding,
Series A, 7.125%, 10/01/32 .............................................................. 21,125,000 23,603,596
Series B, 7.00%, 10/01/32 ............................................................... 7,500,000 8,371,275
Gila County IDAR, Asarco Inc., Refunding, 5.55%, 1/01/27 ................................... 4,000,000 3,921,880
Gilbert Water Resources Municipal Property Corp. Water and Wastewater System Revenue,
sub. lien, 6.875%,
4/01/14 ................................................................................. 1,000,000 1,024,700
4/01/16 ................................................................................. 1,000,000 1,035,940
Maricopa County PCC, PCR, Public Service Co. of Colorado,
Palo Verde, Refunding, Series A, 6.375%, 8/15/23 ........................................ 8,500,000 8,999,375
Refunding, Series A, 5.75%, 11/01/22 .................................................... 20,150,000 20,235,033
Maricopa County Rural Road ID, 8.625%, 7/01/07 ............................................. 4,000,000 4,334,520
Pima County IDAR, Tucson Electric Power Co. Project,
Series A, 6.10%, 9/01/25 ................................................................ 3,990,000 3,980,105
Series B, 6.00%, 9/01/29 ................................................................ 94,690,000 94,452,328
Series C, 6.00%, 9/01/29 ................................................................ 37,000,000 36,907,130
Red Hawk Canyon Community Facility Revenue, 7.625%, 6/01/05 ................................ 14,810,000 15,451,569
Salt River Project Agricultural Improvement and Power District Electric System Revenue,
Series A, 6.00%, 1/01/31 .................................................................. 5,000,000 5,167,100
------------
350,517,611
------------
ARKANSAS .4%
Baxter County IDR, Aeroquip/Trinova Corp. Project, Refunding, 5.80%, 10/01/13 .............. 2,400,000 2,589,192
Conway Hospital Revenue, Refunding, 8.375%, 7/01/11 ........................................ 1,000,000 1,069,640
Independence County PCR,
Arkansas Power and Light Co. Project, Refunding, 6.25%, 1/01/21 ......................... 5,000,000 5,337,000
Mississippi Power and Light Co. Project, Series A, 9.00%, 7/01/13 ....................... 4,275,000 4,341,733
</TABLE>
86
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
ARKANSAS (CONT.)
Independence County PCR, (cont.)
Mississippi Power and Light Co. Project, Series B, 9.00%, 7/01/13 .................... $ 1,185,000 $ 1,203,498
Mississippi Power and Light Co. Project, Series C, 9.50%, 7/01/14 .................... 200,000 203,436
Jefferson County PCR, Entergy Arkansas Inc. Project, Refunding, 5.60%, 10/01/17 ......... 12,150,000 12,387,654
North Little Rock Health Facilities Board Health Care Revenue, Baptist Health Facility,
Series A, MBIA Insured, 5.50%, 12/01/21 ............................................... 700,000 730,534
-----------
27,862,687
-----------
CALIFORNIA 7.4%
Adelanto Water Authority Revenue, sub. lien, Water Systems Acquisition Project, Series A,
7.50%, 9/01/28 ....................................................................... 21,330,000 23,214,719
Alameda County MFHR, Claremont House Project, Refunding, Series A, 8.00%, 12/01/23 ...... 12,950,000 14,069,528
Antioch 1915 Act, AD No. 27, Lone Tree,
Series C, 7.70%, 9/02/17 ............................................................. 11,030,000 11,360,900
Series D, 7.30%, 9/02/13 ............................................................. 4,315,000 4,444,450
Antioch PFA, Reassessment Revenue, sub. lien, Series B, 5.85%, 9/02/15 .................. 7,000,000 6,948,830
Arroyo Grande Hospital System COP, Vista Hospital Systems,
Refunding, Series A, 9.50%, 7/01/20 .................................................. 22,515,000 25,400,973
Series A, 8.375%, 7/01/06 ............................................................ 2,500,000 2,671,625
Avenal PFA Revenue, Refunding,
7.00%, 9/02/10 ....................................................................... 1,660,000 1,694,594
7.25%, 9/02/27 ....................................................................... 3,665,000 3,792,872
Azusa RDA, Tax Allocation, Merged Area Project, Refunding, Series A, 6.75%, 8/01/23 ..... 2,850,000 3,086,208
Beaumont PFA Revenue, Sewer Enterprise Project, Series A, Pre-Refunded, 6.90%, 9/01/23 .. 4,575,000 5,617,231
Benicia 1915 Act, Fleetside Industrial Park Assessment, Refunding,
5.25%, 9/02/99 ....................................................................... 180,000 180,655
5.50%, 9/02/00 ....................................................................... 195,000 197,906
5.65%, 9/02/01 ....................................................................... 205,000 209,490
5.80%, 9/02/02 ....................................................................... 215,000 221,429
5.90%, 9/02/03 ....................................................................... 225,000 232,614
6.00%, 9/02/04 ....................................................................... 240,000 248,057
6.10%, 9/02/05 ....................................................................... 255,000 263,428
6.20%, 9/02/06 ....................................................................... 270,000 278,918
6.30%, 9/02/07 ....................................................................... 290,000 299,605
6.40%, 9/02/08 ....................................................................... 305,000 314,989
6.50%, 9/02/09 ....................................................................... 325,000 335,657
6.60%, 9/02/10 ....................................................................... 340,000 351,091
6.70%, 9/02/11 ....................................................................... 365,000 377,009
6.80%, 9/02/12 ....................................................................... 245,000 253,119
California Educational Facilities Authority Revenue, Pooled College and University
Financing, Series B, 6.125%, 6/01/09 ................................................... 3,000,000 3,239,520
California Health Facilities Financing Authority Revenue, Summit Medical Center,
Series A, Pre-Refunded, 7.50%, 5/01/09 ............................................... 4,370,000 4,489,083
Series A, Pre-Refunded, 7.60%, 5/01/15 ............................................... 2,155,000 2,214,069
Series B, Pre-Refunded, 7.50%, 5/01/09 ............................................... 5,255,000 5,398,199
California HFAR, MFHR, Series A, AMBAC Insured, 6.05%, 8/01/27 .......................... 2,000,000 2,134,340
California Special Districts Association Finance Corp., COP, Series V, 7.50%, 5/01/13 ... 820,000 890,061
California State GO, 5.75%, 3/01/19 ..................................................... 310,000 332,534
California Statewide CDA, California State University Northridge, Refunding, AMBAC
Insured, 6.00%, 4/01/26 ............................................................... 2,500,000 2,741,700
Capistrano USD, CFD,
Special Tax No. 9, 6.60%, 9/01/05 .................................................... 285,000 324,404
Special Tax No. 9, 6.70%, 9/01/06 .................................................... 280,000 319,864
Special Tax No. 9, 6.80%, 9/01/07 .................................................... 325,000 372,606
Special Tax No. 9, 6.90%, 9/01/08 .................................................... 260,000 299,153
Special Tax No. 9, 7.00%, 9/01/18 .................................................... 1,000,000 1,154,710
Contra Costa County PFA Revenue, Refunding,
6.625%, 9/02/10 ...................................................................... 2,300,000 2,374,612
6.875%, 9/02/16 ...................................................................... 2,610,000 2,695,138
</TABLE>
87
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
CALIFORNIA (CONT.)
Corona COP,
Corona Community Hospital Project, ETM, 9.425%, 9/01/06 ............................... $ 7,955,000 $ 9,698,497
Corona Community Hospital Project, Pre-Refunded, 9.425%, 9/01/20 ...................... 8,820,000 12,307,340
Vista Hospital System, Refunding, Series B, 8.375%, 7/01/06 ........................... 11,100,000 11,862,015
Vista Hospital System, Refunding, Series B, 9.50%, 7/01/20 ............................ 10,885,000 12,280,239
Eden Township Hospital District Health Facilities Revenue COP, Insured Eden Hospital
Health Services Corp., Refunding,
5.85%, 7/01/18 ........................................................................ 4,845,000 5,133,907
Emeryville RDA, MFHR, Emery Bay Apartments II,
Refunding, Series A, 5.85%, 10/01/28 .................................................. 15,125,000 15,308,164
sub. lien, Refunding, Series B, 6.35%, 10/01/28 ....................................... 3,555,000 3,580,525
sub. lien, Refunding, Series C, 7.875%, 10/01/28 ...................................... 2,095,000 2,113,038
Foothill/Eastern Corridor Agency, Toll Road Revenue, senior lien, Series A, 6.50%, 1/01/32 37,675,000 42,140,241
Gateway Improvement Authority Revenue, Marin City CFD, Series A, Pre-Refunded,
7.75%, 9/01/25 ........................................................................ 4,500,000 5,454,180
Hawthorne CRDA, Hawthorne Plaza Project, Refunding, 8.50%, 7/01/20 ....................... 4,175,000 4,380,619
Hesperia PFA Revenue, Series B, 7.375%, 10/01/23 ......................................... 6,365,000 6,737,225
Irvine 1915 Act, AD No. 96, Group One, 5.75%, 9/02/22 .................................... 1,000,000 1,010,780
Lake Elsinore 1915 Act, AD No. 9, Series A, 7.90%, 9/02/24 ............................... 6,000,000 6,352,560
Long Beach Special Tax, CFD No. 2, 7.50%, 9/01/11 ........................................ 3,065,000 3,082,379
Los Angeles County CFD No. 4 Special Tax, Improvement Area B, Series A, 9.25%, 9/01/22 ... 29,500,000 30,708,615
Los Angeles MFR, Refunding,
Series J-1A, 7.125%, 1/01/24 .......................................................... 175,000 180,651
Series J-1B, 7.125%, 1/01/24 .......................................................... 675,000 696,796
Series J-1C, 7.125%, 1/01/24 .......................................................... 1,435,000 1,481,336
Series J-2A, 8.50%, 1/01/24 ........................................................... 955,000 983,621
Series J-2B, 8.50%, 1/01/24 ........................................................... 3,330,000 3,429,800
Series J-2C, 8.50%, 1/01/24 ........................................................... 7,090,000 7,302,487
Los Angeles Regional Airports Improvement Corp. Lease Revenue,
Facilities Sub-Lease, Continental Airlines, 9.00%, 8/01/08 ............................ 1,800,000 1,850,112
Facilities Sub-Lease, Continental Airlines, 9.00%, 8/01/17 ............................ 7,595,000 7,806,445
Facilities Sub-Lease, International Airport, Refunding, 6.35%, 11/01/25 ............... 25,000,000 27,217,500
United Airlines, International Airport, Refunding, 6.875%, 11/15/12 ................... 9,500,000 10,394,140
Oakland Revenue, YMCA East Bay Project, Refunding, 7.10%, 6/01/10 ........................ 2,335,000 2,613,846
Orinda 1915 Act, AD No. 9, Oak Springs, 8.25%, 9/02/19 ................................... 2,834,000 2,934,579
Palmdale Special Tax CFD, No. 9 Ritter Ranch Project, Series A, 8.50%, 9/01/24 ........... 23,500,000 21,150,000
Perris PFA, Local Agency Revenue, Series B,
7.125%, 8/15/15 ....................................................................... 2,035,000 2,143,018
7.25%, 8/15/23 ........................................................................ 4,095,000 4,322,232
Riverside County COP, Airforce Village Project West Inc., Series A, 8.125%,
6/15/07 ............................................................................... 7,160,000 7,708,742
6/15/12 ............................................................................... 5,290,000 5,687,226
Roseville Special Tax, North Central CFD No. 1,
8.60%, 11/01/17 ....................................................................... 12,000,000 13,197,120
5.75%, 9/01/23 ........................................................................ 3,000,000 3,031,650
San Bernardino County Finance Authority Revenue, Public Improvement, AD, Refunding,
Series A,
6.00%, 9/02/01 ........................................................................ 1,450,000 1,486,192
6.50%, 9/02/04 ........................................................................ 1,285,000 1,317,626
7.00%, 9/02/17 ........................................................................ 2,720,000 2,787,293
San Francisco Downtown Parking Corp. Parking Revenue,
6.55%, 4/01/12 ........................................................................ 1,800,000 1,985,184
6.65%, 4/01/18 ........................................................................ 2,150,000 2,366,398
San Joaquin Hills Transportation Corridor Agency Toll Road Revenue, 5.00%, 1/01/33 ....... 5,930,000 5,732,531
San Jose MFHR, Timberwood Apartments, Series B, 9.25%, 2/01/10 ........................... 1,500,000 1,546,695
San Luis Obispo COP, Vista Hospital System Inc., 8.375%, 7/01/29 ......................... 22,000,000 23,674,420
San Ramon 1915 Act, Fostoria Parkway Reassessment District No. 9,
6.30%, 9/02/03 ........................................................................ 185,000 192,911
6.80%, 9/02/15 ........................................................................ 680,000 710,185
Santa Margarita/Dana Point Authority Revenue, ID 3, 3A, 4, and 4A, Refunding,
Series B, MBIA Insured, 5.75%, 8/01/20 ................................................ 3,000,000 3,214,860
</TABLE>
88
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
CALIFORNIA (CONT.)
Santa Rosa 1915 Act, Fountain Grove Parkway Extension Assessment, Pre-Refunded,
7.40%, 9/02/13 ........................................................................ $ 3,340,000 $ 3,440,200
7.625%, 9/02/19 ....................................................................... 3,450,000 3,553,500
South San Francisco RDA Tax Allocation, Gateway Redevelopment Project, Pre-Refunded,
7.60%, 9/01/18 ......................................................................... 2,000,000 2,134,680
Vallejo Special Tax, CFD No. 198, 8.90%, 8/01/21 ......................................... 7,500,000 8,233,800
------------
493,703,990
------------
COLORADO 2.5%
Adams County PCR, Public Service Co. of Colorado Project, Refunding, AMBAC Insured,
5.10%, 1/01/19 ........................................................................ 6,750,000 6,716,183
Arvada Limited Sales and Use Tax Revenue, Pre-Refunded, 7.50%, 6/01/11 ................... 2,485,000 2,700,375
Arvada MFHR, Springwood Community Project, 6.45%, 2/20/26 ................................ 3,000,000 3,161,520
Auraria Higher Education Center, Parking Facilities Revenue, Pre-Refunded,
7.75%, 4/01/09 ........................................................................ 3,450,000 3,612,978
7.875%, 4/01/12 ....................................................................... 1,600,000 1,677,696
Colorado Health Facilities Authority Revenue,
Beneficial Living System Inc., Series A, 10.125%, 10/01/20 ............................ 12,300,000 13,198,392
Volunteers of America Care Facilities, Refunding and Improvement, Series A, 5.45%,
7/01/08 .............................................................................. 1,135,000 1,137,372
Volunteers of America Care Facilities, Refunding and Improvement, Series A, 5.75%,
7/01/20 .............................................................................. 3,000,000 2,956,260
Volunteers of America Care Facilities, Refunding and Improvement, Series A, 5.875%,
7/01/28 .............................................................................. 5,290,000 5,313,382
Colorado HFA,
SF Program, Series A-2, 9.25%, 8/01/01 ................................................ 105,000 108,949
SF Program, Series A-2, 9.375%, 8/01/02 ............................................... 240,000 251,321
SF Program, Series B-1, 8.70%, 8/01/01 ................................................ 175,000 180,619
SFMR, Series B-3, 9.75%, 8/01/02 ...................................................... 230,000 235,886
SFMR, Series C, 9.20%, 8/01/02 ........................................................ 385,000 400,138
SFMR, Series C, 9.075%, 8/01/03 ....................................................... 640,000 673,286
Colorado Public Highway Authority Revenue, Highway E-470, Refunding, Senior Series A, MBIA
Insured, 5.00%, 9/01/21 ................................................................ 9,000,000 8,821,350
Colorado Springs Utilities Revenue, Series A, Pre-Refunded, 6.10%, 11/15/24 .............. 3,735,000 4,215,134
Denver City and County Airport Revenue,
Series A, 8.25%, 11/15/12 ............................................................. 5,350,000 5,764,251
Series A, 8.50%, 11/15/23 ............................................................. 29,060,000 31,452,510
Series A, 8.00%, 11/15/25 ............................................................. 135,000 145,024
Series A, MBIA Insured, 5.50%, 11/15/25 ............................................... 8,830,000 9,103,730
Series A, Pre-Refunded, 8.25%, 11/15/12 ............................................... 490,000 537,716
Series A, Pre-Refunded, 8.50%, 11/15/23 ............................................... 2,740,000 3,018,028
Series A, Pre-Refunded, 8.00%, 11/15/25 ............................................... 10,000 10,933
Series D, 7.75%, 11/15/13 ............................................................. 500,000 632,825
Series D, 7.75%, 11/15/21 ............................................................. 3,425,000 3,751,642
Series D, Pre-Refunded, 7.75%, 11/15/21 ............................................... 765,000 859,822
Eagle County Airport Terminal Project Revenue, 7.50%, 5/01/21 ............................ 2,305,000 2,485,228
Eagle County Sports and Housing Facilities Revenue, Vail Associate Project, Refunding,
6.95%, 8/01/19 ........................................................................ 41,200,000 46,004,332
Fremont County COP, Lease Purchase, MBIA Insured, 5.30%, 12/15/17 ........................ 2,000,000 2,063,000
Stonegate Village Metropolitan District, Refunding and Improvement, Series A, FSA Insured,
5.60%, 12/01/25 ....................................................................... 4,640,000 4,878,728
(e)Villages Castle Rock Metropolitan District No. 4, Refunding, 8.50%, 6/01/31 ............ 3,000,000 1,804,740
------------
167,873,350
------------
CONNECTICUT 2.2%
Connecticut State Development Authority First Mortgage Revenue, East Hill Gladeview
Health Project 86, Pre-Refunded,
9.75%, 12/15/16 ....................................................................... 2,600,000 2,853,422
Connecticut State Development Authority PCR,
Connecticut Light and Power, Refunding, Series B, 5.95%, 9/01/28 ...................... 21,750,000 21,851,355
Connecticut Light and Water, Refunding, Series A, 5.85%, 9/01/28 ...................... 74,975,000 75,319,885
Western Massachusetts Electric Co., Refunding, Series A, 5.85%, 9/01/28 ............... 12,500,000 12,557,500
Connecticut State Development Authority Water Facility Revenue, Bridgeport Hydraulic
Co. Project, 6.15%, 4/01/35 ............................................................. 3,000,000 3,246,240
Connecticut State Health and Educational Facilities Authority Revenue,
Sacred Heart University, Refunding, Series C, 6.50%, 7/01/16 .......................... 2,000,000 2,274,700
Windham Community Memorial Hospital, Series C, 6.00%, 7/01/11 ......................... 2,400,000 2,532,096
</TABLE>
89
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
CONNECTICUT (CONT.)
Connecticut State HFA, Housing Mortgage Finance Program,
Series C-1, 6.30%, 11/15/17 .......................................................... $19,995,000 $ 21,727,567
Sub Series F-1, 6.00%, 5/15/17 ....................................................... 3,500,000 3,746,715
------------
146,109,480
------------
FLORIDA 6.8%
Alachua County Health Facilities Authority Revenue, Shands Teaching Hospital, Series A,
MBIA Insured, 5.80%, 12/01/26 .......................................................... 2,990,000 3,236,825
Brooks of Bonita Springs CDD, Capital Improvement Revenue,
Series A, 6.20%, 5/01/19 ............................................................. 11,200,000 11,147,808
Series B, 5.65%, 5/01/06 ............................................................. 2,850,000 2,820,075
Broward County Resource Recovery Revenue, Broward Waste Energy Co., LP, North Project,
Series 1984, 7.95%, 12/01/08 ........................................................... 18,160,000 19,167,880
Capron Trails CDD,
9.375%, 12/01/01 ..................................................................... 1,100,000 1,165,043
9.50%, 12/01/10 ...................................................................... 5,795,000 6,134,587
Championsgate CDD, Capital Improvement Revenue,
Series A, 6.25%, 5/01/20 ............................................................. 2,835,000 2,798,712
Series B, 5.70%, 5/01/05 ............................................................. 1,520,000 1,511,306
East County Water Control District, Lee County Drain, Series 1991, Pre-Refunded,
8.75%, 9/01/01 ....................................................................... 1,800,000 1,918,674
8.625%, 9/01/11 ...................................................................... 10,565,000 11,588,220
Florida State Board of Education Capital Outlay, Public Education, Series B, 5.875%,
6/01/24 .............................................................................. 7,000,000 7,619,220
6/01/25 .............................................................................. 2,000,000 2,176,920
Gateway Services District Water Management Benefit Tax Revenue, Second Assessment Area,
Phase One, 8.00%, 5/01/20 .............................................................. 4,010,000 4,311,993
Heritage Harbor CDD, Special Assessment Revenue,
Series A, 6.70%, 5/01/19 ............................................................. 1,895,000 1,905,062
Series B, 6.00%, 5/01/03 ............................................................. 2,750,000 2,767,793
Heritage Isles CDD, Special Assessment Revenue, Series A, 5.75%, 5/01/05 ................ 2,000,000 2,013,200
Heritage Palms CDD, Capital Improvement Revenue, 5.40%, 11/01/03 ........................ 5,140,000 5,118,720
Highlands County Health Facilities Authority Revenue, Adventist Health Systems, 5.25%,
11/15/28 ............................................................................. 10,000,000 9,692,200
Indian Trace CDD,
Water and Sewer Revenue, Expansion, 6.875%, 4/01/10 .................................. 10,400,000 10,896,392
Water Management Special Benefit, Refunding, Sub Series B, 8.25%, 5/01/05 ............ 9,065,000 10,101,492
Water Management Special Benefit, Refunding, Sub Series B, 8.25%, 5/01/11 ............ 12,760,000 14,328,842
Lakeland Retirement Community Revenue, First Mortgage, Carpenters Home, Refunding,
Series A, 6.75%, 1/01/19 ............................................................... 15,345,000 15,326,433
Lakewood Ranch CDD 2, Benefit Special Assessment,
6.25%, 5/01/18 ....................................................................... 11,970,000 11,811,038
Series A, 8.125%, 5/01/17 ............................................................ 10,245,000 11,265,914
Series B, 8.125%, 5/01/17 ............................................................ 4,565,000 5,019,902
Lakewood Ranch CDD 3, Special Assessment Revenue, 7.625%, 5/01/18 ....................... 8,245,000 8,872,609
Manatee County IDR, Manatee Hospital and Health System Inc., Pre-Refunded, 9.25%, 3/01/21 6,500,000 7,342,010
Meadow Pointe CDD, Capital Improvement Revenue, 6.875%, 7/01/99 ......................... 7,870,000 7,909,665
Meadow Pointe II CDD, Capital Improvement Revenue,
Series A, 5.25%, 8/01/03 ............................................................. 1,000,000 987,580
Series B, 5.50%, 8/01/05 ............................................................. 3,675,000 3,626,086
Mount Dora County Club CDD, Special Assessment Revenue,
6.75%, 5/01/03 ....................................................................... 340,000 341,214
7.125%, 5/01/05 ...................................................................... 3,490,000 3,539,733
7.75%, 5/01/13 ....................................................................... 2,090,000 2,152,825
Naples Heritage CDD, Capital Improvement Revenue, 6.15%, 11/01/01 ....................... 5,940,000 6,014,785
North Broward Hospital District Revenue, Refunding and Improvement, MBIA Insured,
5.75%, 1/15/27 ....................................................................... 20,000,000 21,464,200
North Springs ID,
Special Assessment Revenue, Parkland Isles Project, Series A, 7.00%, 5/01/19 ......... 1,300,000 1,369,862
Special Assessment Revenue, Parkland Isles Project, Series B, 6.25%, 5/01/05 ......... 3,785,000 3,887,574
Water Management, Series A, Pre-Refunded, 8.20%, 5/01/24 ............................. 1,940,000 2,097,858
Water Management, Series B, 8.30%, 5/01/24 ........................................... 1,705,000 2,084,942
</TABLE>
90
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
FLORIDA (CONT.)
Northwood CDD, Special Assessment Revenue,
6.40%, 5/01/02 .......................................................................... $ 2,925,000 $ 2,971,361
Series A, 7.125%, 5/01/00 ............................................................... 390,000 393,069
Series B, 7.60%, 5/01/17 ................................................................ 1,575,000 1,637,354
Orlando Special Assessment Revenue, Conroy Road Interchange Project, Series A,
5.80%, 5/01/26 .......................................................................... 3,250,000 3,249,708
Palm Beach County Health Facilities Authority Revenue, Abbey del Ray South Project,
Refunding, 8.25%, 10/01/15 ................................................................ 6,000,000 6,541,800
(c) Palm Beach County Solid Waste IDR, Okeelanta Power and Light Co. Project, Series A,
6.85%, 2/15/21 .......................................................................... 27,000,000 21,060,000
Pelican Marsh CDD, Special Assessment Revenue,
ETM, Series A, 8.25%, 5/01/99 ........................................................... 215,000 216,817
ETM, Series A, 8.25%, 5/01/00 ........................................................... 230,000 243,255
ETM, Series A, 8.25%, 5/01/01 ........................................................... 250,000 275,315
ETM, Series A, 8.25%, 5/01/02 ........................................................... 270,000 307,608
ETM, Series A, 8.25%, 5/01/03 ........................................................... 295,000 346,303
ETM, Series A, 8.25%, 5/01/04 ........................................................... 315,000 380,107
Refunding, Series A, 5.00%, 5/01/11 ..................................................... 7,220,000 7,451,906
Refunding, Series A, 5.50%, 5/01/16 ..................................................... 4,370,000 4,506,956
Refunding, Series B, 5.25%, 5/01/09 ..................................................... 325,000 335,309
Series A, Pre-Refunded, 8.25%, 5/01/16 .................................................. 6,590,000 7,891,986
Series C, 7.00%, 5/01/19 ................................................................ 13,460,000 13,852,359
Series D, 6.95%, 5/01/19 ................................................................ 8,185,000 8,424,166
Pembroke Pines Capital Improvement Revenue, AMBAC Insured, 5.95%, 10/01/20 ................. 1,225,000 1,323,245
Piney-Z CDD, Capital Improvement Revenue,
Series A, 7.25%, 5/01/19 ................................................................ 995,000 1,013,457
Series B, 6.50%, 5/01/02 ................................................................ 6,320,000 6,321,074
Port Orange Lease Finance Corp. Recreation Facilities Lease Revenue, Pre-Refunded, 8.75%,
10/01/12 ................................................................................ 2,230,000 2,347,320
Reserve CDD,
Capital Improvement Revenue, Stormwater Management, 8.25%, 5/01/14 ...................... 4,395,000 4,659,140
Utility Revenue, Stormwater Management, Refunding, Series A, 6.625%, 12/01/22 ........... 4,400,000 4,386,360
River Ridge CDD, Capital Improvement Revenue, 5.75%, 5/01/08 ............................... 4,000,000 3,952,080
Riverwood Community Development Revenue, Special AD, Series A,
6.75%, 5/01/04 .......................................................................... 3,320,000 3,457,116
7.75%, 5/01/14 .......................................................................... 1,265,000 1,333,753
Santa Rosa County Health Facilities Authority Revenue, Gulf Breeze Hospital Inc., Refunding,
8.60%, 10/01/02 ......................................................................... 195,000 199,551
St. Lucie West Services District Capital Improvement Revenue,
Cascades Project, 6.10%, 5/01/18 ........................................................ 2,560,000 2,548,301
Lake Charles Project, 6.375%, 8/01/02 ................................................... 3,135,000 3,140,079
St. Lucie West Services District Revenue, Port St. Lucie, Refunding,
7.875%, 5/01/20 ......................................................................... 19,785,000 20,922,044
8.25%, 12/01/23 ......................................................................... 22,715,000 24,374,785
St. Lucie West Services District Water Management Benefit Tax, 7.70%, 5/01/25 .............. 4,945,000 5,161,443
Stoneybrook CDD, Capital Improvement Revenue,
Series A, 6.10%, 5/01/19 ................................................................ 830,000 834,150
Series B, 5.70%, 5/01/08 ................................................................ 2,610,000 2,622,711
Sumter County IDAR, Little Sumter Utility Co. Project,
6.75%, 10/01/27 ......................................................................... 2,950,000 2,952,478
7.25%, 10/01/27 ......................................................................... 4,200,000 4,270,644
Tampa Revenue, Aquarium Inc. Project, Pre-Refunded, 7.55%, 5/01/12 ......................... 9,300,000 10,553,826
Village CDD No. 1, Capital Improvement Revenue,
6.75%, 5/01/02 .......................................................................... 60,000 62,003
8.40%, 5/01/12 .......................................................................... 945,000 1,005,849
8.00%, 5/01/15 .......................................................................... 2,895,000 3,048,927
Village Center CDD, Recreational Revenue,
Sub Series B, 8.25%, 1/01/17 ............................................................ 2,700,000 2,871,396
Sub Series C, 7.375%, 1/01/19 ........................................................... 2,640,000 2,650,322
Westchase East CDD, Capital Improvement Revenue, 6.10%, 5/01/20 ............................ 6,200,000 6,204,092
------------
449,836,719
------------
</TABLE>
91
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
GEORGIA .7%
Baldwin County Hospital Authority Revenue, Oconee Regional Medical Center, 5.375%,
12/01/28 ........................................................................... $ 1,470,000 $ 1,420,167
Chatham County Hospital Authority Revenue, Memorial Medical Center, Refunding and
Improvement, Series A, AMBAC Insured,
5.70%, 1/01/19 ..................................................................... 10,000,000 10,625,300
Forsyth County Hospital Authority Revenue, Anticipation Certificate, Georgia
Baptist Health Care System Project,
6.25%, 10/01/18 .................................................................... 6,000,000 5,926,320
6.375%, 10/01/28 ................................................................... 9,000,000 8,899,020
Metropolitan Atlanta Rapid Transit Authority Sales Tax Revenue, Second Indenture,
Refunding, Series A, MBIA Insured,
5.625%, 7/01/20 .................................................................... 15,000,000 15,920,700
Tift County IDAR, Beverly Enterprises, 10.125%, 9/01/10 ............................... 1,270,000 1,381,760
------------
44,173,267
------------
HAWAII .2%
Hawaii State Department of Transportation Special Facilities Revenue, Continental
Airlines Inc., 9.70%, 6/01/20 ...................................................... 6,500,000 6,942,065
Hawaii State Special AD No. 17, AMBAC Insured, 9.50%, 8/01/11 ......................... 4,640,000 4,891,117
Hawaiian Home Lands Department Revenue, Pre-Refunded, 7.60%, 7/01/08 .................. 1,315,000 1,458,690
------------
13,291,872
------------
IDAHO .4%
Nez Perce County PCR, Potlatch Corp. Project, Refunding, 6.00%, 10/01/24 .............. 22,360,000 23,868,853
------------
ILLINOIS 4.8%
Alton Hospital Facilities Revenue, St. Anthony's Health Center Project,
Pre-Refunded, 8.375%, 9/01/14 ...................................................... 8,655,000 9,052,178
Aurora MFR, Fox Valley Two-Oxford Limited Development, Refunding, Series A, GNMA
Secured, 6.125%, 2/20/32 ........................................................... 5,635,000 5,928,753
Bryant PCR, Central Illinois Light Co. Project, Refunding, MBIA Insured,
5.90%, 8/01/23 ..................................................................... 11,000,000 11,623,150
Chicago O'Hare International Airport Special Facilities Revenue,
American Airlines Inc. Project, 8.20%, 12/01/24 .................................... 7,830,000 9,310,340
United Airlines Inc. Project, Series A, 8.85%, 5/01/18 ............................. 14,840,000 16,268,944
United Airlines Inc. Project, Series B, 8.85%, 5/01/18 ............................. 3,540,000 3,880,867
Chicago Wastewater Transmission Revenue, MBIA Insured, Pre-Refunded, 6.375%, 1/01/24 .. 4,780,000 5,467,412
Cook County GO, Refunding, Series A, MBIA Insured, 5.625%, 11/15/22 ................... 22,875,000 23,938,230
Illinois Development Finance Authority Hospital Revenue, Adventist Health System,
Sunbelt Obligation,
5.65%, 11/15/24 .................................................................... 10,000,000 9,945,400
5.50%, 11/15/29 .................................................................... 10,000,000 9,654,500
Illinois Development Finance Authority PCR, Commonwealth Edison Co. Project,
Refunding, Series 1991, 7.25%, 6/01/11 ............................................. 7,000,000 7,524,790
Illinois Development Finance Authority Revenue, Provena Health, Series A, MBIA Insured,
5.50%, 5/15/21 ..................................................................... 10,500,000 10,826,970
Illinois Educational Facilities Authority Revenue, Osteopathic Health Systems,
ETM, 7.125%, 5/15/11 ............................................................... 2,330,000 2,561,159
Pre-Refunded, 7.25%, 5/15/22 ....................................................... 7,000,000 9,037,420
Illinois Health Facilities Authority Revenue,
Northwestern Medical Center, Pre-Refunded, 6.625%, 11/15/25 ........................ 6,500,000 7,519,395
Rush Presbyterian Hospital, Refunding, Series A, MBIA Insured, 6.25%, 11/15/20 ..... 9,000,000 10,011,510
Sarah Bush Lincoln Health Center, Pre-Refunded, 7.25%, 5/15/12 ..................... 2,000,000 2,254,320
Sarah Bush Lincoln Health Center, Refunding, Series B, 6.00%, 2/15/11 .............. 3,370,000 3,655,102
Servantcor, Series B, Pre-Refunded, 7.875%, 8/15/19 ................................ 3,000,000 3,123,990
St. Elizabeth's Hospital, 6.25%, 7/01/16 ........................................... 1,215,000 1,304,521
St. Elizabeth's Hospital, 6.375%, 7/01/26 .......................................... 6,695,000 7,222,231
Thorek Hospital and Medical Center, Refunding, 5.25%, 8/15/18 ...................... 5,125,000 4,913,953
Thorek Hospital and Medical Center, Refunding, 5.375%, 8/15/28 ..................... 8,595,000 8,233,666
Metropolitan Pier and Exposition Authority Hospitality Facilities Revenue,
McCormick Place Convention Center,
5.75%, 7/01/06 ..................................................................... 1,650,000 1,766,886
6.25%, 7/01/17 ..................................................................... 11,000,000 11,881,430
7.00%, 7/01/26 ..................................................................... 7,500,000 9,178,575
Robbins Resource Recovery Revenue,
Series A, 8.375%, 10/15/10 ......................................................... 10,000,000 5,500,000
Series A, 8.375%, 10/15/16 ......................................................... 145,175,000 79,846,250
Series B, 8.375%, 10/15/16 ......................................................... 47,200,000 25,960,000
Sterling First Mortgage Revenue, Hoosier Care Project, Series A, 9.75%, 8/01/19 ....... 1,275,000 1,324,445
------------
318,716,387
------------
</TABLE>
92
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
INDIANA .4%
Crawfordsville Industrial EDR, Kroger Co., Refunding, 7.70%, 11/01/12 .................... $ 5,000,000 $ 5,631,750
Duneland School Building Corp. First Mortgage, MBIA Insured, 5.50%, 8/01/17 .............. 4,060,000 4,223,090
Goshen Industrial Revenue, Greencroft Hospital Association Inc., Refunding, 5.75%,
8/15/19 .............................................................................. 3,000,000 2,946,840
8/15/28 .............................................................................. 5,000,000 4,861,650
Indiana Health Facility Financing Authority Hospital Revenue,
Hancock Memorial Hospital Project, Series 1990, Pre-Refunded, 8.30%, 8/15/20 ............ 3,000,000 3,267,810
Jackson County Scheck Memorial Hospital, Refunding, 5.125%, 2/15/17 ..................... 1,500,000 1,446,240
White River Elementary Building Corp. First Mortgage, AMBAC Insured, 5.00%, 7/15/16 ..... 1,000,000 1,001,600
------------
23,378,980
------------
KANSAS .1%
Prairie Village Revenue, Claridge Court Project, Series A, 8.75%, 8/15/23 ............... 5,730,000 6,538,675
------------
KENTUCKY .8%
Adair County Public Hospital Corp. Revenue, Refunding and Improvement,
5.40%, 1/01/12 ....................................................................... 460,000 465,000
5.70%, 1/01/19 ....................................................................... 1,100,000 1,107,854
Kenton County Airport Board Revenue, Special Facilities, Delta Airlines Inc. Project,
8.10%, 12/01/15 ...................................................................... 11,000,000 11,498,300
Series A, 7.50%, 2/01/20 ............................................................. 11,230,000 12,262,037
Series B, 7.25%, 2/01/22 ............................................................. 3,595,000 3,909,455
Kentucky Economic Development Finance Authority Hospital System Revenue, Appalachian
Regional Health Center Facility, Refunding and Improvement, 5.875%, 10/01/22 ......... 7,835,000 8,056,260
Powderly IDR, First Mortgage Revenue, Kroger Co., Refunding, 7.375%, 9/01/06 ............ 830,000 922,570
Russell Health System Revenue,
8.10%, 7/01/15 ....................................................................... 3,230,000 3,858,429
Franciscan Health Center, Series B, 8.10%, 7/01/01 ................................... 1,100,000 1,185,217
Our Lady of Bellefonte, Refunding, 5.50%, 7/01/15 .................................... 1,000,000 1,031,210
Pre-Refunded, 8.10%, 7/01/15 ......................................................... 4,270,000 5,404,710
Stanford Health Facilities Revenue, Beverly Project, Refunding, 10.375%, 11/01/09 ....... 900,000 988,119
------------
50,689,161
------------
LOUISIANA 2.5%
Calcasieu Parish Public Trust Authority Mortgage Revenue, Refunding, Series A, 7.75%,
6/01/12 .............................................................................. 1,565,000 1,658,180
Iberville Parish PCR, Entergy Gulf States Inc. Project, Refunding, 5.70%, 1/01/14 ....... 15,500,000 15,678,870
Lake Charles Harbor and Terminal District Port Facilities Revenue, Trunkline Co. Project,
Refunding, 7.75%, 8/15/22 .............................................................. 35,000,000 39,593,400
Louisiana Public Facilities Authority Revenue, Xavier University of Louisiana Project,
Refunding, MBIA Insured, 5.25%, 9/01/17 ................................................ 5,000,000 5,097,000
Pointe Coupee Parish PCR, Gulf States Utilities Co. Project, Refunding, 6.70%, 3/01/13 .. 4,850,000 5,182,322
St. Charles Parish PCR, Louisiana Power and Light Co. Project,
8.25%, 6/01/14 ....................................................................... 25,500,000 26,494,500
8.00%, 12/01/14 ...................................................................... 13,525,000 14,254,674
St. Tammany Public Trust Financing Authority Revenue, Christwood Project, Refunding,
5.70%, 11/15/28 ...................................................................... 4,000,000 3,844,840
West Feliciana Parish PCR,
Gulf State Utility Co. Project, Refunding, 8.00%, 12/01/24 ........................... 17,200,000 17,969,356
Gulf State Utility Co. Project, Series D, 5.80%, 12/01/15 ............................ 4,000,000 4,066,520
Gulf State Utility Co. Project, Series D, 5.80%, 4/01/16 ............................. 19,600,000 19,887,532
Series A, 7.50%, 5/01/15 ............................................................. 8,740,000 9,641,181
------------
163,368,375
------------
MAINE .6%
Maine State Finance Authority Solid Waste Disposal Revenue, Boise Cascade Corp. Project,
7.90%, 6/01/15 ....................................................................... 5,000,000 5,283,800
Rumford PCR, Boise Cascade Corp. Project, Refunding, 6.625%, 7/01/20 .................... 4,800,000 5,222,880
Skowhegan PCR, S.D. Warren Co.,
Series A, 6.65%, 10/15/15 ............................................................ 24,570,000 26,226,509
Series B, 6.65%, 10/15/15 ............................................................ 4,940,000 5,273,055
------------
42,006,244
------------
</TABLE>
93
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
MARYLAND .6%
Gaithersberg Hospital Facilities Revenue, Shady Grove Adventist Hospital, Refunding
and Improvement,
Series B, 8.50%, 9/01/03 ............................................................ $ 4,510,000 $ 5,288,742
Series B, 8.50%, 9/01/07 ............................................................ 5,340,000 6,692,302
Series B, Pre-Refunded, 8.50%, 9/01/22 .............................................. 3,550,000 4,179,060
Series C, Pre-Refunded, 6.00%, 9/01/21 .............................................. 5,000,000 5,431,200
Maryland State CDA, Department of Housing and Community Development, Series A,
5.875%, 7/01/16 ..................................................................... 3,975,000 4,182,217
Takoma Park Hospital Facilities Revenue, Washington Adventist Hospital Project,
Series B, 8.50%,
9/01/03 ............................................................................. 4,700,000 5,511,549
9/01/07 ............................................................................. 6,975,000 8,741,349
40,026,419
MASSACHUSETTS 1.9%
Massachusetts Bay Transportation Authority Revenue, General Transportation System,
Refunding, Series C, 5.00%, 3/01/24 ................................................. 5,000,000 4,964,700
Series A, 7.00%, 3/01/21 ............................................................ 2,000,000 2,502,040
Massachusetts Municipal Wholesale Electric Co. Power Supply System Revenue,
Series A, 6.75%, 7/01/11 ............................................................ 4,435,000 4,760,662
Series B, 6.75%, 7/01/17 ............................................................ 3,170,000 3,390,632
Massachusetts State Health and Educational Facilities Authority Revenue,
Bay State Medical Center, Series E, FSA Insured, 6.00%, 7/01/26 ..................... 5,000,000 5,398,500
Framingham Union Hospital, Pre-Refunded, 8.50%, 7/01/10 ............................. 1,910,000 2,075,731
Partners Healthcare System, Series A, MBIA Insured, 5.375%, 7/01/24 ................. 9,000,000 9,145,530
Saint Memorial Medical Center, Refunding, Series A, 5.75%, 10/01/06 ................. 3,250,000 3,258,645
Saint Memorial Medical Center, Refunding, Series A, 6.00%, 10/01/23 ................. 5,735,000 5,750,083
Massachusetts State Industrial Finance Agency Resource Recovery Revenue, Semass Project,
Series A, 9.00%, 7/01/15 ............................................................ 15,490,000 17,247,960
Series B, 9.25%, 7/01/15 ............................................................ 20,470,000 22,855,983
Massachusetts State Industrial Finance Agency Revenue, Cape Cod Health Systems,
Pre-Refunded, 8.50%, 11/15/20 ......................................................... 4,500,000 4,972,500
Massachusetts State Turnpike Authority Metropolitan Highway System Revenue,
Series A, MBIA Insured, 5.00%, 1/01/37 .............................................. 38,500,000 37,105,530
Sub Series B, MBIA Insured, 5.25%, 1/01/29 .......................................... 1,625,000 1,629,826
125,058,322
MICHIGAN 2.2%
Cadillac Local Development Finance Authority Tax Increment Revenue, Refunding, 8.50%,
3/01/10 ............................................................................. 5,720,000 6,194,932
Detroit GO,
City School District, Series A, AMBAC Insured, Pre-Refunded, 5.85%, 5/01/16 ......... 5,175,000 5,860,998
Refunding, Series B, 6.375%, 4/01/07 ................................................ 7,535,000 8,370,104
Refunding, Series B, 6.25%, 4/01/08 ................................................. 3,000,000 3,312,690
Series A, Pre-Refunded, 6.80%, 4/01/15 .............................................. 5,160,000 6,003,402
Dickinson County Memorial Hospital System Revenue, 8.125%, 11/01/24 .................... 4,250,000 4,882,060
Garden City Hospital Financing Authority Hospital Revenue, Refunding,
5.625%, 9/01/10 ..................................................................... 2,000,000 1,987,960
5.75%, 9/01/17 ...................................................................... 1,000,000 993,030
Kalamazoo Hospital Finance Authority Hospital Facility Revenue, Bronson Methodist
Hospital, Refunding, MBIA Insured,
5.50%, 5/15/28 ....................................................................... 4,180,000 4,320,991
Kent Hospital Finance Authority Health Care Revenue, Butterworth Health System,
Series A, MBIA Insured, Pre-Refunded,
6.125%, 1/15/21 ..................................................................... 11,770,000 13,475,826
Michigan Higher Education Facilities Authority Revenue, Limited Obligation,
Calvin College Project, 5.55%, 6/01/17 .............................................. 1,000,000 1,002,230
Michigan State Hospital Finance Authority Revenue,
Detroit Medical Center Obligation Group, Refunding, Series A, 6.25%, 8/15/13 ........ 4,250,000 4,330,963
Detroit Medical Center Obligation Group, Refunding, Series A, 6.50%, 8/15/18 ........ 11,500,000 11,871,450
Genesys Regional Medical Center, Refunding, Series A, 5.50%, 10/01/27 ............... 16,500,000 15,834,390
Mercy Health Services, Series Q, AMBAC Insured, 5.75%, 8/15/16 ...................... 9,310,000 10,008,343
Mercy Health Services, Series Q, AMBAC Insured, 5.375%, 8/15/26 ..................... 4,750,000 4,832,603
Mercy Health Services, Series W, FSA Insured, 5.25%, 8/15/27 ........................ 4,000,000 4,035,120
Sinai Hospital, Refunding, 6.625%, 1/01/16 .......................................... 2,990,000 3,139,291
Sinai Hospital, Refunding, 6.70%, 1/01/26 ........................................... 7,250,000 7,648,968
</TABLE>
94
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
MICHIGAN (CONT.)
<S> <C> <C>
Michigan State Strategic Fund Limited Obligation Revenue, Detroit Edison Co.,
Pollution Project, Refunding, Series BB,
MBIA Insured, 6.20%, 8/15/25 ................................................................ $ 7,825,000 $ 8,642,634
Muskegon Hospital Finance Authority Hospital Revenue,
Muskegon General Hospital, Refunding, Series A, 8.25%, 2/15/11 .................................. 3,500,000 3,737,055
Tawas City Hospital Finance Authority, Tawas St. Joseph's Hospital Project,
Refunding, Series A, 5.60%, 2/15/13 .......................................................... 2,395,000 2,388,031
Series A, 5.75%, 2/15/23 ..................................................................... 4,125,000 4,131,476
Wayne County Downriver Systems Sewer Disposal Revenue, Series A, 7.00%, 11/01/13 ................ 1,900,000 2,082,096
Wayne County GO,
IDA, Building Authority, Pre-Refunded, 8.00%, 3/01/17 ........................................ 4,500,000 5,138,190
South Huron Valley Wastewater Control, Refunding, 7.875%, 5/01/02 ............................ 2,640,000 2,791,166
Wyandotte Tax Increment Finance Authority Central Development Area Project, Pre-Refunded,
7.875%,
6/01/09 ...................................................................................... 500,000 510,870
6/01/10 ...................................................................................... 500,000 510,870
------------
148,037,739
------------
MINNESOTA 2.3%
Burnsville Solid Waste Revenue, Freeway Transfer Inc. Project, 9.00%,
10/01/00 ..................................................................................... 245,000 258,607
4/01/10 ...................................................................................... 1,500,000 1,602,675
Duluth Commercial Development Revenue, Duluth Radisson Hotel Project, Refunding,
8.00%, 12/01/15 ...... 5,000,000 4,251,050
International Falls PCR, Boise Cascade Corp. Project, Refunding, 5.65%, 12/01/22 ................ 10,500,000 10,257,555
Maplewood Health Care Facility Revenue, Health East Project, 5.95%, 11/15/06 .................... 2,200,000 2,193,070
Minneapolis CDA, Supported Development Revenue, Limited Tax,
Series 2, 8.40%, 12/01/12 .................................................................... 2,785,000 2,867,909
Series 3-A, 8.375%, 12/01/19 ................................................................. 600,000 649,128
Minneapolis Revenue, Walker Methodist Senior Services, Series A,
5.875%, 11/15/18 ............................................................................. 2,500,000 2,523,975
6.00%, 11/15/28 .................................................................................. 4,750,000 4,825,383
Minnesota Agriculture and Economic Development Board Revenue, Health Care
System, Fairview Hospital, Refunding, Series A, MBIA Insured, 5.75%, 11/15/26
23,380,000 24,997,662
Minnesota State HFA, Rental Housing, Refunding, Series D,
MBIA Insured, 5.95%, 2/01/18 .................................................................... 3,330,000 3,505,558
Northfield First Mortgage
Nursing Home Revenue, Minnesota Odd Fellows Home Project, 8.75%, 10/01/03
880,000 899,149
Northwest Multi-County RDAR, Government Housing, Pooled Housing
Project, 7.40%, 7/01/26 ......................................................................... 5,165,000 4,390,250
Robbinsdale MFHR, Copperfield Phase
II Apartments, Refunding, 9.00%, 3/01/25 ........................................................ 4,110,000 4,239,424
Rochester Health
Care Facilities Revenue, Mayo Foundation, Series A, 5.50%, 11/15/27 ............................. 15,000,000 15,649,200
Roseville MFHR, Rosepointe I Project, Refunding, Series C, 8.00%,
12/01/29 ........................................................................................ 3,445,000 3,733,312
(e) South Central Multi-County Housing and RDAR, Pooled Housing, 8.00%, 2/01/25 ................. 10,000,000 6,000,000
St. Cloud IDR, Nahan Printing, 9.75%, 6/01/20 ................................................... 5,785,000 6,276,609
St. Paul Housing and RDA, Housing Tax, 8.625%, 9/01/07 .......................................... 1,345,000 1,471,820
St. Paul Port Authority Commercial Development, Theole Printing Project, 9.00%,
10/01/21 .............. 570,000 596,214
St. Paul Port Authority IDR,
Brown and Bigelow Co., Series 1979-2, 7.50%, 10/01/09 ........................................ 40,000 40,398
SDA Enterprises, Series K, 10.25%, 10/01/10 .................................................. 1,095,000 1,085,714
Series A-I, 8.50%, 12/01/01 .................................................................. 665,000 660,983
Series A-I, 9.00%, 12/01/02 .................................................................. 260,000 262,543
Series A-I, 9.00%, 12/01/12 .................................................................. 4,300,000 4,069,864
Series A-II, 8.50%, 12/01/01 ................................................................. 650,000 646,074
Series A-II, 9.00%, 12/01/02 ................................................................. 255,000 257,494
Series A-II, 9.00%, 12/01/12 ................................................................. 4,235,000 4,008,343
Series A-III, 8.50%, 12/01/01 ................................................................ 680,000 675,893
Series A-III, 9.00%, 12/01/02 ................................................................ 265,000 267,592
Series A-III, 9.00%, 12/01/12 ................................................................ 4,430,000 4,192,906
Series A-IV, 8.50%, 12/01/01 ................................................................. 525,000 521,829
Series A-IV, 9.00%, 12/01/02 ................................................................. 205,000 207,005
Series A-IV, 9.00%, 12/01/12 ................................................................. 3,375,000 3,194,370
Series C, 10.00%, 12/01/01 ................................................................... 860,000 872,470
Series C, 10.00%, 12/01/02 ................................................................... 715,000 725,368
</TABLE>
95
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
MINNESOTA (CONT.)
<S> <C> <C>
St. Paul Port Authority IDR, (cont.)
Series C, 10.00%, 12/01/06 ....................................................... $ 2,930,000 $ 2,903,747
Series C, 9.875%, 12/01/08 ....................................................... 3,100,000 3,057,189
Series F, 10.25%, 10/01/99 ....................................................... 65,000 65,168
Series F, 8.00%, 9/01/00 ......................................................... 25,000 24,931
Series F, 10.25%, 10/01/00 ....................................................... 70,000 70,657
Series F, 8.00%, 9/01/01 ......................................................... 25,000 24,991
Series F, 10.25%, 10/01/01 ....................................................... 80,000 80,799
Series F, 8.00%, 9/01/02 ......................................................... 25,000 25,060
Series F, 10.25%, 10/01/02 ....................................................... 90,000 90,647
Series F, 8.00%, 9/01/19 ......................................................... 1,025,000 870,338
Series I, 10.75%, 12/01/00 ....................................................... 15,000 15,219
Series I, 10.75%, 12/01/01 ....................................................... 15,000 15,331
Series I, 10.75%, 12/01/02 ....................................................... 15,000 15,331
Series J, 9.50%, 12/01/01 ........................................................ 80,000 81,342
Series J, 9.50%, 12/01/02 ........................................................ 95,000 96,535
Series J, 9.50%, 12/01/11 ........................................................ 1,325,000 1,304,529
Series L, 9.50%, 12/01/01 ........................................................ 40,000 40,671
Series L, 9.75%, 12/01/01 ........................................................ 25,000 25,416
Series L, 9.50%, 12/01/02 ........................................................ 45,000 45,727
Series L, 9.75%, 12/01/02 ........................................................ 30,000 30,478
Series L, 9.50%, 12/01/14 ........................................................ 1,025,000 1,007,524
Series L, 9.75%, 12/01/14 ........................................................ 1,530,000 1,509,284
Series N, 10.00%, 12/01/01 ....................................................... 65,000 66,046
Series N, 10.75%, 10/01/02 ....................................................... 1,300,000 1,313,182
Series N, 10.00%, 12/01/02 ....................................................... 65,000 66,024
Series N, 10.00%, 12/01/14 ....................................................... 1,405,000 1,392,847
Series S, 9.625%, 12/01/01 ....................................................... 55,000 55,065
Series S, 9.625%, 12/01/02 ....................................................... 60,000 60,043
Series S, 9.625%, 12/01/14 ....................................................... 1,280,000 1,270,950
Series T, 9.625%, 12/01/01 ....................................................... 30,000 30,502
Series T, 9.625%, 12/01/02 ....................................................... 35,000 35,562
Series T, 9.625%, 12/01/14 ....................................................... 910,000 903,566
St. Paul Port Authority Lease Revenue, Mears Park Center Project, 6.50%,
6/01/16 .......................................................................... 5,040,000 5,120,086
6/01/26 .......................................................................... 10,660,000 10,829,387
------------
155,421,570
------------
MISSISSIPPI 1.3%
Claiborne County PCR,
Middle South Energy Inc. Project, Series A, 9.50%, 12/01/13 ...................... 8,515,000 8,828,863
Middle South Energy Inc. Project, Series B, 8.25%, 6/01/14 ....................... 9,750,000 10,118,453
Systems Energy Resources Inc., Refunding, 7.30%, 5/01/25 ......................... 2,500,000 2,621,225
Systems Energy Resources Inc., Refunding, 6.20%, 2/01/26 ......................... 33,295,000 34,327,145
Corinth and Alcorn County Hospital Revenue, Magnolia Regional Health Center Project,
Refunding, Series A, 5.50%, 10/01/21 ............................................. 4,000,000 3,943,840
Series B, 5.50%, 10/01/21 ........................................................ 1,000,000 985,960
Lowndes County Hospital Revenue, Golden Triangle Medical Center, 8.50%, 2/01/10 ..... 4,035,000 4,239,090
Mississippi Business Finance Corp. PCR, Systems Energy Resources Inc. Project, 5.875%,
4/01/22 .......................................................................... 23,400,000 23,372,388
------------
88,436,964
------------
MISSOURI 1.4%
Lake of the Ozarks Community Bridge Corp. Bridge System Revenue,
Pre-Refunded, 6.25%, 12/01/16 .................................................... 1,000,000 1,163,220
Pre-Refunded, 6.40%, 12/01/25 .................................................... 3,000,000 3,519,360
Refunding, 5.25%, 12/01/20 ....................................................... 12,280,000 12,200,303
Refunding, 5.25%, 12/01/26 ....................................................... 8,875,000 8,746,668
Marshall IDA, Hospital Revenue, John Fitzgibbon Memorial Hospital, Pre-Refunded,
10.00%, 5/01/20 .................................................................. 8,600,000 9,421,214
</TABLE>
96
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
MISSOURI (CONT.)
<S> <C> <C>
Missouri State Health and Educational Facilities Authority Health Facilities Revenue,
Heartland Health, Refunding and Improvement,
8.125%, 10/01/10 ..................................................................... $ 7,300,000 $ 7,635,362
Newton County IDA, Health Facilities Revenue, Beverly Enterprises, 10.375%, 11/01/08 .... 1,320,000 1,397,075
Perry County GO, Perry Memorial Hospital, Pre-Refunded, 9.125%, 6/01/11 ................. 1,600,000 1,743,296
St. Louis County IDA, Kiel Center, Refunding,
7.625%, 12/01/09 ..................................................................... 8,000,000 8,732,000
7.75%, 12/01/13 ...................................................................... 5,175,000 5,651,721
7.875%, 12/01/24 ..................................................................... 6,000,000 6,556,380
St. Louis Municipal Finance Corp. Leasehold Revenue,
City Justice Center, Refunding, Series A, AMBAC Insured, 5.95%, 2/15/16 .............. 8,640,000 9,452,851
Refunding, Series A, 6.00%, 7/15/13 .................................................. 14,250,000 14,891,535
-----------
91,110,985
-----------
MONTANA .3%
Montana State Board of Housing SFM,
Senior Bonds, Series B-2, 8.90%, 10/01/00 ............................................ 125,000 127,579
Series A, FHA Insured, 8.275%, 10/01/03 .............................................. 405,000 423,970
Montana State Board of Investments Resource Recovery Revenue, Yellowstone Energy Project,
7.00%, 12/31/19 ...................................................................... 20,770,000 20,090,198
-----------
20,641,747
-----------
NEBRASKA .5%
Douglas County Hospital Authority No. 1 Revenue, Alegent Health, Immanuel Medical Center,
Refunding, 5.25%, 9/01/21 ............................................................ 3,670,000 3,720,242
Kearney IDR, Great Platte River Road, 6.75%,
1/01/23 .............................................................................. 9,000,000 8,831,700
1/01/28 .............................................................................. 6,500,000 6,338,215
Lancaster County Hospital Authority Revenue, Bryan Memorial Hospital Project No. 1,
Series A, MBIA Insured, 5.375%, 6/01/19 .............................................. 5,465,000 5,605,232
Nebraska Investment Finance Authority Health Facilities Revenue, Children's Healthcare
Services, AMBAC Insured, 5.50%, 8/15/27 .............................................. 8,000,000 8,354,480
Scotts Bluff County Hospital Authority No. 1 Hospital Revenue,
Regional West, 6.375%, 12/15/08 ...................................................... 1,145,000 1,240,676
Regional West Medical Center, Pre-Refunded, 6.375%, 12/15/08 ......................... 955,000 1,062,781
-----------
35,153,326
-----------
NEVADA 3.4%
Clark County IDR,
Nevada Power Co. Project, Refunding, Series C, 5.50%, 10/01/30 ....................... 38,400,000 37,279,104
Nevada Power Co. Project, Series A, 5.60%, 10/01/30 .................................. 23,900,000 23,550,582
Nevada Power Co. Project, Series A, 5.90%, 11/01/32 .................................. 9,325,000 9,413,308
Southwest Gas Corp., Series A, 6.50%, 12/01/33 ....................................... 13,775,000 14,848,761
Clark County Special ID No. 108, Summerlin, 6.625%, 2/01/17 ............................. 7,550,000 7,790,770
Henderson Local ID,
No. 2, 9.50%, 8/01/11 ................................................................ 5,725,000 5,917,990
No. T-1, Series A, 8.50%, 8/01/13 .................................................... 22,870,000 24,567,183
No. T-4, Series A, 8.50%, 11/01/12 ................................................... 9,120,000 9,480,149
No. T-4, Series B, 7.30%, 11/01/12 ................................................... 4,630,000 4,783,253
No. T-10, 7.50%, 8/01/15 ............................................................. 7,275,000 7,520,895
No. T-12, Series A, 7.375%, 8/01/18 .................................................. 49,995,000 49,811,518
Las Vegas Downtown RDA, Tax Increment Revenue, Fremont Street Project, Series A,
6.10%, 6/15/14 ....................................................................... 3,500,000 3,676,855
Las Vegas Local Improvement Bond Special Assessment,
ID No. 404, 5.85%, 11/01/09 .......................................................... 3,395,000 3,472,712
ID No. 707, 6.60%, 6/01/05 ........................................................... 1,000,000 1,035,430
ID No. 707, 6.70%, 6/01/06 ........................................................... 1,235,000 1,279,052
ID No. 707, 6.80%, 6/01/07 ........................................................... 1,805,000 1,869,818
ID No. 707, 7.10%, 6/01/16 ........................................................... 8,000,000 8,293,040
Las Vegas Special Assessment ID No. 505, Elkhorn Springs, 8.00%, 9/15/13 ................ 7,615,000 7,796,770
Nevada Housing Division, SF Program, Subordinated,
FI/GML, Series A, 9.30%, 10/01/00 .................................................... 80,000 81,966
FI/GML, Series A-1, 8.75%, 10/01/04 .................................................. 220,000 232,632
FI/GML, Series A-2, 9.375%, 10/01/00 ................................................. 85,000 87,182
</TABLE>
97
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
NEVADA (CONT.)
<S> <C> <C>
Nevada Housing Division, SF Program, Subordinated, (cont.)
FI/GML, Series A-2, 8.65%, 10/01/01 ................................................... $ 240,000 $ 245,018
FI/GML, Series A-3, 9.20%, 10/01/00 ................................................... 115,000 117,640
FI/GML, Series B, 9.50%, 10/01/01 ..................................................... 175,000 181,309
FI/GML, Series B-1, 7.90%, 10/01/05 ................................................... 575,000 602,474
FI/GML, Series C-1, 7.55%, 10/01/05 ................................................... 715,000 754,218
Series B-2, 9.65%, 10/01/02 ........................................................... 145,000 149,765
Series C-1, 9.60%, 10/01/02 ........................................................... 215,000 216,926
------------
225,056,320
------------
NEW HAMPSHIRE 2.6%
New Hampshire Higher Education and Health Facilities Authority Revenue,
Hillcrest Terrace, 7.50%, 7/01/24 ..................................................... 18,750,000 20,172,375
Hospital Littleton Hospital Association, Series B, 5.90%, 5/01/28 ..................... 2,000,000 1,988,780
Kendal at Hanover Project, Pre-Refunded, 8.00%, 10/01/19 .............................. 9,290,000 9,736,385
New Hampshire Catholic Charities, Refunding, Series A, 5.75%, 8/01/11 ................. 1,300,000 1,330,368
New Hampshire State Business Finance Authority PCR,
Connecticut Light and Power Co., Refunding, Series A, 5.85%, 12/01/22 ................. 21,000,000 21,047,670
Public Service Co. of New Hampshire, Refunding, Series D, 6.00%, 5/01/21 .............. 28,000,000 28,526,120
Public Service Co. of New Hampshire, Refunding, Series E, 6.00%, 5/01/21 .............. 21,800,000 22,209,622
United Illuminating Co., Refunding, Series A, 5.875%, 10/01/33 ........................ 3,000,000 3,064,560
New Hampshire State IDAR, Pollution Control,
Connecticut Light and Power Co., 5.90%, 11/01/16 ...................................... 5,400,000 5,484,888
Connecticut Light and Power Co., 5.90%, 8/01/18 ....................................... 8,000,000 8,111,600
Public Service Co. of New Hampshire Project, Series A, 7.65%, 5/01/21 ................. 10,970,000 11,594,522
Public Service Co. of New Hampshire Project, Series C, 7.65%, 5/01/21 ................. 34,635,000 36,606,771
------------
169,873,661
------------
NEW JERSEY .4%
Hudson County Improvement Authority Solid Waste Systems Revenue, Refunding,
Series 1, 6.00%, 1/01/19 .............................................................. 2,180,000 2,169,776
Series 1, 6.00%, 1/01/29 .............................................................. 5,000,000 4,904,250
Series 2, 6.125%, 1/01/19 ............................................................. 2,125,000 2,110,083
Series 2, 6.125%, 1/01/29 ............................................................. 5,105,000 4,995,038
New Jersey EDA Revenue, First Mortgage, Keswick Pines, Refunding, 5.75%, 1/01/24 ......... 1,500,000 1,490,055
New Jersey Health Care Facilities Financing Authority Revenue, Lutheran Home, Series A,
8.40%, 7/01/19 ........................................................................ 2,100,000 2,154,768
New Jersey State Housing and Mortgage Finance Agency MFHR, Refunding, Series A,
AMBAC Insured,
6.00%, 11/01/14 ....................................................................... 3,000,000 3,204,990
6.05%, 11/01/20 ....................................................................... 5,500,000 5,863,715
------------
26,892,675
------------
NEW MEXICO 4.2%
Farmington PCR,
Public Service Co. of New Mexico, San Juan Project, Refunding, Series A, 6.30%, 12/01/16 29,045,000 30,754,298
Public Service Co. of New Mexico, San Juan Project, Refunding, Series A, 5.80%, 4/01/22 22,000,000 22,324,280
Public Service Co. of New Mexico, San Juan Project, Refunding, Series A, 6.40%, 8/15/23 58,250,000 61,030,273
Public Service Co. of New Mexico, San Juan Project, Refunding, Series B, 6.30%, 12/01/16 14,500,000 15,353,325
Public Service Co. of New Mexico, San Juan Project, Refunding, Series B, 5.80%, 4/01/22 19,500,000 19,787,430
Public Service Co. of New Mexico, San Juan Project, Refunding, Series C, 5.80%, 4/01/22 13,900,000 14,104,886
Public Service Co. of New Mexico, San Juan Project, Refunding, Series D, 6.375%, 4/01/22 64,125,000 68,366,869
Tucson Electric Power Co., Series A, 6.95%, 10/01/20 .................................. 37,000,000 40,904,240
New Mexico Mortgage Finance Authority SFM Program,
Refunding, Series A-1, 7.90%, 7/01/04 ................................................. 820,000 855,178
Series A, 9.50%, 9/01/00 .............................................................. 170,000 172,385
Series A, 9.10%, 9/01/03 .............................................................. 720,000 759,859
Series A, FHA Insured, 8.80%, 9/01/01 ................................................. 195,000 200,376
</TABLE>
98
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
NEW MEXICO (CONT.)
<S> <C> <C>
New Mexico Mortgage Finance Authority SFM Program, (cont.)
Series B, 9.30%, 9/01/00 ............................................................... $ 60,000 $ 60,835
Sub Series A, 9.55%, 9/01/02 ........................................................... 575,000 591,704
Rio Rancho Water and Wastewater Revenue, Series A, FSA Insured, Pre-Refunded, 5.90%, 5/15/15 3,620,000 3,930,777
------------
279,196,715
------------
NEW YORK 12.2%
Long Island Power Authority Electric System Revenue, Series A, FSA Insured, 5.25%, 12/01/26 50,470,000 50,892,434
Metropolitan Transportation Authority Commuter Facilities Revenue,
Series 8, 5.50%, 7/01/21 ............................................................... 16,775,000 17,520,481
Series A, 5.625%, 7/01/27 .............................................................. 12,880,000 13,575,391
Series R, 5.50%, 7/01/17 ............................................................... 2,000,000 2,096,980
Service Contract, Refunding, Series 1, 5.70%, 7/01/24 .................................. 10,000,000 10,499,300
Metropolitan Transportation Authority Service Contract Revenue,
Commuter Facilities, Refunding, Series 5, 6.50%, 7/01/16 ............................... 3,860,000 4,126,494
Commuter Facilities, Refunding, Series N, 6.80%, 7/01/04 ............................... 3,330,000 3,688,075
Commuter Facilities, Refunding, Series N, 6.90%, 7/01/05 ............................... 3,050,000 3,383,365
Transit Facilities, Refunding, Series N, 6.80%, 7/01/04 ................................ 2,330,000 2,580,545
Transit Facilities, Refunding, Series N, 6.90%, 7/01/05 ................................ 2,470,000 2,739,971
Transit Facilities, Refunding, Series N, 7.125%, 7/01/09 ............................... 7,830,000 8,706,412
Transit Facilities, Refunding, Series P, 5.75%, 7/01/15 ................................ 6,065,000 6,407,733
Metropolitan Transportation Authority Transit Facilities Revenue,
Series A, MBIA Insured, 5.875%, 7/01/27 ................................................ 22,700,000 24,981,350
Service Contract, Refunding, Series R, 5.50%, 7/01/17 .................................. 5,000,000 5,250,100
New York City GO,
Refunding, Series F, 6.00%, 8/01/11 .................................................... 10,000,000 11,057,200
Refunding, Series F, 5.25%, 8/01/15 .................................................... 20,580,000 20,938,298
Refunding, Series F, 5.375%, 8/01/19 ................................................... 41,250,000 41,912,063
Refunding, Series H, 6.25%, 8/01/15 .................................................... 25,000,000 27,945,500
Refunding, Series H, 6.125%, 8/01/25 ................................................... 5,600,000 6,158,096
Refunding, Series J, 6.00%, 8/01/21 .................................................... 10,000,000 10,925,300
Series A, 6.125%, 8/01/06 .............................................................. 10,190,000 11,262,701
Series A, 6.25%, 8/01/08 ............................................................... 10,000,000 11,087,000
Series A, 7.25%, 3/15/20 ............................................................... 120,000 125,710
Series A, 6.25%, 8/01/21 ............................................................... 845,000 903,516
Series A, Pre-Refunded, 7.25%, 3/15/20 ................................................. 210,000 221,621
Series B, 6.75%, 10/01/15 .............................................................. 30,000 32,914
Series B, 7.00%, 2/01/18 ............................................................... 4,090,000 4,454,910
Series B, 7.00%, 2/01/19 ............................................................... 4,850,000 5,277,091
Series B, 7.00%, 2/01/20 ............................................................... 4,980,000 5,417,144
Series B, 6.00%, 8/15/26 ............................................................... 4,355,000 4,733,406
Series B, Pre-Refunded, 6.75%, 10/01/15 ................................................ 70,000 78,012
Series B, Pre-Refunded, 7.00%, 2/01/19 ................................................. 150,000 165,777
Series B, Pre-Refunded, 7.00%, 2/01/20 ................................................. 765,000 845,463
Series B, Pre-Refunded, 6.00%, 8/15/26 ................................................. 645,000 732,352
Series B, Sub Series B-1, Pre-Refunded, 7.00%, 8/15/16 ................................. 17,070,000 19,829,024
Series B, Sub Series B-1, Pre-Refunded, 7.25%, 8/15/19 ................................. 5,000,000 5,869,050
Series C, 5.375%, 11/15/27 ............................................................. 7,450,000 7,573,670
Series C, 5.50%, 11/15/37 .............................................................. 2,000,000 2,094,240
Series C, Pre-Refunded, 7.25%, 8/15/24 ................................................. 7,905,000 8,604,751
Series C, Sub Series C-1, 7.00%, 8/01/16 ............................................... 15,000 16,516
Series C, Sub Series C-1, 7.00%, 8/01/17 ............................................... 150,000 165,264
Series C, Sub Series C-1, 7.50%, 8/01/21 ............................................... 135,000 150,543
Series C, Sub Series C-1, Pre-Refunded, 7.00%, 8/01/16 ................................. 40,000 44,790
Series C, Sub Series C-1, Pre-Refunded, 7.00%, 8/01/17 ................................. 220,000 246,345
Series C, Sub Series C-1, Pre-Refunded, 7.50%, 8/01/21 ................................. 300,000 340,692
Series D, 6.00%, 2/15/10 ............................................................... 9,445,000 10,285,699
</TABLE>
99
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
NEW YORK (CONT.)
<S> <C> <C>
New York City GO, (cont.)
Series D, 7.625%, 2/01/13 ............................................................. $ 70,000 $ 77,533
Series D, 7.625%, 2/01/14 ............................................................. 170,000 188,246
Series D, 7.50%, 2/01/18 .............................................................. 50,000 55,139
Series D, Pre-Refunded, 6.00%, 2/15/10 ................................................ 2,155,000 2,404,247
Series D, Pre-Refunded, 7.70%, 2/01/11 ................................................ 150,000 168,875
Series D, Pre-Refunded, 7.625%, 2/01/13 ............................................... 330,000 370,844
Series D, Pre-Refunded, 7.625%, 2/01/14 ............................................... 680,000 764,164
Series D, Pre-Refunded, 7.50%, 2/01/18 ................................................ 335,000 375,317
Series D, Pre-Refunded, 7.50%, 2/01/19 ................................................ 330,000 369,716
Series E, 6.25%, 2/15/07 .............................................................. 4,960,000 5,520,728
Series E, 7.50%, 2/01/18 .............................................................. 45,000 49,625
Series E, Pre-Refunded, 6.25%, 2/15/07 ................................................ 5,040,000 5,703,466
Series E, Pre-Refunded, 7.50%, 2/01/18 ................................................ 480,000 537,768
Series F, 7.625%, 2/01/13 ............................................................. 45,000 49,843
Series F, 7.625%, 2/01/15 ............................................................. 30,000 33,194
Series F, 7.50%, 2/01/21 .............................................................. 110,000 121,146
Series F, Pre-Refunded, 7.625%, 2/01/13 ............................................... 310,000 348,369
Series F, Pre-Refunded, 7.625%, 2/01/14 ............................................... 275,000 309,037
Series F, Pre-Refunded, 7.50%, 2/01/21 ................................................ 575,000 644,201
Series F, Pre-Refunded, 6.625%, 2/15/25 ............................................... 8,625,000 9,881,231
Series G, 5.75%, 8/01/10 .............................................................. 505,000 543,981
Series G, 6.125%, 10/15/11 ............................................................ 20,480,000 23,083,213
Series G, 6.20%, 10/15/14 ............................................................. 10,000,000 11,187,100
Series G, 7.50%, 2/01/22 .............................................................. 60,000 66,062
Series G, Pre-Refunded, 5.75%, 8/01/10 ................................................ 1,290,000 1,424,392
Series H, 7.20%, 2/01/14 .............................................................. 625,000 684,875
Series H, 7.20%, 2/01/15 .............................................................. 1,375,000 1,505,529
Series H, 7.00%, 2/01/19 .............................................................. 750,000 816,263
Series H, 7.00%, 2/01/20 .............................................................. 80,000 87,045
Series H, 7.00%, 2/01/22 .............................................................. 10,000 10,875
Series H, Pre-Refunded, 7.00%, 2/01/19 ................................................ 1,495,000 1,654,442
Series H, Pre-Refunded, 7.00%, 2/01/20 ................................................ 200,000 221,036
Series H, Pre-Refunded, 7.00%, 2/01/22 ................................................ 25,000 27,630
Series I, 6.25%, 4/15/17 .............................................................. 24,935,000 27,634,214
Series I, 6.25%, 4/15/27 .............................................................. 9,600,000 10,611,840
Series I, Pre-Refunded, 6.25%, 4/15/17 ................................................ 435,000 498,880
Series I, Pre-Refunded, 6.25%, 4/15/27 ................................................ 13,320,000 15,276,042
New York City Health and Hospital Corp. Revenue, Refunding, Series A, 6.30%, 2/15/20 ..... 8,885,000 9,337,691
New York City IDA,
Civic Facility Revenue, Amboy Properties Corp. Project, 9.625%, 6/01/15 ............... 6,370,000 6,796,280
IDR, La Guardia Association LP Project, Refunding, 6.00%, 11/01/28 .................... 7,500,000 7,555,575
New York State Dormitory Authority Revenue,
City University System, Third General, Series 2, 6.00%, 7/01/26 ....................... 6,100,000 6,645,340
City University System, Third General, Series 2, Pre-Refunded, 6.00%, 7/01/26 ......... 15,750,000 17,914,365
City University System Consolidated, Series 1, 5.375%, 7/01/24 ........................ 5,500,000 5,560,335
Mental Health Services Facilities, Refunding, Series B, 5.625%, 2/15/21 ............... 8,360,000 8,859,594
Mental Health Services Facilities, Series A, 6.00%, 8/15/17 ........................... 11,240,000 12,315,780
Mental Health Services Facilities, Series A, 5.75%, 2/15/27 ........................... 5,000,000 5,355,800
Second Hospital, St. Agnes Hospital, Series A, 5.30%, 2/15/19 ......................... 4,250,000 4,299,173
Second Hospital, St. Clare's Hospital, Series B, 5.40%, 2/15/25 ....................... 6,500,000 6,569,420
State University Educational Facilities, 5.50%, 5/15/26 ............................... 6,055,000 6,257,540
State University Educational Facilities, Pre-Refunded, 6.00%, 5/15/18 ................. 5,000,000 5,678,250
State University Educational Facilities, Refunding, 5.125%, 5/15/27 ................... 3,755,000 3,718,764
New York State Environmental Facilities Corp. Special Obligation PCR, State Water Revenue,
New York Municipal Water, Refunding, Series A, 5.875%, 6/15/14 ........................ 5,000,000 5,364,500
</TABLE>
100
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
NEW YORK (CONT.)
<S> <C> <C>
New York State HFA, Service Contract Obligation Revenue, Series A,
6.00%, 3/15/26 ......................................................................... $ 4,975,000 $ 5,411,606
Pre-Refunded, 7.80%, 9/15/10 ........................................................... 6,850,000 7,442,799
Pre-Refunded, 7.80%, 9/15/20 ........................................................... 9,715,000 10,555,736
Pre-Refunded, 6.50%, 3/15/25 ........................................................... 10,000,000 11,610,500
New York State HFAR, Refunding, Series A, 5.90%, 11/01/05 ................................. 12,515,000 13,640,599
New York State Medical Care Facilities Finance Agency Revenue,
Hospital and Nursing, Series B, 6.95%, 2/15/32 ......................................... 3,305,000 3,596,699
Hospital and Nursing, Series B, Pre-Refunded, 6.95%, 2/15/32 ........................... 695,000 776,850
Montefiore Medical Center, Insured Mortgage, Series A, AMBAC Insured, FHA Guaranteed,
5.75%, 2/15/25 ......................................................................... 6,175,000 6,600,828
New York State Mortgage Agency Revenue, Homeowners Mortgage,
Series 59, 6.10%, 10/01/15 ............................................................. 2,000,000 2,118,860
Series 59, 6.15%, 10/01/17 ............................................................. 2,750,000 2,917,310
Series 61, 5.80%, 10/01/16 ............................................................. 7,100,000 7,412,897
New York State Urban Development Corp., Corporate Purpose, sub. lien, Refunding,
5.50%, 7/01/22 ......................................................................... 7,975,000 8,262,738
New York State Urban Development Corp. Revenue, Correctional Capital Facilities,
Series 6, 5.375%, 1/01/25 .............................................................. 5,750,000 5,811,928
Series 7, 5.70%, 1/01/27 ............................................................... 22,750,000 24,117,958
Onondaga County IDA, Solid Waste Disposal Facility Revenue, Solvay Paperboard LLC Project,
Refunding, 6.80%, 11/01/14 ............................................................. 5,000,000 5,082,700
7.00%, 11/01/30 ........................................................................ 7,000,000 7,116,200
Port Authority of New York and New Jersey Revenue, Special Obligation Revenue, Consolidated,
102nd Series, MBIA Insured, 5.75%, 10/15/23 ............................................. 5,000,000 5,293,400
Port Authority of New York and New Jersey Special Obligation Revenue,
2nd Installment, 6.50%, 10/01/01 ....................................................... 1,000,000 1,060,110
3rd Installment, 7.00%, 10/01/07 ....................................................... 8,000,000 9,292,400
4th Installment, Special Project, 6.75%, 10/01/11 ...................................... 925,000 1,030,043
5th Installment, 6.75%, 10/01/19 ....................................................... 17,500,000 19,405,575
Continental Airlines Inc., Eastern Project, La Guardia, 9.00%, 12/01/10 ................ 10,000,000 10,879,400
Continental Airport Project, Eastern Project, La Guardia, 9.125%, 12/01/15 ............. 27,650,000 30,138,777
Warren and Washington Counties IDAR, Adirondack Resource Recovery Project, Refunding,
Series A, 7.90%, 12/15/07 .............................................................. 1,150,000 1,187,398
------------
812,241,115
------------
NORTH CAROLINA .8%
Asheville Water System Revenue, FGIC Insured, 5.70%, 8/01/25 .............................. 2,500,000 2,676,475
North Carolina Eastern Municipal Power Agency Power System Revenue,
Refunding, Series B, 6.00%, 1/01/14 .................................................... 16,000,000 16,659,520
Series G, 5.875%, 1/01/21 .............................................................. 20,000,000 21,704,600
North Carolina HFA, SF, Series II, GNMA Secured, 6.20%,
3/01/16 ................................................................................ 2,880,000 3,052,973
9/01/17 ................................................................................ 1,915,000 2,030,015
University of North Carolina at Chapel Hill Hospital Revenue, 5.25%, 2/15/26 .............. 6,570,000 6,579,067
------------
52,702,650
------------
NORTH DAKOTA .4%
Mercer County PCR, Basin Electric Power Corp., Refunding, Second Series, AMBAC Insured,
6.05%, 1/01/19 ......................................................................... 24,655,000 27,133,814
------------
OHIO 5.6%
Cleveland Airport Special Revenue, Continental Airlines Inc. Project,
9.00%, 12/01/19 ........................................................................ 21,235,000 22,546,898
(b) Refunding, 5.70%, 12/01/19 ......................................................... 11,520,000 11,098,483
Cuyahoga County Hospital Revenue, University Hospitals Health System, Refunding, Series B,
MBIA Insured, 5.50%, 1/15/16 ........................................................... 10,065,000 10,531,311
Dayton Special Facilities Revenue, Emery Air Freight Corp., Emery Worldwide Air Inc.,
Refunding,
Series A, 5.625%, 2/01/18 .............................................................. 5,000,000 5,116,450
Series C, 6.05%, 10/01/09 .............................................................. 7,500,000 8,108,475
Series E, 6.05%, 10/01/09 .............................................................. 4,000,000 4,324,520
Elyria GO, FGIC Insured, 5.40%, 12/01/22 .................................................. 2,785,000 2,851,005
</TABLE>
101
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
OHIO (CONT.)
<S> <C> <C>
Franklin County Health Care Facilities Revenue, Presbyterian Retirement Services,
Refunding, 5.50%, 7/01/17 ............................................................ $ 3,100,000 $ 3,064,505
Refunding, 5.50%, 7/01/21 ............................................................ 4,700,000 4,610,794
Series A, 6.625%, 7/01/13 ............................................................ 1,000,000 1,094,740
Lorain County Hospital Revenue, Catholic Healthcare Partners, Refunding, Series B,
MBIA Insured,
5.50%, 9/01/27 ....................................................................... 17,885,000 18,578,759
Lucas County Health Facilities Revenue, Presbyterian Retirement Services, Refunding,
Series A, 6.625%, 7/01/14 ............................................................ 1,000,000 1,081,090
6.75%, 7/01/20 ....................................................................... 2,000,000 2,165,280
Montgomery County Health Systems Revenue,
Franciscan at Saint Leonard, Refunding, 5.50%, 7/01/18 ............................... 3,630,000 3,650,292
Franciscan Medical Center-Dayton, Refunding, 5.50%, 7/01/18 .......................... 1,900,000 1,909,082
Refunding, Series B, 8.10%, 7/01/01 .................................................. 800,000 850,160
Refunding, Series B-1, 8.10%, 7/01/01 ................................................ 700,000 754,075
Refunding, Series B-1, 8.10%, 7/01/18 ................................................ 1,955,000 2,342,031
Series B-1, Pre-Refunded, 8.10%, 7/01/18 ............................................. 4,345,000 5,499,640
Series B-2, 8.10%, 7/01/18 ........................................................... 1,995,000 2,369,621
Series B-2, Pre-Refunded, 8.10%, 7/01/18 ............................................. 4,505,000 5,702,159
St. Leonard, Series B, 8.10%, 7/01/18 ................................................ 3,100,000 3,745,606
St. Leonard, Series B, Pre-Refunded, 8.10%, 7/01/18 .................................. 6,500,000 8,227,310
Muskingum County Hospital Facilities Revenue, Franciscan Sisters, Refunding, Connie Lee
Insured, 5.375%, 2/15/12 ............................................................. 1,200,000 1,260,492
Oak Hills Local School District GO, MBIA Insured, 5.45%, 12/01/21 ....................... 4,925,000 5,113,135
Ohio State Air Quality Development Authority Revenue,
Dayton Power and Light Co. Project, Refunding, 6.10%, 9/01/30 ........................ 17,900,000 19,281,701
PCR, Toledo Edison, Series B, Refunding, 8.00%, 5/15/19 .............................. 5,265,000 5,544,098
Pollution Control, Cleveland Electric, Refunding, Series A, 6.10%, 8/01/20 ........... 10,400,000 10,616,216
Pollution Control, Cleveland Electric, Refunding, Series B, 6.00%, 8/01/20 ........... 39,760,000 40,590,586
Pollution Control, Toledo Edison, Refunding, Series A, 6.10%, 8/01/27 ................ 5,000,000 5,103,950
Ohio State HFA, Retirement Rental Housing Revenue, Beverly Enterprises Project, 10.375%,
4/01/09 .............................................................................. 9,500,000 9,815,970
Ohio State Solid Waste Disposal Revenue, USG Corp. Project, 5.65%, 3/01/33 .............. 7,000,000 6,989,430
Ohio State Solid Waste Revenue, Republic Engineered Steels Inc., 9.00%, 6/01/21 ......... 16,650,000 18,485,163
Ohio State Water Development Authority PCR, Facilities Revenue,
Cleveland Electric, Refunding, Series A, 6.10%, 8/01/20 .............................. 18,000,000 18,374,220
Cleveland Electric, Refunding, Series A, 8.00%, 10/01/23 ............................. 27,700,000 31,726,472
Toledo Edison, Series A, 8.00%, 5/15/19 .............................................. 6,200,000 6,528,662
Ohio State Water Development Authority Revenue, Fresh Water Service, AMBAC Insured, 5.90%,
12/01/21 ............................................................................. 9,250,000 10,008,500
Toledo-Lucas County Port Authority Airport Revenue, Burlington Air Express,
Project 1, 7.00%, 4/01/04 ............................................................ 5,240,000 5,634,153
Project 1, 7.25%, 4/01/09 ............................................................ 5,385,000 5,876,543
Project 1, 7.375%, 4/01/14 ........................................................... 8,200,000 8,955,138
Project 1, 7.50%, 4/01/19 ............................................................ 14,365,000 15,699,509
Series 1, 9.125%, 9/15/01 ............................................................ 735,000 810,124
Series 1, 9.125%, 9/15/13 ............................................................ 5,875,000 6,475,484
Toledo-Lucas County Port Authority Development Revenue, Northwest Ohio Bond Fund,
Series A, Pre-Refunded, 8.625%, 5/15/10 .............................................. 1,125,000 1,222,808
Series B, 9.00%, 11/15/08 ............................................................ 980,000 1,007,763
Series D, 8.25%, 5/15/20 ............................................................. 2,920,000 3,115,815
Willoughby IDR, Presbyterian Retirement Services, Refunding, Series A, 6.875%, 7/01/16 .. 1,500,000 1,568,055
------------
370,026,273
------------
OKLAHOMA .3%
Tulsa County Municipal Airport Revenue, American Airlines Inc., 7.375%,
12/01/20 12,845,000 13,714,607 Valley View Hospital Authority Revenue, Valley
View Regional Medical Center, Refunding, 6.00%, 8/15/14 4,000,000 4,166,680
Washington County Medical Authority Revenue, Bartlesville, Jane Phillips
Hospital, Series A, Pre-Refunded, 8.50%, 11/01/10 ....................................... 2,385,000 2,453,163
------------
20,334,450
------------
</TABLE>
102
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
<S> <C> <C>
OREGON .2%
Northern Wasco County Peoples Utilities District Electric Revenue, FGIC Insured, 5.625%,
12/01/22 ................................................................................. $ 2,500,000 $ 2,640,175
Oregon State Department of Administrative Services COP,
Series A, MBIA Insured, 5.50%, 11/01/20 .................................................. 5,585,000 5,821,860
Series C, MBIA Insured, 5.75%, 5/01/17 ................................................... 4,665,000 5,028,450
-----------
13,490,485
-----------
PENNSYLVANIA 4.5%
Allegheny County Hospital Development Authority Revenue,
Allegheny Valley Health Facilities Management Co., 7.50%, 8/01/13 ........................ 9,100,000 8,073,611
Allegheny Valley Hospital, 7.75%, 8/01/20 ................................................ 2,100,000 1,857,219
Bucks County IDA, Environmental Improvement Revenue, USX Corp. Project, Refunding, 5.60%,
3/01/33 .................................................................................. 4,125,000 4,131,683
Chartiers Valley Industrial and Commercial Development Authority Revenue, Asbury Health Center
Project, Refunding, 7.40%, 12/01/15 ...................................................... 5,250,000 5,727,645
Delaware River Port Authority Pennsylvania and New Jersey Revenue, Series 1995, FGIC Insured,
5.50%, 1/01/26 ........................................................................... 20,750,000 21,921,338
Franklin County IDA, Health Facilities Revenue, Encore Nursing Center,
10.375%, 7/01/11 ......................................................................... 650,000 716,651
Refunding, 10.375%, 7/01/11 .............................................................. 2,900,000 3,197,366
Gettysburg IDA Health Facilities Revenue, Encore Nursing Center, Refunding, 10.375%, 7/01/11 3,000,000 3,307,620
Lehigh County IDA, PCR, Pennsylvania Power and Light Co. Project, Refunding, Series A, MBIA
Insured, 6.15%, 8/01/29 ................................................................... 4,000,000 4,370,040
Monroeville Hospital Authority Hospital Revenue, Forbes Health Systems, Refunding,
5.75%, 10/01/05 .......................................................................... 1,000,000 899,510
7.00%, 10/01/13 .......................................................................... 8,825,000 8,194,101
6.25%, 10/01/15 .......................................................................... 4,545,000 4,083,228
Montgomery County Higher Education and Health Authority Revenue,
First Mortgage, Holy Redeemer Long-Term Care, Series A, Pre-Refunded, 8.20%, 6/01/06 ..... 1,615,000 1,811,788
First Mortgage, Holy Redeemer Long-Term Care, Series A, Pre-Refunded, 8.00%, 6/01/22 ..... 3,500,000 3,967,355
St. Joseph's University, Pre-Refunded, 8.30%, 6/01/10 .................................... 5,000,000 5,397,950
United Hospital, Series A, Pre-Refunded, 8.375%, 11/01/11 ................................ 200,000 210,962
United Hospital, Series A, Pre-Refunded, 7.50%, 11/01/12 ................................. 3,560,000 3,665,056
United Hospital, Series A, Pre-Refunded, 7.50%, 11/01/13 ................................. 750,000 772,133
United Hospital, Series A, Pre-Refunded, 7.50%, 11/01/14 ................................. 600,000 617,706
United Hospital, Series B, Pre-Refunded, 7.50%, 11/01/14 ................................. 3,940,000 4,056,269
United Hospital, Series B, Pre-Refunded, 7.50%, 11/01/15 ................................. 1,600,000 1,647,216
Montgomery County IDA, Retirement Community Revenue, Act Retirement-Life Communities,
5.25%, 11/15/28 ......................................................................... 2,500,000 2,415,925
Montgomery County IDAR,
Hill School Project, MBIA Insured, 5.35%, 8/15/27 ........................................ 8,885,000 9,072,385
Resource Recovery, 7.50%, 1/01/12 ........................................................ 10,000,000 10,578,400
Pennsylvania Convention Center Authority Revenue, Refunding, Series A,
5.75%, 9/01/99 ........................................................................... 1,750,000 1,766,975
6.25%, 9/01/04 ........................................................................... 5,000,000 5,314,300
6.60%, 9/01/09 ........................................................................... 16,000,000 17,476,800
6.70%, 9/01/14 ........................................................................... 20,760,000 22,722,443
6.75%, 9/01/19 ........................................................................... 15,800,000 17,331,020
Pennsylvania EDA, Financing Resources Recovery Revenue, Colver Project, Series D, 7.125%,
12/01/15 ................................................................................. 10,000,000 11,061,600
Pennsylvania State Higher Educational Facilities Authority Revenue,
Health Services, Allegheny Delaware Valley Obligated Group, Series A, MBIA Insured, 5.875%,
11/15/16 ................................................................................. 15,000,000 15,380,850
Medical College of Pennsylvania, Series A, Pre-Refunded, 8.375%, 3/01/11 ................. 1,200,000 1,224,000
Pennsylvania State Pooled Finance Authority Lease Revenue, Capital Improvement, Series B,
MBIA Insured, Pre-Refunded, 8.00%, 11/01/09 ............................................... 1,825,000 1,837,812
Philadelphia Gas Works Revenue, Series A, 6.375%, 7/01/26 ................................... 2,850,000 3,129,671
Philadelphia GO, Refunding, Series B, 6.00%, 5/15/05 ........................................ 3,080,000 3,328,063
Philadelphia IDA, Health Care Facility Revenue, Pauls Run, Series A,
5.85%, 5/15/13 ........................................................................... 2,200,000 2,217,754
5.75%, 5/15/18 ........................................................................... 1,500,000 1,482,690
5.875%, 5/15/28 .......................................................................... 2,500,000 2,491,100
</TABLE>
103
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
PENNSYLVANIA (CONT.)
<S> <C> <C>
Philadelphia Municipal Authority Revenue, Lease,
Refunding, Series D, 6.30%, 7/15/17 ........................................................... $ 3,500,000 $ 3,705,765
Sub Series C, 8.625%, 11/15/16 ................................................................ 2,210,000 2,415,486
Sub Series D, 6.25%, 7/15/13 .................................................................. 3,000,000 3,200,940
Philadelphia Water and Sewer Revenue, ETM, Series 10, 7.35%, 9/01/04 ............................. 14,235,000 16,115,871
Schuylkill County IDA, Resource Recovery Revenue, Schuylkill Energy Resources Inc., Pre-Refunded,
6.50%, 1/01/10 ................................................................................ 28,870,000 29,682,113
South Fork Municipal Authority Hospital Revenue, Conemaugh Valley Memorial Hospital Project,
Series A, MBIA Insured, 5.75%, 7/01/16 ........................................................ 8,130,000 8,666,905
South Wayne County Water and Sewer Authority Revenue, Refunding, 8.20%, 4/15/13 .................. 8,350,000 8,715,563
Washington County IDA, PCR, West Pennsylvania Power Co., Series G, AMBAC Insured, 6.05%, 4/01/14 . 5,025,000 5,508,807
------------
295,469,685
------------
RHODE ISLAND .3%
Rhode Island Housing and Mortgage Finance Corp. Revenue, Homeownership Opportunity, Series 17-A,
6.25%, 4/01/17 ................................................................................ 5,000,000 5,251,650
Rhode Island State Health and Educational Building Corp. Revenue,
Hospital Financing Lifespan Obligation Group, MBIA Insured, 5.75%, 5/15/23 .................... 5,000,000 5,400,100
Landmark Medical Center, 5.875%, 10/01/19 ..................................................... 6,000,000 6,328,740
West Warwick GO, Series A,
7.00%, 8/15/02 ................................................................................ 145,000 155,312
7.30%, 7/15/08 ................................................................................ 915,000 1,023,958
------------
18,159,760
------------
SOUTH CAROLINA 1.0%
Charleston County Hospital Facilities First Mortgage Revenue, Sandpiper Village Inc., 8.00%,
11/01/13 ...................................................................................... 3,535,000 3,548,468
Piedmont Municipal Power Agency Electric Revenue, Refunding,
6.60%, 1/01/21 ................................................................................ 8,770,000 8,819,989
Series A, AMBAC Insured, 6.55%, 1/01/16 ....................................................... 9,500,000 9,552,345
South Carolina Jobs EDA, Health Facilities Revenue, 1st Mortgage Lutheran Homes, Refunding,
5.65%, 5/01/18 ................................................................................ 3,200,000 3,162,848
5.70%, 5/01/26 ................................................................................ 4,235,000 4,148,691
South Carolina Public Service Authority Revenue, Refunding, Series A, MBIA Insured, 5.75%,
1/01/22 ....................................................................................... 32,500,000 34,867,300
------------
64,099,641
------------
SOUTH DAKOTA .2%
South Dakota HDA Revenue, Homeownership Mortgage, Series A, 6.125%, 5/01/17 ...................... 5,000,000 5,273,600
South Dakota Health and Educational Facilities Authority Revenue,
5.50%, 8/01/22 ................................................................................ 7,100,000 7,375,551
Prairie Lakes Health Care, Pre-Refunded, 7.25%, 4/01/22 ....................................... 2,480,000 2,842,824
Prairie Lakes Health Care, Refunding, 7.25%, 4/01/22 .......................................... 1,020,000 1,114,401
------------
16,606,376
------------
TENNESSEE .5%
Jackson Hospital Revenue, Jackson-Madison County General Hospital, AMBAC
Insured, 5.00%, 4/01/28 ........................................................................ 2,000,000 1,934,460
Johnson City Health and Educational Facilities Board Revenue, Pine Oaks Assisted Project,
Mortgage Revenue, Series A, GNMA Secured, 5.90%, 6/20/37 ....................................... 2,620,000 2,715,918
Johnson City Health and Educational Revenue, Medical Center Hospital, Refunding and Improvement,
MBIA Insured, 5.125%, 7/01/25 .................................................................. 10,650,000 10,430,717
Knox County Health, Educational and Housing Facilities Board MFHR, East Towne Village Project,
GNMA Secured, 8.20%, 7/01/28 ................................................................... 3,050,000 3,139,182
Memphis-Shelby County Airport Authority Special Facilities and Project Revenue, Federal Express
Corp., 7.875%, 9/01/09 ......................................................................... 6,000,000 6,624,840
Metropolitan Government of Nashville and Davidson County GO, Public Improvements, 5.875%, 5/15/26 5,000,000 5,500,050
Shelby County Health and Education Housing Facility Revenue, Beverly Enterprise, 10.125%, 12/01/11 2,800,000 3,019,716
Tennessee HDA, Mortgage Finance, Series A, 6.90%, 7/01/25 ........................................ 200,000 217,304
------------
33,582,187
------------
TEXAS 3.0%
Alliance Airport Authority Special Facilities Revenue, 7.50%, 12/01/29 ........................... 10,000,000 10,692,500
Bexar County Health Facilities Development Corp. Revenue, Incarnate Word Health Services,
ETM, Refunding, FSA Insured, 6.00%, 11/15/15 ................................................... 8,750,000 9,958,813
Coppell Special Assessment, Gateway Project, 8.70%, 3/01/12 ...................................... 4,355,000 4,514,872
</TABLE>
104
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
TEXAS (CONT.)
<S> <C> <C>
Copperas Cove Health Facilities Development Corp. Hospital Revenue, First Mortgage, Metroplex
Health, Series B,
9.125%, 12/01/19 ................................................................................ $ 5,328,000 $ 5,614,540
El Paso HFC, SFMR, Refunding, Series A, 8.75%, 10/01/11 ............................................ 4,050,000 4,361,000
Harris County Health Facilities Development Corp. Hospital Revenue, Memorial Hospital System
Project, Refunding, Series A, MBIA Insured,
5.75%, 6/01/19 .................................................................................. 15,065,000 16,274,569
5.50%, 6/01/24 .................................................................................. 12,000,000 12,524,400
Harris County Health Facilities Development Corp. Special Facilities Revenue, Medical Center Project,
MBIA Insured, 6.00%, 5/15/20 .................................................................... 7,000,000 7,663,600
Lower Neches Valley Authority IDC Revenue, Mobil Oil Refunding Corp., Refunding, 5.55%, 3/01/33 .... 2,500,000 2,547,400
Nueces River Authority Environmental Improvement Revenue, Asarco Inc. Project, Refunding,
5.60%, 1/01/27 .................................................................................. 8,640,000 8,413,632
Series A, 5.60%, 4/01/18 ........................................................................ 4,500,000 4,442,670
Nueces River Authority Water Supply Revenue, Facilities, Corpus Christi Lake Project, FSA Insured,
5.50%, 3/01/27 .................................................................................. 7,500,000 7,866,975
Port Corpus Christi IDC Revenue, Valero, Refunding, Series C, 5.40%, 4/01/18 ....................... 5,000,000 4,946,950
Port Corpus Christi Nueces County General Revenue, Union Pacific, Refunding, 5.65%, 12/01/22 ....... 5,000,000 5,159,300
Red River Authority PCR, West Texas Utilities Co. Project, Oklahoma Central Power and Light Co.,
Refunding, MBIA Insured, 6.00%, 6/01/20 ......................................................... 8,000,000 8,766,640
Sabine River Authority PCR, Southwestern Electric Power Co., Refunding, MBIA Insured, 6.10%, 4/01/18 7,000,000 7,702,520
Sam Rayburn Municipal Power Agency Supply System Revenue, Refunding, Series A, 6.50%, 10/01/08 ..... 380,000 397,833
Series A, 6.75%, 10/01/14 ....................................................................... 12,990,000 13,719,778
Series A, 6.25%, 10/01/17 ....................................................................... 4,795,000 4,908,546
Series B, 5.75%, 10/01/08 ....................................................................... 1,315,000 1,327,545
Series B, 6.125%, 10/01/13 ...................................................................... 5,150,000 5,276,330
Series B, 5.50%, 10/01/20 ....................................................................... 11,255,000 11,100,581
San Antonio Electric and Gas Revenue, Series 95, MBIA Insured, 5.375%, 2/01/18 ..................... 6,000,000 6,138,240
Texas State GO, Veterans Housing Assistance Fund I, Refunding, 6.15%, 12/01/25 ..................... 7,430,000 7,787,234
Texas Water Development Board Revenue, State Revolving Fund, 6.00%, 7/15/13 ........................ 4,000,000 4,294,480
Tomball Hospital Authority Revenue, Refunding, 6.125%, 7/01/23 ..................................... 8,750,000 9,142,613
Travis County Health Facilities Development Corp. Hospital Revenue, Charity Obligation Group,
Series A, 5.375%, 11/01/28 ...................................................................... 11,685,000 11,779,882
Tyler Health Facilities Development Corp. Hospital Revenue, East Texas Medical Center Project,
Series B, FSA Insured, 5.60%, 11/01/27 ........................................................... 3,450,000 3,627,951
------------
200,951,394
------------
U.S. TERRITORIES 4.5%
American Samoa EDA, Executive Office Building Revenue, 10.125%, 9/01/08 ............................ 2,175,000 2,246,275
District of Columbia GO,
ETM, Series A, 5.875%, 6/01/05 .................................................................. 595,000 654,339
ETM, Series A, 6.00%, 6/01/07 ................................................................... 870,000 971,686
Refunding, Series A, 5.875%, 6/01/05 ............................................................ 7,205,000 7,742,565
Refunding, Series A, 6.00%, 6/01/07 ............................................................. 10,905,000 11,887,104
Refunding, Series B, 5.25%, 6/01/26 ............................................................. 59,315,000 58,464,423
Series A, 5.25%, 6/01/27 ........................................................................ 16,225,000 15,988,602
Series A, Pre-Refunded, 6.375%, 6/01/11 ......................................................... 22,770,000 26,248,345
Series A, Pre-Refunded, 6.375%, 6/01/16 ......................................................... 27,230,000 31,389,655
Series E, 6.00%, 6/01/11 ........................................................................ 5,000,000 5,379,300
District of Columbia Hospital Revenue,
Medlantic Healthcare Group, ETM, Refunding, Series A, MBIA Insured, 5.70%, 8/15/08 .............. 6,500,000 7,134,335
Medlantic Healthcare Group, ETM, Refunding, Series A, MBIA Insured, 5.875%, 8/15/19 ............. 8,850,000 9,669,068
Washington Hospital Center Corp., Series A, Pre-Refunded, 7.00%, 8/15/05 ........................ 2,000,000 2,166,940
Washington Hospital Center Corp., Series A, Pre-Refunded, 9.00%, 1/01/08 ........................ 12,430,000 13,850,749
Washington Hospital Center Corp., Series A, Pre-Refunded, 8.75%, 1/01/15 ........................ 3,750,000 4,165,725
Washington Hospital Center Corp., Series A, Pre-Refunded, 7.125%, 8/15/19 ....................... 4,500,000 5,058,450
District of Columbia Redevelopment Land Agency Washington D.C. Sports Arena Special Tax Revenue,
5.625%, 11/01/10 ................................................................................ 1,050,000 1,092,305
District of Columbia Revenue, Carnegie Endowment Revenue, 5.75%, 11/15/26 .......................... 5,410,000 5,659,131
Northern Mariana Islands Commonwealth Ports Authority Airport Revenue, senior lien, Series A,
6.25%, 3/15/28 .................................................................................. 15,000,000 15,099,300
Northern Mariana Islands Commonwealth Ports Authority Seaport Revenue, Series A, 6.40%, 3/15/28 .... 9,090,000 8,865,204
</TABLE>
105
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
U.S. TERRITORIES (CONT.)
<S> <C> <C>
Puerto Rico Commonwealth Infrastructure Financing Authority, Special Tax Revenue, Series A,
7.75%, 7/01/08 ................................................................................. $ 700,000 $ 715,722
Virgin Islands PFA Revenue,
Matching Fund Loan Notes, Refunding, Series A, 7.25%, 10/01/18 .................................. 14,000,000 15,997,940
sub. lien, Fund Loan Notes, Refunding, Series D, 5.50%, 10/01/01 ................................ 1,600,000 1,650,256
sub. lien, Fund Loan Notes, Refunding, Series D, 5.50%, 10/01/02 ................................ 1,840,000 1,905,026
sub. lien, Fund Loan Notes, Refunding, Series D, 5.50%, 10/01/03 ................................ 1,895,000 1,974,931
sub. lien, Fund Loan Notes, Refunding, Series E, 5.75%, 10/01/13 ................................ 15,000,000 15,670,350
sub. lien, Fund Loan Notes, Refunding, Series E, 5.875%, 10/01/18 ............................... 9,000,000 9,324,810
sub. lien, Fund Loan Notes, Refunding, Series E, 6.00%, 10/01/22 ................................ 15,000,000 15,661,350
Virgin Islands Water and Power Authority Electric System Revenue, Series A, Pre-Refunded, 7.40%,
7/01/11 ......................................................................................... 380,000 414,542
Virgin Islands Water and Power Authority Water System Revenue, Series B, 7.60%, 1/01/12 ............ 4,000,000 4,575,120
------------
301,623,548
------------
UTAH .7%
Box Elder County PCR, Nucor Corp. Project, 6.90%, 5/15/17 .......................................... 2,000,000 2,172,340
Carbon County Solid Waste Disposal Revenue, Laidlaw Environmental Services, Refunding, Series A,
7.45%, 7/01/17 .................................................................................. 2,500,000 2,768,625
Davis County Solid Waste Management Energy Recovery Revenue, Special Services District, Pre-Refunded,
6.125%, 6/15/09 ................................................................................. 16,800,000 18,650,688
Tooele County PCR, Laidlaw Environmental, Refunding, Series A, 7.55%, 7/01/27 ...................... 3,500,000 3,898,755
Utah Assessed Municipal Power Systems Revenue, San Juan Project, 6.375%, 6/01/22 ................... 11,000,000 12,515,140
Utah State HFA, SFM,
Series A, 9.625%, 7/01/00 ....................................................................... 5,000 5,106
Series A-2, 9.625%, 7/01/02 ..................................................................... 20,000 20,631
Series A-2, 9.45%, 7/01/03 ...................................................................... 40,000 41,481
Series B, 9.50%, 7/01/00 ........................................................................ 15,000 15,322
Series B, 9.25%, 7/01/01 ........................................................................ 25,000 25,570
Series B-2, 9.50%, 7/01/02 ...................................................................... 10,000 10,303
Series B-2, 9.45%, 7/01/03 ...................................................................... 70,000 72,983
Series C-1, 9.375%, 7/01/00 ..................................................................... 20,000 20,363
Series C-2, 9.05%, 7/01/03 ...................................................................... 115,000 120,383
Series D-2, 9.00%, 7/01/03 ...................................................................... 230,000 240,757
Series E, 9.50%, 7/01/00 ........................................................................ 10,000 10,197
Series E-1, 8.70%, 7/01/03 ...................................................................... 280,000 294,064
Series F, 9.60%, 7/01/00 ........................................................................ 5,000 5,105
Series G-2, 9.30%, 7/01/00 ...................................................................... 10,000 10,104
Sub Series B-2, 8.70%, 7/01/04 .................................................................. 445,000 468,567
Sub Series D, 8.45%, 7/01/04 .................................................................... 215,000 224,228
Weber County Municipal Building Authority Lease Revenue, Refunding, MBIA Insured, 5.75%, 12/15/19 .. 5,000,000 5,375,050
------------
46,965,762
------------
VIRGINIA .4%
Hanover County IDA Hospital Revenue, Memorial Regional Medical Center Project, MBIA Insured, 5.50%,
8/15/25 .......................................................................................... 14,725,000 15,175,732
Virginia State HDA, Commonwealth Mortgage, Series D, Sub Series D-3, 6.125%, 1/01/19 ............... 9,715,000 10,194,824
------------
25,370,556
------------
WASHINGTON .1%
Washington State Health Care Facilities Authority Revenue, Swedish Hospital Medical Center,
AMBAC Insured, Pre-Refunded, 6.30%, 11/15/22 ..................................................... 2,675,000 2,969,812
Washington State Public Power Supply System Revenue, Nuclear Project No. 1, Series C, Pre-Refunded,
8.00%, 7/01/17 ................................................................................... 5,000,000 5,398,250
------------
8,368,062
------------
WEST VIRGINIA .3%
West Virginia State Hospital Finance Authority Hospital Revenue, Logan General Hospital Project,
Refunding and Improvement, 7.25%, 7/01/20 ....................................................... 15,000,000 14,625,000
West Virginia State Water Development Authority Revenue, Solid Waste Management, Series C, 8.125%,
8/01/15 ......................................................................................... 2,355,000 2,496,182
------------
17,121,182
------------
WISCONSIN 1.1%
Wisconsin Central District Tax Revenue, Junior Dedicated, Series B, 5.75%, 12/15/27 ................ 12,840,000 14,377,847
Wisconsin Housing and EDA, Homeownership Revenue, Series C, 6.15%, 9/01/17 ......................... 2,355,000 2,476,235
</TABLE>
106
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
WISCONSIN (CONT.)
<S> <C> <C>
Wisconsin State Health and Educational Facilities Authority Revenue,
Clement Manor, Refunding, 5.75%, 8/15/24 ............................................... $ 4,000,000 $ 3,875,280
Felician Health Care, Series A, AMBAC Insured, Pre-Refunded, 7.00%, 1/01/15 ............ 5,000,000 5,257,450
Franciscan Health System Inc. Project, Pre-Refunded, 8.375%, 3/01/05 ................... 6,000,000 6,414,720
Franciscan Health System Inc. Project, Pre-Refunded, 8.50%, 3/01/20 .................... 6,000,000 6,421,980
Franciscan Skemp Medical Center Inc. Project, 6.25%, 11/15/20 .......................... 9,510,000 10,275,840
Sisters Sorrowful Mother, Series A, MBIA Insured, 5.90%, 8/15/24 ....................... 22,055,000 23,959,890
--------------
73,059,242
--------------
WYOMING .2%
Sweetwater County PCR, Idaho Power Co. Project, Refunding, Series A, 6.05%, 7/15/26 ....... 10,500,000 11,299,575
Teton County Hospital District Hospital Revenue, Refunding and Improvement, 5.80%, 12/01/17 1,265,000 1,318,266
Wyoming CDA, Housing Revenue, Series 1, 6.15%, 6/01/17 .................................... 1,000,000 1,069,860
--------------
13,687,701
--------------
TOTAL BONDS ............................................................................... 6,280,880,302
--------------
(d)ZERO COUPON BONDS 3.5%
CALIFORNIA 3.1%
San Francisco City and County RDA, Lease Revenue, George R. Moscone Center,
7/01/09 ................................................................................ 3,750,000 2,309,250
7/01/10 ................................................................................ 4,500,000 2,614,905
7/01/12 ................................................................................ 4,500,000 2,311,920
7/01/13 ................................................................................ 4,250,000 2,048,245
7/01/14 ................................................................................ 2,250,000 1,015,223
San Joaquin Hills Transportation Corridor Agency Toll Road Revenue,
junior lien, ETM, 1/01/04 .............................................................. 7,400,000 6,155,690
junior lien, ETM, 1/01/05 .............................................................. 8,000,000 6,369,280
junior lien, ETM, 1/01/06 .............................................................. 9,000,000 6,844,590
junior lien, ETM, 1/01/07 .............................................................. 9,400,000 6,789,338
junior lien, ETM, 1/01/08 .............................................................. 10,400,000 7,174,648
junior lien, ETM, 1/01/09 .............................................................. 21,900,000 14,416,551
junior lien, ETM, 1/01/10 .............................................................. 15,000,000 9,196,200
junior lien, ETM, 1/01/12 .............................................................. 30,100,000 16,711,821
junior lien, ETM, 1/01/24 .............................................................. 52,700,000 15,056,917
junior lien, ETM, 1/01/25 .............................................................. 45,200,000 12,279,032
junior lien, ETM, 1/01/26 .............................................................. 131,900,000 34,068,451
junior lien, ETM, 1/01/27 .............................................................. 139,100,000 34,815,339
senior lien, Refunding, Series A, 1/15/23 .............................................. 20,000,000 13,992,600
senior lien, Refunding, Series A, 1/15/24 .............................................. 20,000,000 13,756,000
--------------
207,926,000
--------------
FLORIDA .2%
Miami-Dade County Special Obligation,
Capital Appreciation, Series B, MBIA Insured, 10/01/28 ................................. 11,860,000 2,420,863
Capital Appreciation, Series B, MBIA Insured, 10/01/29 ................................. 20,000,000 3,862,000
Capital Appreciation, Series B, MBIA Insured, 10/01/32 ................................. 7,780,000 1,255,225
Capital Appreciation, Series B, MBIA Insured, 10/01/33 ................................. 2,000,000 305,160
Capital Appreciation, Series B, MBIA Insured, 10/01/35 ................................. 6,765,000 923,152
sub. lien, Series B, MBIA Insured, 10/01/34 ............................................ 3,895,000 562,049
--------------
9,328,449
--------------
NEBRASKA .1%
Kearney IDR, Great Platte River Road, Capital Appreciation, zero cpn. to 1/01/06, 7.00%
thereafter,
1/01/11 ................................................................................ 4,255,000 2,691,670
1/01/17 ................................................................................ 8,895,000 5,648,147
--------------
8,339,817
--------------
NEW YORK
MAC for City of Troy, Capital Appreciation, Series C, MBIA Insured,
7/15/21 ................................................................................. 428,010 136,064
1/15/22 ................................................................................. 649,658 200,855
--------------
336,919
--------------
</TABLE>
107
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
(d)ZERO COUPON BONDS (CONT.)
<S> <C> <C>
OHIO .1%
Akron COP, Akron Municipal Baseball Stadium Project, Capital Appreciation, zero cpn. to 12/01/01,
6.30% thereafter, 12/01/05 ........................................................................ $ 1,700,000 $ 1,582,904
6.40% thereafter, 12/01/06 ........................................................................ 1,685,000 1,588,972
6.50% thereafter, 12/01/07 ........................................................................ 1,750,000 1,662,220
6.90% thereafter, 12/01/16 ........................................................................ 2,500,000 2,430,525
--------------
7,264,621
--------------
TOTAL ZERO COUPON BONDS ........................................................................... 233,195,806
--------------
TOTAL LONG TERM INVESTMENTS (COST $6,183,878,766) ................................................. 6,514,076,108
--------------
(a)SHORT TERM INVESTMENTS .6%
Arkansas State Development Finance Authority Higher Education, Capital Asset,
Series A, FGIC Insured, Weekly VRDN and Put, 3.00%, 12/01/15 ...................................... 600,000 600,000
Ashland PCR, Ashland Oil Inc. Project, Weekly VRDN and Put, 2.90%, 4/01/09 ........................ 600,000 600,000
Connecticut State Health and Educational Facilities Authority
Revenue, Yale University, Series T-1, Weekly VRDN and Put, 2.85%, 7/01/29 ......................... 100,000 100,000
Fort Wayne Hospital Authority Hospital Revenue, Parkview Memorial Hospital, Series D, Weekly
VRDN and Put, 3.00%, 1/01/16 .................................................................. 600,000 600,000
Hawaii State Housing Finance and Development Corp. Revenue, Rental Housing System, Series A, Weekly
VRDN and Put, 3.00%, 7/01/24 .................................................................. 500,000 500,000
Indiana State Development Financing Authority Revenue, Bayer Corp. Project, Refunding, Daily
VRDN and Put, 3.25%, 3/01/09 .................................................................. 6,150,000 6,150,000
New York City GO, Unlimited, Series B, Sub Series B-4, Daily VRDN and Put, 3.15%, 8/15/23 ......... 5,350,000 5,350,000
New York City Municipal Water Finance Authority Water and Sewer System Revenue,
Series C, FGIC Insured, Daily VRDN and Put, 3.15%, 6/15/23 .................................... 2,000,000 2,000,000
Series G, FGIC Insured, Daily VRDN and Put, 3.20%, 6/15/24 .................................... 3,700,000 3,700,000
Putnam County Development Authority PCR, Georgia Power Co., Plant Branch, First Series, Daily
VRDN and Put, 3.15%, 6/01/23 .................................................................. 1,900,000 1,900,000
West Jefferson IDB, PCR, Alabama Power Co. Project, Refunding, Daily VRDN and Put, 3.15%, 6/01/28 . 15,000,000 15,000,000
--------------
TOTAL SHORT TERM INVESTMENTS (COST $36,500,000) ................................................... 36,500,000
--------------
TOTAL INVESTMENTS (COST $6,220,378,766) 98.7% ..................................................... 6,550,576,108
OTHER ASSETS, LESS LIABILITIES 1.3% ............................................................... 85,089,565
--------------
NET ASSETS 100.0% ................................................................................. $6,635,665,673
--------------
</TABLE>
See glossary of terms on page 134.
(a) Variable rate demand notes (VRDNs) are tax-exempt obligations which contain
a floating or variable interest rate adjustment formula and an
unconditional right of demand to receive payment of the principal balance
plus accrued interest at specified dates.
(b) Sufficient collateral has been segregated for securities traded on a
when-issued or delayed delivery basis.
(c) See Note 6 regarding defaulted securities.
(d) Zero coupon/step-up bonds. The current effective yield may vary. The
original accretion rate will remain constant.
(e) The bond pays interest based upon the issuer's ability to pay, which may be
less than the stated interest rate.
See notes to financial statements.
108
FRANKLIN TAX-FREE TRUST
Financial Highlights
<TABLE>
<CAPTION>
FRANKLIN INDIANA TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28,
----------------------------------------------------------------------
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 12.07 $ 11.77 $ 11.76 $ 11.40 $ 12.01
----------------------------------------------------------------------
Income from investment operations:
Net investment income ...................... .62 .65 .66 .67 .66
Net realized and unrealized gains (losses) . -- .32 .01 .35 (.61)
----------------------------------------------------------------------
Total from investment operations ............ .62 .97 .67 1.02 .05
----------------------------------------------------------------------
Less distributions from:
Net investment income ...................... (.63) (.65) (.66) (.66) (.66)
Net realized gains ......................... (.03) (.02) -- -- --
----------------------------------------------------------------------
Total distributions ......................... (.66) (.67) (.66) (.66) (.66)
----------------------------------------------------------------------
Net asset value, end of year ................ $ 12.03 $ 12.07 $ 11.77 $ 11.76 $ 11.40
----------------------------------------------------------------------
Total return* ............................... 5.25% 8.52% 5.91% 9.20% .58%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $ 59,014 $ 54,643 $ 51,137 $ 48,949 $ 46,583
Ratios to average net assets:
Expenses ................................... .82% .82% .82% .80% .81%
Net investment income ...................... 5.12% 5.45% 5.69% 5.80% 5.84%
Portfolio turnover rate ..................... 18.79% 24.08% 23.54% 10.56% 26.49%
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year. Prior to May
1, 1994, dividends from net investment income were reinvested at the offering
price.
See notes to financial statements.
109
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN INDIANA TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------------
(a)LONG TERM INVESTMENTS 98.0%
<S> <C> <C>
Beech Grove EDR, Westvaco Corp., 8.75%, 7/01/10 .................................................. $ 50,000 $ 50,811
Carmel EDR, Cool Creek Association, Refunding, 6.50%, 9/01/15 .................................... 1,000,000 1,074,290
Clarke County Hospital Association, First Mortgage, MBIA Insured, Pre-Refunded, 7.50%, 9/01/07 ... 250,000 255,000
Cloverdale Multi-School Building Corp. First Mortgage, MBIA Insured, 5.35%, 1/15/23 .............. 1,200,000 1,220,700
Crown Point Industrial Redevelopment District Lake County Tax Increment, 8.10%, 2/01/07 .......... 50,000 50,154
Duneland School Building Corp. First Mortgage, MBIA Insured, 5.50%, 8/01/17 ...................... 1,000,000 1,040,170
Eastern Hancock Middle School Building Corp. First Mortgage, Pre-Refunded, 6.00%, 1/15/21 ........ 1,000,000 1,129,940
Elkhart County Hospital Authority Revenue, Goshen Hospital Association Inc. Project, 7.35%, 7/01/12 1,750,000 1,883,473
Elwood Middle School Building Corp. First Mortgage, Refunding, 7.30%, 1/01/08 .................... 500,000 533,935
Fort Wayne Hospital Authority Hospital Revenue, Parkview Memorial Hospital, Series A, FGIC Insured,
Pre-Refunded, 6.50%, 11/15/12 ................................................................. 1,000,000 1,043,950
Hammond Industrial Sewer and Solid Waste Disposal Revenue, American Maize-Products Co., Project A,
8.00%, 12/01/24 ............................................................................... 3,000,000 3,497,610
Hammond IPC Revenue, Stauffer Chemical Project, Guaranteed by Imperial Chemical, Series 1982,
8.00%, 11/01/12 ............................................................................... 300,000 317,130
Hammond Multi-School Building Corp. First Mortgage, Refunding, Series A, 6.20%, 7/10/15 .......... 1,500,000 1,587,600
Indiana Bond Bank Special Program,
Series A, 8.375%, 2/01/18 ..................................................................... 130,000 132,388
Series A, 7.50%, 2/01/20 ...................................................................... 250,000 263,445
Series B, 6.20%, 2/01/23 ...................................................................... 3,500,000 3,762,605
Series C, 8.00%, 8/01/11 ...................................................................... 20,000 20,211
Indiana Health Facility Financing Authority Hospital Revenue,
Hancock Memorial Hospital Health Services, 6.125%, 8/15/17 .................................... 2,000,000 2,112,220
Jackson County Schneck Memorial Hospital, Pre-Refunded, 7.50%, 2/15/22 ........................ 1,835,000 2,063,825
Jackson County Schneck Memorial Hospital, Refunding, 5.25%, 2/15/22 ........................... 1,200,000 1,165,692
Methodist Hospital Inc., 6.75%, 9/15/09 ....................................................... 1,280,000 1,387,520
(b)Sisters of St. Francis Health, Series A, MBIA Insured, 5.00%, 11/01/29 ........................ 1,000,000 959,090
St. Anthony's Medical Center/Home Inc., Series A, 7.00%, 10/01/17 ............................. 1,000,000 1,077,990
Indiana Health Facility Financing Authority Revenue, Greenwood Village South Project, Refunding,
5.625%, 5/15/28 ............................................................................... 1,750,000 1,719,060
Indiana State Development Financing Authority Environmental Revenue, 6.25%, 7/15/30 .............. 2,000,000 2,141,200
Indiana State Educational Facilities Authority Revenue,
DePauw University Project, Refunding, 5.30%, 7/01/16 .......................................... 600,000 610,182
Valparaiso University, AMBAC Insured, 5.125%, 10/01/23 ........................................ 2,015,000 1,985,823
Indiana State HFA, SFMR,
6.10%, 7/01/22 ................................................................................ 1,000,000 1,053,960
Series A, GNMA Secured, 8.125%, 7/01/06 ....................................................... 30,000 31,043
Series F-2, GNMA Secured, 7.75%, 7/01/22 ...................................................... 330,000 345,916
Indiana State Office Building Commission Correctional Facilities Program Revenue, Pre-Refunded,
6.375%, 7/01/16 ............................................................................... 1,000,000 1,094,110
Indianapolis Airport Authority, Indianapolis International Airport Revenue, 6.50%, 11/15/31 ...... 1,460,000 1,575,574
Indianapolis Industrial Gas Utility Revenue, Distribution System, Refunding, Series A, AMBAC
Insured, 5.00%, 8/15/24 ....................................................................... 1,000,000 973,300
Indianapolis Local Public Improvement Bond, Series D, 6.75%, 2/01/20 ............................. 2,300,000 2,566,202
Jasper County EDR, Georgia-Pacific Corp. Project, 5.625%, 12/01/27 ............................... 1,000,000 1,002,700
Jasper County PCR, Northern Indiana Public Service Co., Refunding, MBIA Insured, 7.10%, 7/01/17 .. 500,000 540,640
Lake Central Industrial Multi-School Building Corp. First Mortgage, Refunding, MBIA Insured,
6.50%, 1/15/14 ................................................................................ 2,100,000 2,287,929
Madison County Authority Anderson Hospital Revenue, Refunding, Series A, BIG Insured,
8.00%, 1/01/14 ................................................................................ 95,000 97,080
Marion County Convention and Recreational Facilities Authority Excise Tax Revenue, Lease Rental,
Series A, AMBAC Insured, 7.00%, 6/01/21 ....................................................... 250,000 269,995
Subordinated Lien, Series A, MBIA Insured, 5.00%, 6/01/27 ..................................... 2,750,000 2,660,928
Monroe County MFHR, Country View, Series A, GNMA Secured, 5.75%, 4/01/33 ......................... 1,100,000 1,117,061
Muncies Edit Building Corp. First Mortgage, Series A, AMBAC Insured, 6.60%, 12/01/17 ............. 2,000,000 2,220,800
New Albany Floyd County School Building Corp. Revenue, First Mortgage, MBIA Insured, 5.375%,
1/15/18 ....................................................................................... 1,500,000 1,546,920
New Prairie Unified School Building Corp. Revenue, First Mortgage, Refunding, 5.80%, 7/05/11 ..... 1,520,000 1,644,534
Penn-Harris-Madison Multi-School Building Corp. First Mortgage, FSA Insured, 5.90%, 7/15/14 ...... 1,000,000 1,100,310
Princeton PCR, Refunding, Public Service Co. of Indiana Project, Series C, MBIA Insured, 7.375%,
3/15/12 ....................................................................................... 250,000 263,830
Rochester Community Multi-School Building Corp. Revenue, First Mortgage, AMBAC Insured, 5.20%,
1/15/18 ....................................................................................... 1,000,000 1,011,530
Steuben County Metropolitan School District COP, 6.90%, 1/01/08 .................................. 500,000 526,030
Sullivan Industrial PCR, Hoosier Energy, Merom Project, Refunding, 7.10%, 4/01/19 ................ 750,000 799,737
-----------
TOTAL LONG TERM INVESTMENTS (COST $54,130,869) ................................................... 57,816,143
-----------
</TABLE>
110
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN INDIANA TAX-FREE INCOME FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------
(a)SHORT TERM INVESTMENTS 2.5%
<S> <C> <C>
Fort Wayne Hospital Authority Hospital Revenue, Parkview Memorial Hospital,
Series B, Weekly VRDN and Put, 3.00%, 1/01/16 ............................................. $ 100,000 $ 100,000
Series D, Weekly VRDN and Put, 3.00%, 1/01/16 ............................................. 800,000 800,000
Indiana Health Facility Financing Authority Revenue, St. Anthony Medical Center Project, Weekly
VRDN and Put, 3.50%, 12/01/14 ............................................................. 500,000 500,000
Princeton PCR, PSI Energy Inc. Project, Refunding, Daily VRDN and Put, 3.20%, 4/01/22 ........ 100,000 100,000
------------
TOTAL SHORT TERM INVESTMENTS (COST $1,500,000) ............................................... 1,500,000
------------
TOTAL INVESTMENTS (COST $55,630,869) 100.5% .................................................. 59,316,143
OTHER ASSETS, LESS LIABILITIES (.5%) ......................................................... (302,320)
------------
NET ASSETS 100.0% ............................................................................ $ 59,013,823
</TABLE>
See glossary of terms on page 134.
(a) Variable rate demand notes (VRDNs) are tax-exempt obligations which contain
a floating or variable interest rate adjustment formula and an
unconditional right of demand to receive payment of the principal balance
plus accrued interest at specified dates.
(b) Sufficient collateral has been segregated for securities traded on a
when-issued or delayed delivery basis.
See notes to financial statements.
111
FRANKLIN TAX-FREE TRUST
Financial Highlights
<TABLE>
<CAPTION>
FRANKLIN MICHIGAN TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28,
---------------------------------------
1999 1998 1997(1)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................. $ 11.02 $ 10.42 $ 10.00
---------------------------------------
Income from investment operations:
Net investment income ............................. .54 .51 .30
Net realized and unrealized gains ................. .12 .67 .32
---------------------------------------
Total from investment operations ................... .66 1.18 .62
---------------------------------------
Less distributions from:
Net investment income ............................. (.57) (.58) (.20)
Net realized gains ................................ (.02) -- --
---------------------------------------
Total distributions ................................ (.59) (.58) (.20)
---------------------------------------
Net asset value, end of year ....................... $ 11.09 $ 11.02 $ 10.42
=======================================
Total return* ...................................... 6.15% 11.62% 6.17%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................... $ 17,117 $ 9,268 $ 3,884
Ratios to average net assets:
Expenses .......................................... .25% .25% .34%**
Expenses excluding waiver and payments by affiliate .94% 1.01% 1.21%**
Net investment income ............................. 5.03% 5.39% 4.90%**
Portfolio turnover rate ............................ 16.00% 51.81% 42.83%
</TABLE>
* Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year. Prior
to May 1, 1994, dividends from net investment income were reinvested at the
offering price.
** Annualized
(1) For the period July 1, 1996 (effective date) to February 28, 1997.
See notes to financial statements.
112
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN MICHIGAN TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 95.5%
<S> <C> <C>
Avondale School District, AMBAC Insured, 5.75%, 5/01/22 .......................................... $ 150,000 $ 167,012
Caledonia Community Schools, MBIA Insured, Pre-Refunded, 5.85%, 5/01/22 .......................... 100,000 106,805
Cedar Springs Public School District, MBIA Insured, Pre-Refunded, 5.875%, 5/01/19 ................ 250,000 277,800
Central Michigan University Revenue, FGIC Insured, 5.00%, 10/01/27 ............................... 500,000 480,155
Chippewa County Hospital Financing Authority Revenue, Chippewa County War Memorial Hospital,
Refunding, Series B, 5.625%, 11/01/14 ......................................................... 650,000 661,687
Dearborn EDC Hospital Revenue, Oakwood Obligation Group, Series A, FGIC Insured, 5.75%, 11/15/15 . 100,000 107,793
Detroit Local Development Finance Authority, Refunding, Series A, 5.375%, 5/01/21 ................ 100,000 101,439
Detroit Sewage Disposal Revenue, Series A, MBIA Insured, 5.50%, 7/01/20 .......................... 215,000 224,103
Detroit Water Supply System Revenue, Series A, MBIA Insured, 5.00%, 7/01/27 ...................... 750,000 728,918
Detroit/Wayne County Stadium Authority, FGIC Insured, 5.25%, 2/01/27 ............................. 500,000 503,435
Farmington Hills EDC Revenue, Botsford Continuing Care, Series A, MBIA Insured, 5.75%, 2/15/25 ... 100,000 106,214
Ferris State University Revenue, AMBAC Insured, Pre-Refunded, 5.90%, 10/01/26 .................... 240,000 271,171
Gogebic-Iron Wastewater Authority Wastewater Treatment System Revenue, Refunding, MBIA Insured,
6.05%, 1/01/25 ................................................................................ 500,000 535,600
Greenville Public School Building GO, MBIA Insured, Pre-Refunded, 5.75%, 5/01/19 ................. 160,000 176,202
Grosse-Ile Township School District GO, FGIC Insured, Pre-Refunded, 6.00%, 5/01/22 ............... 150,000 169,590
Huron Valley School District GO, FGIC Insured, Pre-Refunded,
5.875%, 5/01/16 ............................................................................... 100,000 112,200
5.75%, 5/01/22 ................................................................................ 100,000 111,341
Jenison Public Schools, Refunding, FGIC Insured, 5.75%, 5/01/16 .................................. 130,000 138,701
Kalamazoo Downtown Development, Refunding, 5.35%, 4/01/18 ........................................ 200,000 205,784
Kalamazoo Hospital Finance Authority Hospital Facility Revenue, Bronson Methodist Hospital,
Refunding and Improvement, MBIA Insured, 5.875%, 5/15/26 ...................................... 225,000 241,763
Refunding, MBIA Insured, 5.25%, 5/15/18 ....................................................... 250,000 253,790
Kenowa Hills Public Schools, MBIA Insured, 5.875%, 5/01/21 ....................................... 275,000 292,375
Kent County Building Authority GO, 5.00%, 6/01/26 ................................................ 600,000 579,186
Lakeview Community Schools GO, FGIC Insured, Pre-Refunded, 5.75%, 5/01/16 ........................ 100,000 106,693
Lincoln Consolidated School District,
FGIC Insured, Pre-Refunded, 5.85%, 5/01/21 .................................................... 130,000 144,841
Refunding, FGIC Insured, 5.85%, 5/01/21 ....................................................... 10,000 10,862
Lincoln Park School District, Refunding, FGIC Insured, 5.00%, 5/01/26 ............................ 400,000 390,676
Michigan Higher Education Facilities Authority Revenue, Limited Obligation, Calvin College Project,
5.55%, 6/01/17 ................................................................................ 840,000 841,873
Michigan Municipal Bond Authority Revenue, Local Government Loan Program Revenue Sharing, 5.20%,
11/01/19 ...................................................................................... 330,000 323,832
Michigan State Building Authority Revenue, Facilities Program, Refunding, Series 1, 4.75%, 10/15/21 500,000 474,715
Michigan State HDA,
Rental Housing Revenue, Series A, AMBAC Insured, 6.00%, 4/01/16 ............................... 200,000 213,388
SFMR, Refunding, Series B, 6.20%, 6/01/27 ..................................................... 75,000 79,471
SFMR, Refunding, Series E, 6.20%, 12/01/27 .................................................... 310,000 324,263
SFMR, Series D, 5.95%, 12/01/16 ............................................................... 250,000 262,998
Michigan State Hospital Finance Authority Revenue,
Mercy Health Services, Series U, 5.75%, 8/15/26 ............................................... 300,000 313,521
Oakwood Obligation Group, Refunding, Series A, FSA Insured, 5.00%, 8/15/26 .................... 500,000 485,455
Presbyterian Villages Obligation Group, 6.375%, 1/01/15 ....................................... 225,000 241,718
Presbyterian Villages Obligation Group, 6.375%, 1/01/25 ....................................... 1,250,000 1,333,046
Sparrow Obligation Group, MBIA Insured, 5.90%, 11/15/26 ....................................... 100,000 108,257
Michigan State Hospital Financing Authority Revenue, Hospital-Charity Obligation Group, Series A,
5.125%, 11/01/29 .............................................................................. 800,000 778,840
Michigan State Strategic Fund Limited Obligation Revenue,
Hope Network Project, Refunding, Series B, 5.125%, 9/01/13 .................................... 600,000 611,754
Worthington Armstrong Venture, 5.75%, 10/01/22 ................................................ 350,000 368,613
Michigan State Trunk Line, Refunding, Series A, MBIA Insured, 5.00%, 11/01/26 .................... 500,000 489,690
Oakland County EDC, Limited Obligation Revenue, Cranbrook Educational Community, Refunding, 5.00%,
11/01/17 ...................................................................................... 500,000 496,965
Oakridge Public Schools GO, FSA Insured, 5.125%, 5/01/28 ......................................... 500,000 497,340
Ottawa County GO, Holland Township Water Supply, Refunding, 5.15%, 8/01/18 ....................... 280,000 284,371
Wayne Charter County Airport Revenue, Detroit Metro Airport, Series A, MBIA Insured, 5.25%,
12/01/18 ...................................................................................... 500,000 504,325
Zeeland Public Schools GO, Series B, MBIA Insured, Pre-Refunded, 6.05%, 5/01/19 .................. 100,000 112,347
-----------
TOTAL LONG TERM INVESTMENTS (COST $15,734,216) ................................................... 16,352,918
-----------
</TABLE>
113
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN MICHIGAN TAX-FREE INCOME FUND AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------
(a)SHORT TERM INVESTMENTS 3.0%
<S> <C> <C>
Delta County EDC, Environmental Improvement Revenue, Mead Escanaba Paper
Project, Refunding, Series C, Daily VRDN and Put, 3.10%, 12/01/23 . $ 100,000 $ 100,000
Michigan State Strategic Fund Limited Obligation Revenue, Detroit
Edison Co., Reserve 1, Refunding, Daily VRDN and Put, 3.15%, 9/01/30 300,000 300,000
Midland County EDC, Limited Obligation Revenue, Dow Chemical Co. ..
Project, Refunding, Series B, Daily VRDN and Put, 2.20%, 12/01/15 . 100,000 100,000
-----------
TOTAL SHORT TERM INVESTMENTS (COST $500,000) ...................... 500,000
-----------
TOTAL INVESTMENTS (COST $16,234,216) 98.5% ........................ 16,852,918
OTHER ASSETS, LESS LIABILITIES 1.5% ............................... 264,500
-----------
NET ASSETS 100.0% ................................................. $17,117,418
===========
</TABLE>
See glossary of terms on page 134.
(a) Variable rate demand notes (VRDNs) are tax-exempt obligations which contain
a floating or variable interest rate adjustment formula and an
unconditional right of demand to receive payment of the principal balance
plus accrued interest at specified dates.
See notes to financial statements.
114
<TABLE>
<CAPTION>
FRANKLIN TAX-FREE TRUST
Financial Highlights
FRANKLIN NEW JERSEY TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28,
-----------------------------------------------------------------------------
CLASS A 1998 1997 19961 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 11.92 $ 11.61 $ 11.68 $ 11.28 $ 11.82
-----------------------------------------------------------------------------
Income from investment operations:
Net investment income ...................... .61 .63 .64 .65 .66
Net realized and unrealized gains (losses) . .05 .32 (.06) .39 (.55)
-----------------------------------------------------------------------------
Total from investment operations ............ .66 .95 .58 1.04 .11
-----------------------------------------------------------------------------
Less distributions from net investment income (.62) (.64) (.65) (.64) (.65)
-----------------------------------------------------------------------------
Net asset value, end of year ................ $ 11.96 $ 11.92 $ 11.61 $ 11.68 $ 11.28
=============================================================================
Total return* ............................... 5.63% 8.37% 5.13% 9.43% 1.12%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $ 681,818 $ 636,929 $ 574,691 $ 564,864 $ 533,937
Ratios to average net assets:
Expenses ................................... .65% .66% .64% .65% .63%
Net investment income ...................... 5.06% 5.34% 5.58% 5.65% 5.86%
Portfolio turnover rate ..................... 5.43% 12.77% 8.87% 12.04% 31.05%
</TABLE>
<TABLE>
<CAPTION>
CLASS C
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 11.98 $ 11.66 $ 11.72 $ 11.30
-----------------------------------------------------------
Income from investment operations:
Net investment income ...................... .54 .56 .57 .49
Net realized and unrealized gains (losses) . .06 .33 (.05) .40
-----------------------------------------------------------
Total from investment operations ............ .60 .89 .52 .89
-----------------------------------------------------------
Less distributions from net investment income (.55) (.57) (.58) (.47)
-----------------------------------------------------------
Net asset value, end of year ................ $ 12.03 $ 11.98 $ 11.66 $ 11.72
===========================================================
Total return* ............................... 5.09% 7.84% 4.57% 8.02%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $ 48,715 $ 28,139 $ 13,095 $ 4,542
Ratios to average net assets:
Expenses ................................... 1.21% 1.21% 1.21% 1.23%**
Net investment income ...................... 4.50% 4.77% 5.01% 5.15%**
Portfolio turnover rate ..................... 5.43% 12.77% 8.87% 12.04%
</TABLE>
* Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year. Prior
to May 1, 1994, dividends from net investment income were reinvested at the
offering price.
** Annualized
1 For the period May 1, 1995 (effective date) to February 29, 1996 for Class
C.
See notes to financial statements.
115
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN NEW JERSEY TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------------
(a)LONG TERM INVESTMENTS 99.2%
<S> <C> <C>
BONDS 99.2%
Aberdeen Township, Refunding, FGIC Insured, 5.70%, 2/01/22 .......................................... $ 4,100,000 $ 4,378,144
Allamuchy Town Board of Education COP, MBIA Insured, 6.00%, 11/01/14................................. 1,000,000 1,100,270
Atlantic City Municipal Utilities Authority Revenue, Water
System, Pre-Refunded, 7.75%, 5/01/17 ................................................................ 2,000,000 2,141,340
Atlantic County Improvement Authority Luxury Tax Revenue, Convention Center Project, ETM, MBIA
Insured, 7.40%, 7/01/16 ............................................................................. 9,500,000 12,211,775
Atlantic County Utilities Authority, Solid Waste Revenue,
7.00%, 3/01/08 ................................................................................... 2,000,000 2,032,720
7.125%, 3/01/16 ................................................................................... 6,600,000 6,728,568
Bedminister Township Board of Education COP, Pre-Refunded, 7.125%, 9/01/10........................... 2,000,000 2,179,880
Bergen County Utility Authority Solid Waste System Revenue,
Series A, FGIC Insured, 6.25%, 6/15/11 1,325,000 1,433,067 Camden County
Improvement Authority Health System Revenue, Catholic Health East, Series B,
AMBAC Insured, 5.00%, 11/15/28 ...................................................................... 11,600,000 11,440,152
Camden County Municipal Utilities Authority Sewer Revenue, Refunding, FGIC Insured,
5.20%, 7/15/15 ................................................................................... 5,000,000 5,145,050
5.25%, 7/15/16 ................................................................................... 2,005,000 2,072,929
5.125%, 7/15/17 .................................................................................. 4,560,000 4,620,101
5.25%, 7/15/17 ................................................................................... 2,425,000 2,497,168
Cape May County IPC, Financing Authority Revenue, Refunding, Atlantic City Electric Co., Series A,
MBIA Insured, 6.80%, 3/01/21 ..................................................................... 5,400,000 6,721,272
Carteret Board of Education COP, MBIA Insured, 6.25%, 4/15/19 ....................................... 2,750,000 3,032,068
Church Street Corp. Keansburg Elderly Housing Mortgage Revenue,
Refunding, 5.625%, 3/01/11 1,890,000 1,962,387 Delaware River and Bay Authority Revenue, FGIC
Insured, 5.25%, 1/01/26 .......................................................................... 10,200,000 10,415,934
Delaware River Port Authority Pennsylvania and New Jersey Revenue, Series 1995, FGIC Insured,
5.50%, 1/01/26 ................................................................................... 24,000,000 25,354,794
Essex County Improvement Authority Revenue,
MBIA Insured, Pre-Refunded, 6.00%, 12/01/17 ...................................................... 2,510,000 2,767,677
Utilities System, Orange Franchise, Series A, MBIA Insured, 5.375%, 7/01/18 ...................... 1,400,000 1,444,982
Evesham Municipal Utilities Authority Revenue, Series B, MBIA Insured, 7.00%, 7/01/10 ............... 3,000,000 3,127,320
Freehold Township Board of Education, FSA Insured, 5.40%, 7/15/28 ................................... 1,080,000 1,109,171
Gloucester County Improvement Authority Revenue, Justice Complex Lease Project, Pre-Refunded,
7.50%, 12/15/10 .................................................................................. 1,000,000 1,044,680
Gloucester County Improvement Authority Solid Waste Resource Recovery Revenue, SES Gloucester Co. ...
LP Project, Series B, 8.375%, 7/01/10 ............................................................ 275,000 275,982
Hamilton Township Board of Education COP, Series B, FSA Insured, 7.00%, 12/15/15 .................... 4,670,000 5,053,500
Highland Park School District GO, Refunding, MBIA
Insured, 5.125%, 2/15/25 7,120,000 7,157,878 Howell Township GO, Refunding,
FGIC Insured, 6.80%, 1/01/14 1,750,000 1,911,928 Hudson County Improvement
Authorities Facilities Lease Revenue, Hudson County Lease Project, FGIC
Insured, Pre-Refunded, 6.00%, 12/01/25 .............................................................. 2,000,000 2,205,320
Hudson County Improvement Authority Solid Waste Systems Revenue, Koppers Site Project, Series
A, 6.125%, 1/01/29 .............................................................................. 6,510,000 6,365,478
Mercer County Improvement Authority Revenue, Library Systems, Series A, Pre-Refunded, 6.00%, 12/01/14 2,500,000 2,789,950
Middlesex County COP,
MBIA Insured, 5.30%, 6/15/29 ..................................................................... 5,000,000 5,123,400
MBIA Insured, Pre-Refunded, 6.00%, 8/15/14 ....................................................... 1,500,000 1,660,050
MBIA Insured, Pre-Refunded, 6.125%, 2/15/19 ...................................................... 2,300,000 2,558,267
Refunding, MBIA Insured, 5.00%, 2/15/19 .......................................................... 4,250,000 4,233,935
Middlesex County Improvement Authority Revenue, Guaranteed Educational Services, Commission Project,
Pre-Refunded, 6.00%, 9/15/14 ..................................................................... 2,000,000 2,255,520
Middlesex County Utilities Authority Sewer Revenue, Refunding, Series A, FGIC Insured,
5.375%, 9/15/15 .................................................................................. 2,100,000 2,185,176
5.125%, 12/01/16 ................................................................................. 9,000,000 9,181,980
Middletown Township GO, Board of Education, MBIA Insured, 5.85%,
8/01/24 .......................................................................................... 4,295,000 4,597,755
8/01/25 .......................................................................................... 4,300,000 4,603,107
Moorestown Township School District, FGIC Insured, 5.00%, 1/01/26 ................................... 1,000,000 991,170
Mount Olive Township, Board of Education, FGIC Insured, 5.25%,
1/15/22 .......................................................................................... 2,550,000 2,594,192
1/15/23 .......................................................................................... 2,690,000 2,733,121
New Brunswick Parking Authority Revenue, City GTD Parking, FGIC Insured, 5.00%, 1/01/29 ............. 2,000,000 1,981,480
New Jersey EDA Revenue,
Educational Testing Service, Refunding, Series A, MBIA Insured, 4.75%, 5/15/25 ................... 3,500,000 3,362,870
Hillcrest Health Services System Project, Refunding, AMBAC Insured, 5.375%, 1/01/16 .............. 2,500,000 2,602,950
St. Barnabas Project, Series A, MBIA Insured, 5.375%, 7/01/27 .................................... 4,375,000 4,473,875
New Jersey EDA,
Auto Parking Revenue, Blair Development Co., FGIC Insured, 5.60%, 10/15/26 ....................... 2,000,000 2,113,000
EDR, School Revenue, Blair Academy, 1995 Project, Series N, 6.90%, 12/01/11 ...................... 3,545,000 3,806,656
</TABLE>
116
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN NEW JERSEY TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------
(a)LONG TERM INVESTMENTS (CONT.)
<S> <C> <C>
BONDS (CONT.)
New Jersey EDA, (cont.)
EDR, School Revenue, Blair Academy, 1995 Project, Series P, 6.90%, 12/01/11 .................. $ 395,000 $ 424,155
Heating and Cooling Revenue, Trigen-Trenton Project, Series A, 6.20%, 12/01/10 ............... 6,370,000 6,694,615
Heating and Cooling Revenue, Trigen-Trenton Project, Series B, 6.10%, 12/01/04 ............... 3,245,000 3,397,937
Heating and Cooling Revenue, Trigen-Trenton Project, Series B, 6.20%, 12/01/07 ............... 2,720,000 2,866,499
Market Transition Facilities Revenue, senior lien, Series A, MBIA Insured, 5.875%, 7/01/11 ... 3,000,000 3,279,510
Natural Gas Facilities Revenue, New Jersey Natural Gas Co. Project, Series A, AMBAC Insured,
6.25%, 8/01/24 ............................................................................... 8,200,000 9,036,974
PCR, Jersey Central Power and Light, 7.10%, 7/01/15 .......................................... 550,000 596,998
School Revenue, Blair Academy, 1995 Project, Series A, 5.85%, 9/01/16 ........................ 1,640,000 1,696,285
State Lease Revenue, Liberty State Park Lease Rental, Refunding, AMBAC Insured, 5.75%, 3/15/20 4,605,000 4,936,468
State Lease Revenue, Liberty State Park Lease Rental, Refunding, AMBAC Insured, 5.75%, 3/15/22 3,315,000 3,553,614
Terminal Revenue, GATX Terminals Corp. Project, 6.65%, 9/01/22 ............................... 7,440,000 7,999,042
Water Facilities Revenue, Hackensack Water Co. Project, Refunding, Series A, MBIA Insured,
5.80%, 3/01/24 ........................................................................... 1,000,000 1,061,260
Water Facilities Revenue, Middlesex Water Co. Project, 7.25%, 7/01/21 ........................ 6,000,000 6,457,380
New Jersey Health Care Facilities Financing Authority Revenue,
Atlantic City Medical Center, Series C, 6.80%, 7/01/11 ....................................... 2,500,000 2,730,175
Atlantic Health Systems, Series A, 5.00%, 7/01/27 ............................................ 5,500,000 5,425,750
Berkeley Heights Convalescent Hospital, AMBAC Insured, 5.00%, 7/01/26 ........................ 6,000,000 5,920,320
Beth Israel Hospital Association Passaic, 7.80%, 7/01/04 ..................................... 2,720,000 2,800,893
Beth Israel Hospital Association Passaic, Refunding, 7.875%, 7/01/07 ......................... 1,000,000 1,029,570
Cathedral Health Service, Pre-Refunded, 7.25%, 2/15/21 ....................................... 2,020,000 2,203,315
Cathedral Health Services, Refunding, MBIA Insured, 5.25%, 8/01/21 ........................... 5,000,000 5,078,650
Cathedral Health, Series A, FHA Insured, Pre-Refunded, 7.25%, 2/15/10 ........................ 9,330,000 10,176,698
Christian Health Care Center, Refunding, Series A, 5.50%, 7/01/18 ............................ 1,200,000 1,198,488
Clara Maas Medical Center, Series B, Pre-Refunded, 7.30%, 7/01/09 ............................ 1,000,000 1,033,810
Clara Maas Medical Center, Series B, Pre-Refunded, 7.25%, 7/01/19 ............................ 2,435,000 2,516,938
East Orange General Hospital, Series B, 7.75%, 7/01/20 ....................................... 5,445,000 5,733,585
Elizabeth General Medical Center, Series C, 7.375%, 7/01/15 .................................. 4,890,000 5,163,596
Franciscan St. Mary's Hospital, 5.875%, 7/01/12 .............................................. 5,150,000 5,351,829
Hackensack Medical Center, FGIC Insured, Pre-Refunded, 6.25%, 7/01/21 ........................ 2,400,000 2,554,464
Hackensack University Medical Center, Refunding, Series B, MBIA Insured, 5.20%, 1/01/28 ...... 5,000,000 5,061,050
Holy Name Hospital, 6.00%, 7/01/25 ........................................................... 3,000,000 3,148,080
Holy Name Hospital, AMBAC Insured, 5.25%, 7/01/20 ............................................ 4,380,000 4,445,963
Holy Name Hospital, Series B, AMBAC Insured, Pre-Refunded, 7.00%, 7/01/08 .................... 2,000,000 2,136,260
Jersey Shore Medical Center, Refunding, AMBAC Insured, 5.875%, 7/01/24 ....................... 2,500,000 2,635,650
JFK Medical Center/Hartwyck, Refunding, MBIA Insured, 5.00%, 7/01/25 ......................... 7,855,000 7,752,571
John F. Kennedy Health Systems, Obligation Group Revenue, FGIC Insured, 5.70%, 7/01/25 ....... 5,000,000 5,276,950
Medical Center at Princeton Obligation Group, AMBAC Insured, 5.00%, 7/01/28 .................. 7,000,000 6,946,240
Monmouth Medical Center, Series C, FSA Insured,Pre-Refunded, 6.25%, 7/01/16 .................. 4,900,000 5,566,694
Monmouth Medical Center, Series C, FSA Insured,Pre-Refunded, 6.25%, 7/01/24 .................. 8,250,000 9,372,495
Morristown Memorial Hospital, Series C, Pre-Refunded, 7.125%, 7/01/08 ........................ 1,800,000 1,859,832
New Jersey Geriatric Center of Workmen's Circle Inc., Series A, FHA Mortgage Insured, 8.00%,
2/01/28 .................................................................................. 125,000 128,185
Newcomb Medical Center, Series A, 7.875%, 7/01/03 ............................................ 2,590,000 2,722,168
Pascack Valley Hospital Association, 5.125%, 7/01/28 ......................................... 6,000,000 5,673,780
Pascack Valley Hospital, Pre-Refunded, 6.90%, 7/01/21 ........................................ 3,565,000 3,903,461
Riverview Medical Center, 5.875%, 7/01/16 .................................................... 10,000,000 10,737,900
Shoreline Behavioral Health, MBIA Insured, 5.50%, 7/01/27 .................................... 1,500,000 1,564,740
Southern Ocean County Hospital, FSA Insured, 5.00%, 7/01/27 .................................. 2,000,000 1,973,000
St. Barnabas Health, Refunding, Series B, MBIA Insured, 5.00%, 7/01/24 ....................... 16,000,000 15,795,200
St. Joseph's Hospital and Medical Center, Refunding, 5.75%, 7/01/16 .......................... 2,050,000 2,198,092
St. Joseph's Hospital and Medical Center, Refunding, 6.00%, 7/01/26 .......................... 1,000,000 1,090,050
Wayne General Hospital, Series B, Pre-Refunded, 5.75%, 8/01/11 ............................... 1,720,000 1,829,633
Wayne General Hospital, Series B, Pre-Refunded, 5.875%, 8/01/18 .............................. 1,000,000 1,054,220
New Jersey State Building Authority Revenue, Refunding, 5.00%, 6/15/15 .......................... 5,000,000 5,063,850
New Jersey State Educational Facilities Authority Revenue,
Jersey State College, Series D, MBIA Insured, 6.125%, 7/01/22 ................................ 2,000,000 2,145,980
New Jersey Institute of Technology Revenue, Refunding, Series A, MBIA Insured, 6.00%,
7/01/24 .................................................................................. 1,455,000 1,579,504
New Jersey Institute of Technology, Series 95-E, MBIA Insured, 5.375%, 7/01/25 ............... 2,500,000 2,561,325
New Jersey Institute of Technology, Series A, MBIA Insured, 6.00%, 7/01/15 ................... 4,000,000 4,366,160
</TABLE>
117
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN NEW JERSEY TAX-FREE INCOME FUND AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------------
(a)LONG TERM INVESTMENTS (CONT.)
<S> <C> <C>
BONDS (CONT.)
New Jersey State Educational Facilities Authority Revenue, (cont.)
Princeton University, Series C, 5.25%, 7/01/25 ................................................. $ 2,760,000 $ 2,805,816
Rider College, Series D, AMBAC Insured, 6.20%, 7/01/17 ......................................... 3,000,000 3,238,530
Rowan College, Series E, AMBAC Insured, 6.00%, 7/01/26 ......................................... 9,810,000 10,655,524
Seton Hall University Project, Refunding, Series E,MBIA Insured, 5.60%, 7/01/16 ................ 1,765,000 1,882,867
Seton Hall University Project, Series C, BIG Insured, 6.85%, 7/01/19 ........................... 445,000 459,476
Seton Hall University Project, Series C, BIG Insured, Pre-Refunded, 6.85%, 7/01/19 ............. 555,000 573,054
Seton Hall University Project, Series D, 7.00%, 7/01/21 ........................................ 4,400,000 4,653,176
St. Peters College, Series B, 5.50%, 7/01/27 ................................................... 2,000,000 2,014,940
Stevens Institute of Technology, Series I, 5.00%, 7/01/18 ...................................... 1,100,000 1,091,849
Stevens Institute of Technology, Series I, 5.00%, 7/01/28 ...................................... 1,575,000 1,551,060
Trenton State College, Series A, MBIA Insured, 5.10%, 7/01/21 .................................. 3,600,000 3,610,332
Trenton State College, Series B, AMBAC Insured, 6.125%, 7/01/19 ................................ 4,780,000 5,174,589
Trenton State College, Series B, AMBAC Insured, 6.125%, 7/01/24 ................................ 7,845,000 8,481,073
New Jersey State Highway Authority Garden State Parkway, Senior Parkway Revenue,
6.20%, 1/01/10 ................................................................................. 5,000,000 5,698,800
6.25%, 1/01/14 ................................................................................. 2,500,000 2,683,750
6.00%, 1/01/16 ................................................................................. 2,900,000 3,033,690
New Jersey State Housing and Mortgage Finance Agency MFHR,
Montclarion Project, Series J, FHA Insured, 7.70%, 11/01/29 .................................... 2,170,000 2,258,059
Refunding, Series A, AMBAC Insured, 6.00%, 11/01/14 ............................................ 5,000,000 5,341,650
Refunding, Series A, AMBAC Insured, 6.05%, 11/01/20 ............................................ 12,500,000 13,326,625
Regency Park Project, Series H, 7.70%, 11/01/30 ................................................ 450,000 465,345
Series A, AMBAC Insured, 5.55%, 5/01/27 ........................................................ 2,000,000 2,041,800
New Jersey State Housing and Mortgage Finance Agency Revenue,
Home Buyer, Series B, MBIA Insured, 7.90%, 10/01/22 ............................................ 485,000 500,399
Home Buyer, Series D, MBIA Insured, 7.70%, 10/01/29 ............................................ 2,340,000 2,409,077
Home Buyer, Series J, MBIA Insured, 6.20%, 10/01/25 ............................................ 4,980,000 5,265,454
Home Buyer, Series N, MBIA Insured, 6.35%, 10/01/27 ............................................ 4,000,000 4,247,800
Home Buyer, Series U, MBIA Insured, 5.85%, 4/01/29 ............................................. 12,000,000 12,498,960
Section 8, Refunding, Series 1, 6.70%, 11/01/28 ................................................ 2,885,000 3,098,144
Section 8, Refunding, Series A, 6.95%, 11/01/13 ................................................ 12,400,000 13,328,884
New Jersey State Sports and Exposition Authority Convention Center Luxury Tax, Series A,
MBIA Insured,
6.60%, 7/01/15 ................................................................................. 8,000,000 8,758,080
6.25%, 7/01/20 ................................................................................. 6,800,000 7,322,444
Newark Board of Education, MBIA Insured, 5.875%, 12/15/14 ......................................... 3,250,000 3,554,948
North Brunswick Township Board of Education GO, Refunding, FGIC Insured, 5.00%, 2/01/15 ........... 2,000,000 2,022,860
Northern Mariana Islands Commonwealth Ports Authority Seaport Revenue, Series A, 6.40%, 3/15/28 ... 2,000,000 1,950,540
Ocean Township Municipal Utilities Authority Revenue, Refunding, MBIA Insured, 5.80%, 12/01/18 .... 7,400,000 7,855,470
Orange Township GO, Municipal Utility and Lease, Refunding, Series C, MBIA Insured, 5.10%, 12/01/17 3,035,000 3,072,361
Piscataway Township School District COP, MBIA Insured, Pre-Refunded, 7.50%, 6/15/09 ............... 1,000,000 1,012,790
(b)Plainfield Board Education, FSA Insured, 5.00%, 8/01/26 ......................................... 5,000,000 4,933,600
Port Authority of New York and New Jersey Revenue, Consolidated 74th Series, 6.75%, 8/01/26 ....... 1,000,000 1,076,440
Port Authority of New York and New Jersey Revenue,
Consolidated 67th Series, 6.875%, 1/01/25 ...................................................... 2,500,000 2,588,200
Consolidated 67th Series, AMBAC Insured, 6.875%, 1/01/25 ....................................... 750,000 778,785
Consolidated 71st Series, 6.50%, 1/15/26 ....................................................... 2,500,000 2,643,700
Consolidated 72nd Series, Pre-Refunded, 7.35%, 10/01/27 ........................................ 7,000,000 7,909,930
Consolidated 84th Series, 6.00%, 1/15/28 ....................................................... 1,125,000 1,193,681
Consolidated 94th Series, 6.00%, 12/01/16 ...................................................... 2,000,000 2,161,480
Consolidated 94th Series, 6.00%, 6/01/17 ....................................................... 5,000,000 5,403,700
Consolidated, 109th Series, FGIC Insured, 5.375%, 7/15/22 ...................................... 4,645,000 4,790,017
Delta Air Lines Special Project, Series 1, 6.95%, 6/01/08 ...................................... 5,000,000 5,433,050
Special Obligation Revenue, Consolidated, 102nd Series, MBIA Insured, 5.75%, 10/15/23 .......... 5,000,000 5,293,400
Port Authority of New York and New Jersey Special Obligation Revenue,
4th Installment, Special Project, 6.75%, 10/01/11 .............................................. 2,500,000 2,783,900
John F. Kennedy International Air Terminal, MBIA Insured, 5.75%, 12/01/22 ...................... 8,000,000 8,569,040
Puerto Rico Commonwealth GO, Pre-Refunded, 6.45%, 7/01/17 ......................................... 3,000,000 3,432,450
</TABLE>
118
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN NEW JERSEY TAX-FREE INCOME FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------
(a)LONG TERM INVESTMENTS (CONT.)
<S> <C> <C>
BONDS (CONT.)
Puerto Rico Commonwealth Highway and Transportation Authority Revenue, Series Q, Pre-Refunded,
8.00%, 7/01/18 ............................................................................. $ 8,000,000 $ 8,653,600
Puerto Rico Commonwealth Infrastructure Financing Authority, Special Tax Revenue, Series A,
7.90%, 7/01/07 ............................................................................. 120,000 123,996
7.75%, 7/01/08 ............................................................................. 1,350,000 1,380,321
7.50%, 7/01/09 ............................................................................. 100,000 102,221
Puerto Rico Commonwealth Urban Renewal and Housing Corp. Commonwealth Appropriation, Refunding,
7.875%, 10/01/04 ........................................................................... 1,000,000 1,042,180
Puerto Rico Electric Power Authority Revenue,
Refunding, Series N, 7.125%, 7/01/14 ....................................................... 2,355,000 2,422,023
Series T, 6.00%, 7/01/16 ................................................................... 11,535,000 12,482,024
Series X, 6.00%, 7/01/15 ................................................................... 2,000,000 2,167,120
Series X, 6.125%, 7/01/21 .................................................................. 5,000,000 5,711,700
Puerto Rico HFC Revenue,
MF Mortgage, Portfolio A-I, 7.50%, 4/01/22 ................................................. 4,185,000 4,348,299
Sixth Portfolio, Section 8 Assisted, FHA Mortgage Insured, Pre-Refunded, 7.75%, 12/01/26 ... 125,000 152,519
Puerto Rico HFC, SFMR, Portfolio No. 1, Series B, GNMA Secured, 7.65%, 10/15/22 ............... 660,000 692,020
Rutgers State University, Series A,
6.50%, 5/01/18 ............................................................................. 4,250,000 4,566,158
5.00%, 5/01/23 ............................................................................. 3,255,000 3,227,723
Salem County IPC, Financing Authority Revenue, Public Services, Electric and
Gas Co., Refunding, Series D, MBIA Insured, 6.55%, 10/01/29 ................................... 5,000,000 5,655,300
South Brunswick Township Board of Education GO, Refunding, Series AA, FGIC
Insured, 5.50%, 8/01/24 ....................................................................... 1,720,000 1,790,365
Stony Brook Regional Sewerage
Authority Revenue, Series A, Pre-Refunded, 7.40%, 12/01/09 .................................... 1,000,000 1,052,030
Union County Improvement Authority Revenue, Plainfield Board of Education, FGIC
Insured, 5.85%, 8/01/26 ....................................................................... 5,000,000 5,407,550
Union County Utilities Authority Solid Waste Revenue, sub. leased, Ogden Martin, Series A,
AMBAC Insured, 5.35%, 6/01/23 .............................................................. 3,000,000 3,047,910
University of Medicine and Dentistry COP, Series A, MBIA Insured, 5.00%, 9/01/22 .............. 1,700,000 1,672,307
University of Medicine and Dentistry Revenue, Series C, Pre-Refunded, 7.20%,
12/01/09 ................................................................................... 750,000 787,928
12/01/19 ................................................................................... 725,000 761,663
Virgin Islands PFA Revenue, senior lien, Fund Loan Notes, Refunding, Series A, 5.50%,
10/01/15 ................................................................................... 2,500,000 2,544,900
10/01/18 ................................................................................... 3,045,000 3,078,647
10/01/22 ................................................................................... 2,000,000 2,006,700
Warren Hills Regional School District COP, BIG Insured, Pre-Refunded, 7.375%, 12/15/09 ........ 1,200,000 1,214,940
------------
TOTAL BONDS ................................................................................... 724,311,573
------------
ZERO COUPON BONDS
(d)Middlesex County COP, MBIA Insured, zero cpn., 6/15/24 ...................................... 1,000,000 272,420
------------
TOTAL LONG TERM INVESTMENTS (COST $678,154,419) ............................................... 724,583,993
------------
(a)SHORT TERM INVESTMENTS .3%
New Jersey EDA, EDR, Dow Chemical, El Dorado Term 1984B, Refunding, Daily VRDN
and Put, 2.80%, 5/01/03 ....................................................................... 600,000 600,000
New Jersey State Turnpike Authority
Revenue, Series D, Weekly VRDN and Put, 1.95%, 1/01/18 ........................................ 800,000 800,000
Port Authority of New York and New Jersey Special Obligation Revenue, Versatile Structure,
Series 2, Daily VRDN and Put, 3.15%, 5/01/19 ............................................... 400,000 400,000
Puerto Rico Commonwealth Government Development Bank, Refunding, MBIA Insured, Weekly
VRDN and Put, 2.20%, 12/01/15 ................................................................. 400,000 400,000
------------
TOTAL SHORT TERM INVESTMENTS (COST $2,200,000) ................................................ 2,200,000
------------
TOTAL INVESTMENTS (COST $680,354,419) 99.5% ................................................... 726,783,993
OTHER ASSETS, LESS LIABILITIES .5% ............................................................ 3,749,196
------------
NET ASSETS 100.0% ............................................................................. $730,533,189
============
</TABLE>
See glossary of terms on page 134.
(a) Variable rate demand notes (VRDNs) are tax-exempt obligations which contain
a floating or variable interest rate adjustment formula and an
unconditional right of demand to receive payment of the principal balance
plus accrued interest at specified dates.
(b) Sufficient collateral has been segregated for securities traded on a
when-issued or delayed delivery basis.
(d) Zero coupon/step-up bonds. The current effective yield may vary. The
original accretion rate will remain constant.
See notes to financial statements.
119
FRANKLIN TAX-FREE TRUST
Financial Highlights
<TABLE>
<CAPTION>
FRANKLIN OREGON TAX-FREE INCOME FUND
YEAR ENDED FEBRUARY 28,
-----------------------------------------------------------------------------
CLASS A 1999 1998 1997 19961 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 11.86 $ 11.55 $ 11.60 $ 11.22 $ 11.70
-----------------------------------------------------------------------------
Income from investment operations:
Net investment income ...................... .59 .62 .63 .63 .63
Net realized and unrealized gains (losses) . (.01) .31 (.05) .38 (.49)
-----------------------------------------------------------------------------
Total from investment operations ............ .58 .93 .58 1.01 .14
-----------------------------------------------------------------------------
Less distributions from net investment income (.61) (.62) (.63) (.63) (.62)
-----------------------------------------------------------------------------
Net asset value, end of year ................ $ 11.83 $ 11.86 $ 11.55 $ 11.60 $ 11.22
-----------------------------------------------------------------------------
Total return* ............................... 5.12% 8.21% 5.13% 9.19% 1.36%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $ 483,664 $ 427,022 $ 384,003 $ 375,415 $ 349,458
Ratios to average net assets:
Expenses ................................... .67% .67% .66% .66% .65%
Net investment income ...................... 5.00% 5.33% 5.52% 5.51% 5.71%
Portfolio turnover rate ..................... 10.65% 12.18% 4.47% 6.52% 26.44%
</TABLE>
<TABLE>
<CAPTION>
CLASS C
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 11.92 $ 11.61 $ 11.65 $ 11.23
-------------------------------------------------------------
Income from investment operations:
Net investment income ...................... .53 .56 .56 .47
Net realized and unrealized gains (losses) . -- .31 (.04) .41
-------------------------------------------------------------
Total from investment operations ............ .53 .87 .52 .88
-------------------------------------------------------------
Less distributions from net investment income (.55) (.56) (.56) (.46)
-------------------------------------------------------------
Net asset value, end of year ................ $ 11.90 $ 11.92 $ 11.61 $ 11.65
-------------------------------------------------------------
Total return* ............................... 4.59% 7.66% 4.59% 7.99%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $ 32,962 $ 15,946 $ 7,100 $ 2,044
Ratios to average net assets:
Expenses ................................... 1.23% 1.22% 1.23% 1.24%**
Net investment income ...................... 4.44% 4.74% 4.93% 4.87%**
Portfolio turnover rate ..................... 10.65% 12.18% 4.47% 6.52%
</TABLE>
* Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year. Prior
to May 1, 1994, dividends from net investment income were reinvested at the
offering price.
** Annualized
1 For the period May 1, 1995 (effective date) to February 29, 1996 for Class
C.
See notes to financial statements.
120
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STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN OREGON TAX-FREE INCOME FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 102.3%
<S> <C> <C>
Albany Water Revenue, Second Lien, Pre-Refunded, 7.25%, 8/01/09 .................................. $ 1,000,000 $ 1,017,390
Bay Area Health District Hospital Facility Authority, Health Facilities Revenue, Evergreen
Court Project, 7.25%, 10/01/14 ................................................................ 2,000,000 2,127,960
Bend Urban Renewal Agency Tax Revenue, Series A, Pre-Refunded,
6.85%, 9/01/06 ................................................................................ 600,000 600,000
7.00%, 9/01/11 ................................................................................ 750,000 750,000
Benton County Hospital Facilities Authority Revenue, Samaritan Health Services Project, Refunding,
5.20%, 10/01/17 ............................................................................... 4,000,000 4,006,720
5.125%, 10/01/28 .............................................................................. 4,500,000 4,435,740
Benton County Hospital Facilities Authority, Good Samaritan Hospital, Corvallis, Pre-Refunded,
6.25%, 10/01/09 ............................................................................... 1,125,000 1,234,103
Chemeketa Community College District, FGIC Insured, Pre-Refunded, 5.80%,
6/01/12 .......................................................................................... 1,000,000 1,115,500
Clackamas Community College District, MBIA Insured,
Pre-Refunded, 5.80%, 6/01/26 ..................................................................... 1,000,000 1,115,500
Clackamas County Health Facilities Authority Hospital Revenue, Adventist Health, Refunding,
Series A, MBIA Insured, 6.35%, 3/01/09 ........................................................ 4,945,000 5,318,397
Clackamas County Hospital Facilities Authority Revenue,
Gross Willamette Falls, Refunding, 5.75%, 4/01/15 ............................................. 2,250,000 2,322,383
Jennings Lodge Project, GNMA Secured, 7.50%, 10/20/31 ......................................... 2,990,000 3,151,251
Kaiser Permanente, Series A, 6.50%, 4/01/11 ................................................... 1,635,000 1,739,002
Kaiser Permanente, Series A, 5.375%, 4/01/14 .................................................. 2,500,000 2,588,725
Kaiser Permanente, Series A, 6.25%, 4/01/21 ................................................... 4,950,000 5,213,093
Sisters of Providence Project, 8.125%, 10/01/07 ............................................... 110,000 111,412
Willamette View Inc. Project, Refunding, 6.10%, 11/01/12 ...................................... 500,000 521,045
Willamette View Inc. Project, Refunding, 6.30%, 11/01/21 ...................................... 1,500,000 1,565,745
Clackamas County USD No. 115, AMBAC Insured, Pre-Refunded, 6.15%, 6/01/14 ........................ 4,000,000 4,518,760
Clairmont Water District Revenue, 6.50%, 2/01/12 ................................................. 1,125,000 1,158,840
Deschutes County Hospital Facilities Authority Hospital Revenue, St. Charles Medical Center,
6.00%, 1/01/13 ................................................................................ 3,000,000 3,221,040
Douglas County Hospital Facilities Authority Revenue, Catholic Health Facilities, Series B, MBIA
Insured, 6.00%, 11/15/15 ...................................................................... 1,950,000 2,143,343
Emerald People's Utility District Electric System Revenue, AMBAC Insured, Series B, Pre-Refunded,
7.30%, 11/01/11 ............................................................................... 500,000 514,275
Eugene Electric Utility System Revenue,
Pre-Refunded, 6.65%, 8/01/10 .................................................................. 655,000 703,070
Pre-Refunded, 6.70%, 8/01/11 .................................................................. 700,000 752,171
Pre-Refunded, 5.75%, 8/01/16 .................................................................. 3,000,000 3,308,070
Refunding, FSA Insured, 5.00%, 8/01/18 ........................................................ 4,500,000 4,488,705
Refunding, FSA Insured, 5.05%, 8/01/22 ........................................................ 13,620,000 13,639,613
Eugene Public Safety Facilities, FGIC Insured, 5.70%, 6/01/16 .................................... 500,000 529,100
Eugene Trojan Nuclear Project Revenue, Refunding, 5.90%, 9/01/09 ................................. 840,000 841,344
Guam Airport Authority Revenue, Series B,
6.60%, 10/01/10 ............................................................................... 750,000 822,780
6.70%, 10/01/23 ............................................................................... 1,900,000 2,085,516
Guam Power Authority Revenue, Series A, 6.30%, 10/01/12 .......................................... 825,000 892,741
Hermiston GO, AMBAC Insured, 6.00%, 8/01/15 ...................................................... 1,000,000 1,077,250
Hillsborough Hospital Facilities Authority Revenue, Refunding, 5.75%, 10/01/12 ................... 205,000 216,708
Klamath Falls Intercommunity Hospital Revenue, Merle West Medical Center Project,
7.00%, 6/01/02 ................................................................................ 1,500,000 1,628,385
7.25%, 6/01/06 ................................................................................ 2,310,000 2,507,159
Lane and Douglas Counties GO, School District No. 28J Fern Ridge, FGIC Insured, 5.00%, 6/01/17 ... 1,000,000 1,007,290
Lane County COP, Fairground Project, 7.00%, 8/01/04 .............................................. 1,000,000 1,012,530
Lane County PCR, Weyerhaeuser Co. Project, Refunding, 6.50%, 7/01/09 ............................. 11,575,000 12,566,515
Lebanon Wastewater Revenue, Refunding, 5.875%, 6/01/20 ........................................... 2,425,000 2,455,676
Marion County COP, Courthouse Square Project, Series A, MBIA Insured,
4.80%, 6/01/17 ................................................................................ 1,140,000 1,119,526
4.80%, 6/01/18 ................................................................................ 1,165,000 1,137,739
5.00%, 6/01/23 ................................................................................ 2,000,000 1,972,200
Marion County Housing Authority Revenue, Elliott Residence Project, GNMA Secured, 7.50%, 10/20/25 1,240,000 1,396,017
Marion County UHSD No. 7J, Pre-Refunded, 6.00%, 6/01/13 .......................................... 1,000,000 1,114,380
Medford Hospital Facilities Authority Revenue,
Asante Health System, Series A, MBIA Insured, 5.00%, 8/15/18 .................................. 13,700,000 13,548,478
Asante Health System, Series A, MBIA Insured, 5.00%, 8/15/24 .................................. 6,300,000 6,192,963
Asante Health Systems, Series B, MBIA Insured, 5.125%, 8/15/28 ................................ 11,500,000 11,513,455
Gross Rogue Valley Health Services, MBIA Insured, Pre-Refunded, 6.75%, 12/01/20 ............... 4,475,000 4,818,859
Metropolitan Service District Convention Center GO, Series A, 6.25%, 1/01/13 ..................... 4,865,000 5,068,698
Multnomah County Drain District No. 1 Assessment, MBIA Insured, 5.25%, 7/01/17 ................... 1,000,000 1,025,000
</TABLE>
121
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STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN OREGON TAX-FREE INCOME FUND AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
<S> <C> <C>
Multnomah Educational Service District, 5.40%, 6/01/17 ........................................ $ 1,000,000 $ 1,036,240
Northern Mariana Islands Commonwealth Ports Authority Seaport Revenue, Series A, 6.40%, 3/15/28 3,500,000 3,413,445
Oak Lodge Water District GO, AMBAC Insured,
7.40%, 12/01/08 ............................................................................ 215,000 250,370
7.50%, 12/01/09 ............................................................................ 215,000 250,146
Ontario Catholic Health Revenue, Dominican Sisters Holy Rosary, 6.10%, 11/15/17 ............... 1,500,000 1,602,045
Oregon City Sewer Revenue, Pre-Refunded, 6.875%, 10/01/19 ..................................... 4,000,000 4,702,720
Oregon Health Sciences University Revenue, Series A, MBIA Insured, 5.25%,
7/01/25 .................................................................................... 100,000 102,212
7/01/28 .................................................................................... 2,000,000 2,045,740
Oregon State Department of Administrative Services COP,
Series A, AMBAC Insured, 5.80%, 5/01/24 .................................................... 5,000,000 5,417,250
Series C, MBIA Insured, 5.75%, 5/01/17 ..................................................... 2,000,000 2,155,820
Oregon State Department of General Services COP,
Real Property Financing Program, Series A, AMBAC Insured, Pre-Refunded, 7.50%, 9/01/15 ..... 750,000 810,998
Real Property Financing Program, Series A, MBIA Insured, Pre-Refunded, 7.20%, 1/15/15 ...... 10,000 10,551
Refunding, Series D, MBIA Insured, 5.80%, 3/01/15 .......................................... 1,000,000 1,048,910
Series B, MBIA Insured, Pre-Refunded, 7.20%, 1/15/15 ....................................... 150,000 158,267
Series F, AMBAC Insured, Pre-Refunded, 7.50%, 9/01/15 ...................................... 950,000 1,027,264
Series G, AMBAC Insured, 6.25%, 9/01/15 .................................................... 750,000 805,718
Oregon State Department of Transportation Revenue GO, Regional Light Rail Federal Westside
Project, MBIA Insured, 6.10%,
6/01/07 .................................................................................... 2,000,000 2,217,220
6.20%, 6/01/08 ............................................................................. 2,500,000 2,775,675
6.25%, 6/01/09 ............................................................................. 1,750,000 1,934,818
(b)Oregon State Department Services, COP, Series A, Refunding, 5.00%, 5/01/24 .................. 35,000,000 34,749,750
Oregon State EDR, Georgia Pacific Corp. Project,
Refunding, Series 183, 5.70%, 12/01/25 ..................................................... 1,500,000 1,514,250
Series CLVII, 6.35%, 8/01/25 ............................................................... 18,500,000 19,599,825
Oregon State Elderly Housing GO, Series A, 7.125%, 8/01/30 .................................... 635,000 655,803
Oregon State GO,
Alternative Energy Project, Refunding, Series D, 5.00%, 1/01/28 ............................ 4,265,000 4,232,501
Board of Higher Education, 6.50%, 10/01/17 ................................................. 750,000 800,393
Board of Higher Education, Baccalaureate, Series A, 5.00%, 8/01/22 ......................... 5,000,000 5,004,100
Board of Higher Education, Baccalaureate, Series A, 5.00%, 8/01/27 ......................... 6,000,000 5,981,640
Board of Higher Education, Series A, 5.65%, 8/01/27 ........................................ 4,440,000 4,756,927
Board of Higher Education, Series C, 5.65%, 8/01/27 ........................................ 1,460,000 1,564,215
Elderly and Disabled Housing Authority, Series A, 6.00%, 8/01/15 ........................... 910,000 975,684
Elderly and Disabled Housing Authority, Series A, 6.00%, 8/01/21 ........................... 455,000 485,262
Elderly and Disabled Housing Authority, Series A, 5.375%, 8/01/28 .......................... 1,950,000 1,997,561
Elderly and Disabled Housing Authority, Series B, 6.10%, 8/01/17 ........................... 1,410,000 1,506,331
Elderly and Disabled Housing Authority, Series B, 6.25%, 8/01/23 ........................... 2,015,000 2,244,146
Elderly and Disabled Housing Authority, Series B, 6.375%, 8/01/24 .......................... 2,155,000 2,364,401
Elderly and Disabled Housing Authority, Series C, 6.50%, 8/01/22 ........................... 6,000,000 6,608,820
Veteran's Welfare, Series 75, 5.85%, 10/01/15 .............................................. 800,000 883,424
Veteran's Welfare, Series 75, 5.875%, 10/01/18 ............................................. 460,000 494,054
Veteran's Welfare, Series 75, 6.00%, 4/01/27 ............................................... 2,655,000 2,956,104
Veteran's Welfare, Series 76-A, 6.05%, 10/01/28 ............................................ 3,000,000 3,319,260
Veteran's Welfare, Series 77, 5.30%, 10/01/29 .............................................. 5,000,000 5,087,850
Oregon State Health, Housing, Educational and Cultural Facilities Authority Revenue, Lewis
and Clark College Project, Series A, 6.125%, 10/01/24 ...................................... 10,500,000 11,540,550
Oregon State Housing and Community Services Department Finance Housing Revenue SFM,
Series A, 5.75%, 7/01/12 ................................................................... 850,000 882,283
Series A, 6.35%, 7/01/14 ................................................................... 2,920,000 3,093,010
Series A, 6.40%, 7/01/18 ................................................................... 1,340,000 1,412,628
Series A, 6.45%, 7/01/26 ................................................................... 3,100,000 3,264,734
Series B, 6.875%, 7/01/28 .................................................................. 12,000,000 12,705,960
Series C, 6.20%, 7/01/15 ................................................................... 2,480,000 2,604,645
Series C, 6.40%, 7/01/26 ................................................................... 1,180,000 1,246,045
Series D, 6.80%, 7/01/27 ................................................................... 1,750,000 1,837,990
Series E, 7.00%, 7/01/09 ................................................................... 125,000 133,978
</TABLE>
122
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STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN OREGON TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
<S> <C> <C>
Oregon State Housing and Community Services Department Finance Housing Revenue SFM, (cont.)
Series E, 5.80%, 7/01/16 ....................................................................... $ 800,000 $ 820,088
Series E, 6.75%, 7/01/16 ....................................................................... 45,000 45,029
Series E, 7.15%, 7/01/25 ....................................................................... 425,000 455,779
Series F, 7.00%, 7/01/22 ....................................................................... 910,000 916,197
Series F, 5.65%, 7/01/28 ....................................................................... 1,000,000 1,023,490
Series G, 6.80%, 7/01/22 ....................................................................... 620,000 657,355
Series H, 5.65%, 7/01/28 ....................................................................... 2,000,000 2,034,740
Oregon State Housing and Community Services Department Finance Housing Revenue, Multi-Unit,
Series A, 6.80%, 7/01/13 ....................................................................... 6,710,000 7,089,786
Series A, 6.15%, 7/01/21 ....................................................................... 910,000 971,097
Series C, 6.85%, 7/01/22 ....................................................................... 180,000 189,853
Port Astoria GO, MBIA Insured, Pre-Refunded, 6.60%, 9/01/11 ....................................... 450,000 484,160
Port Morrow PCR, Idaho Power Co., Boardman Project, 7.25%, 8/01/08 ................................ 2,200,000 2,233,154
Port of Portland International Airport Revenue, Portland International Airport,
Series 7A, MBIA Insured, 6.75%, 7/01/09 ........................................................ 990,000 1,057,756
Series 7A, MBIA Insured, Pre-Refunded, 6.75%, 7/01/09 .......................................... 510,000 552,611
Series 7-B, MBIA Insured, Pre-Refunded, 7.10%, 7/01/21 ......................................... 2,800,000 3,405,248
Series 10, FGIC Insured, 5.75%, 7/01/25 ........................................................ 300,000 317,595
Series 12C, FGIC Insured, 5.00%, 7/01/28 ....................................................... 5,000,000 4,872,050
Series 12C, FGIC Insured., 5.00%, 7/01/18 ...................................................... 1,500,000 1,494,375
Port of Portland International Airport Special Obligation Revenue, Delta Airlines Inc. Project,
6.20%, 9/01/22 ................................................................................. 4,000,000 4,187,080
Port St. Helens PCR,
Boise Cascade Corp. Project, Refunding, 5.65%, 12/01/27 ........................................ 7,750,000 7,767,825
Portland General Electric Co. Project, Series A, 5.25%, 8/01/14 ................................ 3,600,000 3,651,948
Port Umpqua PCR, International Paper Co. Project, Refunding, Series B, 5.20%, 6/01/11 ............. 2,200,000 2,260,016
Portland Airport Way-Urban Renewal and Redevelopment Tax Increment, Sub-Series B-3, FGIC Insured,
Pre-Refunded, 7.60%, 6/01/10 ................................................................... 2,825,000 2,969,923
Portland COP, PBA, Series A, Pre-Refunded, 7.25%, 4/01/08 ......................................... 2,000,000 2,006,540
Portland Hospital Facilities Authority Hospital Revenue, Legacy Health System, Refunding,
Series A, AMBAC Insured, 6.70%, 5/01/21 ........................................................ 5,500,000 5,862,505
Series B, AMBAC Insured, 6.70%, 5/01/21 ........................................................ 8,475,000 9,033,587
Portland Housing Authority MFR, Berry Ridge Project, 6.30%, 5/01/29 ............................... 1,500,000 1,561,815
Portland Housing Authority Revenue, 7.10%, 7/01/15 ................................................ 1,000,000 1,046,180
Portland Hydroelectric Power Revenue, Bull Run Project, Series C, 7.00%, 10/01/16 ................. 635,000 635,584
Portland International Airport, Portland International Airport, Series 7-B, MBIA Insured,
7.10%, 7/01/21 ................................................................................. 105,000 114,021
Pre-Refunded, 7.10%, 7/01/21 ................................................................... 95,000 103,340
Portland MFHR, Civic Stadium Housing Project, Series A, 6.00%, 3/01/17 ............................ 1,000,000 1,042,220
Portland Oregon GO, Revenue, Limited Tax, Series A, 5.00%, 4/01/18 ................................ 3,380,000 3,338,933
Portland Sewer System Revenue,
Refunding, Series A, FGIC Insured, 5.00%, 6/01/15 .............................................. 500,000 503,995
Series A, Pre-Refunded, 6.25%, 6/01/15 ......................................................... 9,100,000 10,225,124
Portland Urban Renewal and Redevelopment, Downtown Waterfront, Refunding, Series A, 6.40%,
6/01/08 ........................................................................................ 5,555,000 5,952,960
Portland Water System Revenue, Series A, 5.00%, 8/01/16 ........................................... 1,000,000 1,004,730
Puerto Rico Commonwealth Aqueduct and Sewer Authority Revenue, Series A, FSA Insured, Pre-Refunded,
9.00%, 7/01/09 ................................................................................. 75,000 92,932
Puerto Rico Commonwealth GO,
Pre-Refunded, 6.45%, 7/01/17 ................................................................... 1,000,000 1,144,150
Public Improvement, Refunding, 5.375%, 7/01/25 ................................................. 1,000,000 1,030,710
Puerto Rico Commonwealth Highway and Transportation Authority Revenue,
Series Q, Pre-Refunded, 8.00%, 7/01/18 ......................................................... 4,000,000 4,326,800
Series Y, 5.50%, 7/01/36 ....................................................................... 13,000,000 13,934,440
Series Y, 5.50%, 7/01/26 ....................................................................... 7,275,000 7,642,606
Puerto Rico Commonwealth Infrastructure Financing Authority, Special Tax Revenue, Series A, 7.75%,
7/01/08 ........................................................................................ 280,000 286,289
Puerto Rico Electric Power Authority Revenue,
Refunding, Series O, 7.125%, 7/01/14 ........................................................... 1,065,000 1,095,310
Refunding, Series X, 5.50%, 7/01/25 ............................................................ 2,600,000 2,695,264
(b)Series DD, 5.00%, 7/01/28 .................................................................... 6,000,000 5,846,460
Series R, Pre-Refunded, 6.25%, 7/01/17 ......................................................... 2,070,000 2,271,473
Series X, 6.00%, 7/01/15 ....................................................................... 2,500,000 2,708,900
Puerto Rico HFC Revenue, Sixth Portfolio, Section 8 Assisted, FHA Mortgage Insured, Pre-Refunded,
7.75%, 12/01/26 ................................................................................ 395,000 481,959
</TABLE>
123
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STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN OREGON TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
<S> <C> <C>
Puerto Rico HFC, SFMR, Portfolio No. 1, Series B, GNMA Secured, 7.65%, 10/15/22 ................... $ 240,000 $ 251,645
Puerto Rico Housing Bank and Financing Authority SFMR, Homeownership Fifth Portfolio, Pre-Refunded,
7.50%, 12/01/15 ................................................................................ 500,000 525,675
Puerto Rico PBA Revenue, Government Facilities, Series B, 5.25%, 7/01/21 .......................... 3,700,000 3,746,805
Puerto Rico PBA, Public Education and Health Facilities, Refunding, Series M, 5.75%, 7/01/15 ...... 2,500,000 2,633,200
Puerto Rico Telephone Authority Revenue, Refunding, Series L, 6.125%, 1/01/22 ..................... 1,100,000 1,163,195
Salem Educational Facilities Revenue, Williamette University, Refunding, 6.10%, 4/01/14 ........... 1,000,000 1,056,530
Salem GO, Series A, 5.875%, 1/01/07 ............................................................... 1,250,000 1,304,263
Salem-Keizer School District No. 24J GO, FGIC Insured, Pre-Refunded, 6.00%,
6/01/13 ........................................................................................ 4,345,000 4,806,222
6/01/14 ........................................................................................ 4,395,000 4,861,529
Taft-Nelscott-Delake Rural Fire Protection District, 6.00%, 6/01/16 ............................... 1,110,000 1,206,147
Tillamook Peoples Utilities District, Pre-Refunded, 5.75%, 1/01/28 ................................ 2,765,000 2,989,435
Tri-County Metropolitan Transportation District GO, Light Rail Extended, Series A, 6.00%, 7/01/12 . 2,500,000 2,678,525
Unified Sewer Agency Sewer Revenue, Pre-Refunded, 7.00%, 11/01/09 ................................. 2,700,000 2,770,929
Virgin Islands PFA Revenue, Senior Lien, Fund Loan Notes, Refunding, Series A, 5.50%,
10/01/15 ....................................................................................... 1,635,000 1,664,365
10/01/18 ....................................................................................... 2,400,000 2,426,520
Virgin Islands Water and Power Authority Electric System Revenue, Refunding, 5.30%,
7/01/18 ........................................................................................ 2,500,000 2,496,800
7/01/21 ........................................................................................ 1,400,000 1,389,024
Wasco County Hospital Facility Authority Hospital Revenue, 7.375%, 7/01/00 ........................ 2,000,000 2,072,340
Washington County Housing Authority MFHR,
Bethany Meadows II Project, 5.85%, 9/01/27 ..................................................... 1,435,000 1,501,426
Terrace View Project, 5.50%, 12/01/17 .......................................................... 1,725,000 1,790,067
Terrace View Project, 5.60%, 12/01/22 .......................................................... 1,360,000 1,407,627
Washington County School District No. 088 GO, J Sherwood, FSA Insured,
6.10%, 6/01/12 ................................................................................. 190,000 209,963
Pre-Refunded, 6.10%, 6/01/12 ................................................................... 810,000 910,246
Washington County Unified Sewer Agency Revenue, senior lien, Series A,
AMBAC Insured, 6.20%, 10/01/10 ................................................................. 470,000 514,580
AMBAC Insured, Pre-Refunded, 6.125%, 10/01/12 .................................................. 1,000,000 1,118,500
Pre-Refunded, 6.20%, 10/01/10 .................................................................. 3,530,000 3,961,507
Western Lane Hospital District Hospital Facilities Authority Revenue, Sisters of St. Joseph of
Peace Health and Hospital Services,
MBIA Insured, Pre-Refunded, 7.125%, 8/01/17 .................................................... 2,700,000 2,799,495
Refunding, MBIA Insured, 5.875%, 8/01/12 ....................................................... 4,400,000 4,834,764
Yamhill County GO, USD No. 029J Newberg, FSA Insured, 6.10%, 6/01/11 .............................. 5,000,000 5,582,850
------------
TOTAL LONG TERM INVESTMENTS (COST $500,936,176) ................................................... 528,321,851
(a)SHORT TERM INVESTMENTS 2.0%
Oregon State GO,
Series 73E, Weekly VRDN and Put, 2.95%, 12/01/16 ............................................... 4,300,000 4,300,000
Series 73 F, Weekly VRDN and Put, 2.95%, 12/01/17 .............................................. 1,000,000 1,000,000
Port of Portland International Airport Special Obligation Revenue, Horizon Airlines Inc. ..........
Project, Daily VRDN and Put, 3.40%, 6/15/27 .................................................... 100,000 100,000
Port of Portland PCR, Reynolds Metals, Daily VRDN and Put, 3.35%, 12/01/09 ........................ 1,100,000 1,100,000
Puerto Rico Commonwealth Government Development Bank, Refunding, MBIA Insured, Weekly VRDN and
Put, 2.40%, 12/01/15 ........................................................................... 1,500,000 1,500,000
Puerto Rico Commonwealth Highway and Transportation Authority Revenue, Series A, AMBAC Insured,
Weekly VRDN and Put 2.60%, 7/01/28 ............................................................. 2,700,000 2,700,000
------------
TOTAL SHORT TERM INVESTMENTS (COST $10,700,000) ................................................... 10,700,000
TOTAL INVESTMENTS (COST $511,636,176) 104.3% ...................................................... 539,021,851
OTHER ASSETS, LESS LIABILITIES (4.3%) ............................................................. (22,395,171)
------------
NET ASSETS 100.0% ................................................................................. $516,626,680
</TABLE>
See glossary of terms on page 134.
(a) Variable rate demand notes (VRDNs) are tax-exempt obligations which contain
a floating or variable interest rate adjustment formula and an
unconditional right of demand to receive payment of the principal balance
plus accrued interest at specified dates.
(b) Sufficient collateral has been segregated for securities traded on a
when-issued or delayed delivery basis.
See notes to financial statements.
124
FRANKLIN TAX-FREE TRUST
Financial Highlights
FRANKLIN PENNSYLVANIA TAX-FREE INCOME FUND
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28,
----------------------------------------------------------------
CLASS A 1999 1998 1997 1996(1) 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 10.56 $ 10.39 $ 10.44 $ 10.16 $ 10.56
Income from investment operations:
Net investment income ...................... .55 .58 .60 .62 .62
Net realized and unrealized gains (losses) . (.02) .32 (.04) .29 (.41)
Total from investment operations ............ .53 .90 .56 .91 .21
Less distributions from:
Net investment income ...................... (.55) (.58) (.61) (.63) (.61)
In excess of net investment income ......... (.01) (.01) -- -- --
Net realized gains ......................... (.01) (.14) -- -- --
----------------------------------------------------------------
Total distributions ......................... (.57) (.73) (.61) (.63) (.61)
----------------------------------------------------------------
Net asset value, end of year ................ $ 10.52 $ 10.56 $ 10.39 $ 10.44 $ 10.16
----------------------------------------------------------------
Total return* ............................... 5.11% 8.90% 5.53% 9.15% 2.22%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $ 758,942 $ 713,141 $ 658,339 $ 639,847 $ 587,366
Ratios to average net assets:
Expenses ................................... .65% .65% .64% .64% .63%
Net investment income ...................... 5.17% 5.49% 5.84% 5.96% 6.15%
Portfolio turnover rate ..................... 11.11% 12.74% 22.24% 9.71% 12.91%
CLASS C
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 10.61 $ 10.43 $ 10.47 $ 10.17
--------------------------------------------------
Income from investment operations:
Net investment income ...................... .49 .52 .55 .47
Net realized and unrealized gains (losses) . (.03) .33 (.05) .30
--------------------------------------------------
Total from investment operations ............ .46 .85 .50 .77
--------------------------------------------------
Less distributions from:
Net investment income ...................... (.49)(2) (.53) (.54) (.47)
Net realized gains ......................... (.01) (.14) -- --
--------------------------------------------------
Total distributions ......................... (.50) (.67) (.54) (.47)
--------------------------------------------------
Net asset value, end of year ................ $ 10.57 $ 10.61 $ 10.43 $ 10.47
--------------------------------------------------
Total return* ............................... 4.50% 8.35% 4.98% 7.71%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $ 41,917 $ 25,899 $ 11,935 $ 3,110
Ratios to average net assets:
Expenses ................................... 1.21% 1.21% 1.21% 1.22%**
Net investment income ...................... 4.61% 4.89% 5.22% 5.36%**
Portfolio turnover rate ..................... 11.11% 12.74% 22.24% 9.71%
</TABLE>
* Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year. Prior to May
1, 1994, dividends from net investment income were reinvested at the offering
price.
** Annualized
(1) For the period May 1, 1995 (effective date) to February 29, 1996 for Class
C.
(2) Includes distributions in excess of net investment income in the amount of
$.004.
See notes to financial statements. 125
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN PENNSYLVANIA TAX-FREE INCOME FUND AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS 98.4%
BONDS 97.7%
Abington School, FGIC Insured, Pre-Refunded, 6.00%, 5/15/26 .......................... $ 2,000,000 $ 2,247,960
Allegheny County Higher Education Building Authority, Duquesne University
Project, 5.00%, 3/01/21 ............................................................ 1,000,000 984,270
Allegheny County Hospital Development Authority Revenue,
Allegheny General Hospital Project, Series A, MBIA Insured, 6.25%, 9/01/20 ......... 10,000,000 10,163,800
Allegheny Hospital, South Hills Health System, Series A, MBIA Insured,
5.875%, 5/01/26 ................................................................. 1,700,000 1,823,624
Health Center, Canterbury Place, 5.375%, 12/01/21 .................................. 5,000,000 5,107,550
Health Center, University of Pittsburgh Medical Center, Series B,
MBIA Insured, 5.00%, 7/01/16 .................................................... 4,000,000 3,985,960
University of Pittsburgh Health Center, Refunding, Series A, MBIA
Insured, 5.625%, 4/01/27 ........................................................ 10,450,000 10,944,808
Allegheny County IDAR,
Environmental Improvement, Refunding, 6.10%, 1/15/18 ............................... 2,000,000 2,113,680
Environmental Improvement, USX Corp., Refunding, 5.50%, 12/01/29 ................... 10,000,000 9,987,300
Environmental Improvement, USX Corp., Refunding, 5.60%, 9/01/30 .................... 7,530,000 7,542,199
Kaufmann Medical Project, Refunding, Series A, MBIA Insured, 6.80%, 3/01/15 ........ 1,000,000 1,095,740
Allegheny County RDAR, Home Improvement Loan, Refunding, Series A, 5.90%, 2/01/11 .... 1,555,000 1,606,502
Allegheny County Residential Finance Authority Mortgage Revenue SFM,
Series DD-1, GNMA Secured, 5.35%, 11/01/19 ......................................... 1,000,000 1,004,230
Series DD-2, GNMA Secured, 5.40%, 11/01/29 ......................................... 2,000,000 2,013,620
Allegheny County Residential Finance Authority Mortgage Revenue,
Ladies Grand Army Republic Health Facilities Project, Series G, FHA
Insured, 6.35%, 10/01/36 ........................................................ 1,960,000 2,076,287
Lexington Home, Series E, 7.125%, 2/01/27 .......................................... 3,715,000 3,851,563
MFMR, Series D, FHA Insured, 7.50%, 6/01/33 ........................................ 1,400,000 1,461,656
Series J, GNMA Secured, 7.50%, 6/01/17 ............................................. 1,915,000 1,959,217
Series K, GNMA Secured, 7.75%, 12/01/22 ............................................ 1,815,000 1,857,634
SFMR, Series M, GNMA Secured, 7.90%, 6/01/11 ....................................... 1,075,000 1,123,225
SFMR, Series T, GNMA Secured, 6.95%, 5/01/17 ....................................... 810,000 854,153
Ambridge Area School District, Refunding, Series A, FGIC Insured, 5.25%, 11/01/16 .... 2,730,000 2,786,921
Beaver County Hospital Authority Revenue, Beaver County Medical Center Inc.,
AMBAC Insured, Pre-Refunded, 6.625%, 7/01/10 ....................................... 5,000,000 5,550,500
Beaver County IDA, PCR,
Beaver Valley Project, Pennsylvania Power and Light, Refunding, Series A,
7.15%, 9/01/21 .................................................................. 4,400,000 4,698,144
Ohio Edison Project, Series A, 7.75%, 9/01/24 ...................................... 6,475,000 6,705,381
Bensalem Township, Refunding, FGIC Insured, 5.75%, 12/01/16 .......................... 3,000,000 3,191,280
Berks County Municipal Authority Revenue, FGIC Insured, Pre-Refunded, 7.00%, 5/15/18 . 4,000,000 4,588,360
Bethlehem Area School District, MBIA Insured, Pre-Refunded, 6.00%, 3/01/16 ........... 4,000,000 4,483,920
Bradford County IDA, Solid Waste Disposal Revenue, International Paper Co. Projects,
Series A, 6.60%, 3/01/19 .......................................................... 2,500,000 2,744,900
Burrell School District, FGIC Insured, Pre-Refunded, 5.60%, 11/15/15 ................. 2,890,000 3,176,630
(b) Butler Area School District, Refunding, Series B, FGIC Insured, 5.00%, 10/01/26 .... 5,000,000 4,868,450
Butler County IDA, PCR, Witco Corp. Project, Refunding, 5.85%, 12/01/23 .............. 2,000,000 2,097,300
Cambria County HDA, Hospital Revenue, Conemaugh Valley Memorial Hospital,
Refunding, Series B, 6.375%, 7/01/18 .............................................. 3,500,000 3,858,155
Cambria County IDA, PCR, Pennsylvania Electric Co. Project, Refunding,
Series A, MBIA Insured, 5.80%, 11/01/20 ........................................... 5,000,000 5,390,450
Chartiers Valley Industrial and Commercial Development Authority Revenue,
First Mortgage, Asbury Place Project, Refunding, 6.50%, 2/01/36 ................... 4,250,000 4,624,128
Clarion County Hospital Authority Revenue, Clarion Hospital Project,
Refunding, 5.40%, 7/01/07 ......................................................... 1,000,000 1,017,360
5.55%, 7/01/09 .................................................................... 2,365,000 2,430,321
5.60%, 7/01/10 .................................................................... 600,000 614,124
5.75%, 7/01/12 .................................................................... 1,795,000 1,844,075
5.75%, 7/01/17 .................................................................... 700,000 710,829
5.625%,7/01/21 .................................................................... 1,500,000 1,502,775
Cranberry Township Municipal Authority Water and Sewer Revenue,
MBIA Insured, 5.125%, 12/01/26 .................................................... 1,450,000 1,455,467
Dauphin County General Authority Health System Revenue, Pinnacle Health
System Project, Refunding, MBIA Insured, 5.50%, 5/15/17 ........................... 4,280,000 4,455,951
Dauphin County General Authority Hospital Revenue, Hapsco-Western
Hospital Project, Refunding,
Series A, MBIA Insured, 6.50%, 7/01/12 ............................................. 4,500,000 4,881,690
Series B, MBIA Insured, 6.25%, 7/01/16 ............................................. 5,000,000 5,337,450
Dauphin County General Authority, Sub Series 0003, AMBAC Insured, 4.75%, 6/01/26 ..... 1,000,000 1,042,090
Deer Lakes School District, Series A, FSA Insured, 5.00%, 1/15/23 .................... 1,000,000 980,810
Delaware County Authority Health Facility Revenue, Mercy Health Corp. ................
Project, ETM, Refunding, 6.00%, 12/15/26 .......................................... 10,800,000 12,199,572
Delaware County Authority Healthcare Revenue, Mercy Health Corp. .....................
Southeastern, Series B, Pre-Refunded, 6.00%, 11/15/07 ............................. 9,000,000 9,876,330
Delaware County Authority Revenue, Elwyn Inc. Project, Pre-Refunded, 8.35%, 6/01/15 .. 2,000,000 2,160,400
</TABLE>
126
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (cont.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN PENNSYLVANIA TAX-FREE INCOME FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (cont.)
BONDS (cont.)
Delaware County IDAR, Philadelphia Electric, Refunding, Series 1991, 7.375%, 4/01/21 ..... $ 5,000,000 $ 5,364,750
Delaware River Port Authority Pennsylvania and New Jersey Revenue,
Series 1995, FGIC Insured, 5.50%, 1/01/26 ............................................. 7,350,000 7,764,908
Delaware Valley Regional Finance Authority Local Government Revenue,
Series B, AMBAC Insured, 5.60%, 7/01/17 ............................................... 5,000,000 5,438,800
Erie County Hospital Authority Revenue,
Nursing Home, Sarah A. Reed Retirement Center, Refunding, 5.625%, 7/01/14 .............. 3,660,000 3,602,501
St. Vincent Health Center Project, Series A, MBIA Insured, 6.375%, 7/01/22 ............. 7,000,000 7,530,670
Erie County IDAR, Nursing Home, Sarah Reed Center Project, Pre-Refunded, 8.625%, 7/01/14 . 2,110,000 2,172,055
Erie Higher Education Building Authority College Revenue, Gannon
University Project, Series A, Pre-Refunded, 8.50%, 6/01/15 ............................ 3,000,000 3,099,510
Erie-Western Pennsylvania Port Authority General Revenue,
6.875%, 6/15/16 ........................................................................ 920,000 1,005,045
Pre-Refunded, 8.625%, 6/15/10 .......................................................... 1,850,000 2,008,120
Exeter Township, Refunding, Series B, FGIC Insured, 5.30%, 7/15/21 ....................... 6,100,000 6,194,306
Harrisburg Authority Revenue, Series I, MBIA Insured, 5.625%, 4/01/19 .................... 6,000,000 6,293,040
Hazleton Area School District, Series B, FGIC Insured, 5.00%, 3/01/23 .................... 4,455,000 4,369,553
Hazleton Health Services Authority Hospital Revenue, Hazleton General
Hospital, 5.50%, 7/01/27 .............................................................. 2,475,000 2,492,251
Interboro School District GO, Delaware County, MBIA Insured, 5.375%, 8/15/22 ............. 2,335,000 2,381,770
Jeannette County Municipal Authority Sewer Revenue, Pre-Refunded, 7.00%, 7/01/17 ......... 1,250,000 1,377,963
Jeannette Health Service Authority Hospital Revenue, Jeannette District Memorial
Hospital, Refunding, Series A, 6.00%, 11/01/18 ........................................ 785,000 824,854
Lancaster County Hospital Authority Revenue, Health Center, Masonic Homes
Project, Refunding, AMBAC Insured, 5.00%, 11/15/20 .................................... 1,600,000 1,589,408
Lawrence County IDA, PCR, Pennsylvania Power Co., New Castle Project,
Refunding, 7.15%, 3/01/17 .............................................................. 5,595,000 5,974,117
Lebanon County Good Samaritan Hospital Authority Revenue, Good Samaritan
Hospital Project, Refunding, 6.00%, 11/15/18 .......................................... 2,500,000 2,600,350
Lehigh County General Purpose Authority Revenue,
Good Shepard Rehabilitation Hospital, Refunding, AMBAC Insured, 5.25%, 11/15/27 ........ 5,500,000 5,571,500
Hospital Lehigh Valley, Health Network, Series A, MBIA Insured, 5.00%, 7/01/28 ......... 4,000,000 3,880,000
Lehigh Valley Hospital Inc., Refunding, Series A, MBIA Insured, 5.875%, 7/01/15 ........ 1,000,000 1,075,080
Muhlenburg Hospital Center, Series A, Pre-Refunded, 8.00%, 7/15/01 ..................... 1,000,000 1,034,500
Muhlenburg Hospital Center, Series A, Pre-Refunded, 6.60%, 7/15/22 ..................... 5,800,000 6,551,390
Muhlenburg Hospital Center, Series B, Pre-Refunded, 8.00%, 7/15/01 ..................... 900,000 934,020
Lehigh County IDA, PCR, Pennsylvania Power and Light Co. Project, Refunding,
Series A, MBIA Insured, 6.40%, 11/01/21 .............................................. 5,000,000 5,424,950
Series A, MBIA Insured, 6.15%, 8/01/29 ............................................... 5,550,000 6,063,431
Series B, MBIA Insured, 6.40%, 9/01/29 ............................................... 10,000,000 11,108,600
Lower Providence Township Sewer Authority Revenue, Refunding, MBIA Insured, 5.25%,
5/01/14 ................................................................................ 2,000,000 2,052,640
5/01/22 ................................................................................ 3,750,000 3,801,075
Luzerne County IDA, Exempt Facility Revenue, Gas and Water Co. Project,
Refunding, Series A, AMBAC Insured, 7.00%, 12/01/17 .................................... 5,000,000 5,728,250
6.05%, 1/01/19 ...................................................................... 4,750,000 4,976,385
Meadville GO, Series A, AMBAC Insured, 5.25%, 10/01/25 ................................... 2,285,000 2,300,035
Montgomery County GO, Refunding, Series B, 5.375%, 10/15/21 .............................. 3,400,000 3,501,456
Montgomery County Higher Education and Health Authority Revenue,
Holy Redeemer Hospital, Series A, AMBAC Insured, Pre-Refunded, 7.625%, 2/01/20 ......... 2,375,000 2,471,805
Jeanes Health System Project, Pre-Refunded, 8.75%, 7/01/20 ............................. 5,000,000 5,446,500
Pottstown Memorial Medical Center Project, Pre-Refunded, 7.35%, 11/15/05 ............... 1,315,000 1,470,025
St. Joseph's University, Refunding, Connie Lee Insured, 6.50%, 12/15/22 ................ 1,750,000 1,921,150
Montgomery County IDA, Retirement Community Revenue,
Act Retirement-Life Communities, 5.25%, 11/15/28 ....................................... 5,000,000 4,831,850
Adult Community Total Services, Refunding, Series A, 5.875%, 11/15/22 .................. 4,850,000 5,044,000
Adult Community Total Services, Series B, 5.75%, 11/15/17 .............................. 3,000,000 3,098,790
Montgomery County IDAR,
Hill School Project, MBIA Insured, 5.35%, 8/15/27 ...................................... 4,000,000 4,084,360
PCR, Philadelphia Electric Co., Refunding, Series A, 7.60%, 4/01/21 .................... 2,530,000 2,725,721
PCR, Philadelphia Electric Co., Series B, MBIA Insured, 6.70%, 12/01/21 ................ 5,000,000 5,401,500
Resource Recovery, 7.50%, 1/01/12 ...................................................... 10,000,000 10,578,400
Mount Pleasant Business District Authority Hospital Revenue,
Frick Hospital, Refunding,
5.70%, 12/01/13 ........................................................................ 1,205,000 1,220,340
5.75%, 12/01/17 ........................................................................ 500,000 503,535
5.75%, 12/01/27 ........................................................................ 1,600,000 1,602,384
</TABLE>
127
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (cont.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN PENNSYLVANIA TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (cont.)
BONDS (cont.)
Neshaminy School District GO, FGIC Insured, Pre-Refunded, 7.00%, 2/15/14 .............. $ 1,000,000 $ 1,153,510
New Wilmington Municipal Authority College Revenue, Westminster
College, 5.35%, 3/01/28 ............................................................ 2,250,000 2,220,615
North Hampton County IDAR, PCR, Metropolitan Edison Co., Refunding,
Series A, MBIA Insured, 6.10%, 7/15/21 ............................................. 6,100,000 6,715,917
Northeastern Pennsylvania Hospital and Educational Authority Revenue,
Kings College Project, Refunding, Series B, 6.00%, 7/15/11 .......................... 1,000,000 1,037,880
Kings College Project, Refunding, Series B, 6.00%, 7/15/18 .......................... 1,000,000 1,028,090
Wilkes University, Refunding, 6.125%, 10/01/11 ...................................... 5,000,000 5,002,700
Pennsylvania Convention Center Authority Revenue, Refunding, Series A, 6.60%, 9/01/09 . 5,000,000 5,461,500
Pennsylvania EDA,
Financing Authority Revenue, MacMillan LP Project, 7.60%, 12/01/20 .................. 3,000,000 3,648,660
Financing Resources Recovery Revenue, Colver Project, Series D, 7.125%, 12/01/15 .... 5,000,000 5,530,800
Pennsylvania HFA,
Rental Housing, Refunding, FNMA Insured, 5.75%, 7/01/14 ............................. 10,000,000 10,368,900
SFM, Refunding, Series Y, 7.45%, 4/01/16 ............................................ 2,355,000 2,425,038
SFM, Series 29, 7.375%, 10/01/16 .................................................... 3,065,000 3,212,978
SFM, Series 30, 7.30%, 10/01/17 ..................................................... 2,055,000 2,164,943
SFM, Series 34-A, 6.85%, 4/01/16 .................................................... 3,000,000 3,168,210
SFM, Series 34-B, 7.00%, 4/01/24 .................................................... 6,000,000 6,317,940
SFM, Series 38, 6.125%, 10/01/24 .................................................... 4,895,000 5,118,750
SFM, Series 1991, 7.15%, 4/01/15 .................................................... 4,370,000 4,588,456
SFM, Series U, 7.80%, 10/01/20 ...................................................... 330,000 344,210
SFM, Series W, 7.80%, 10/01/20 ...................................................... 1,965,000 2,023,754
SFMR, Refunding, Series 54-A, 6.15%, 10/01/22 ....................................... 1,500,000 1,567,215
Pennsylvania Infrastructure Investment Authority Revenue, Pennvest Loan
Pool Program, MBIA Insured, 5.625%, 9/01/13 ........................................ 6,010,000 6,498,192
9/01/14 ......................................................................... 2,870,000 3,075,980
Pennsylvania Intergovernmental Cooperative Authority Special Tax
Revenue, Philadelphia Funding Project, FGIC Insured, Pre-Refunded, 7.00%, 6/15/14 .. 6,000,000 7,009,020
Pennsylvania State Financial Authority Revenue, Municipal Capital
Improvements Program, Refunding, 6.60%, 11/01/09 .................................... 12,565,000 13,872,263
Pennsylvania State Higher Educational Facilities Authority Revenue,
Allegheny College Project, Refunding, Series B, 6.125%, 11/01/13 .................... 1,000,000 1,062,070
Allegheny College Project, Refunding, Series B, 6.00%, 11/01/22 ..................... 3,140,000 3,492,182
Allegheny College, Refunding, Series A, MBIA Insured, 5.00%, 11/01/22 ............... 3,300,000 3,245,814
Allegheny College, Refunding, Series B, 5.00%, 11/01/26 ............................. 3,000,000 2,942,490
Drexel University, Refunding, 6.375%, 5/01/17 ....................................... 5,220,000 5,649,136
Drexel University, Refunding, MBIA Insured, 5.75%, 5/01/22 .......................... 4,385,000 4,705,631
Geneva College, 5.45%, 4/01/18 ...................................................... 2,360,000 2,348,814
Health Services, Allegheny Delaware Valley, Refunding,
Series A, MBIA Insured, 5.875%, 11/15/21 ......................................... 17,000,000 17,498,440
Health Services, University of Pennsylvania, Refunding, Series A, 5.75%, 1/01/22 .... 10,000,000 10,435,000
La Salle University, MBIA Insured, 5.25%, 5/01/23 ................................... 1,500,000 1,519,935
La Salle University, Refunding, MBIA Insured, 5.625%, 5/01/17 ....................... 4,000,000 4,211,280
Medical College of Pennsylvania, Series A, Pre-Refunded, 8.375%, 3/01/11 ............ 1,000,000 1,020,000
Medical College of Pennsylvania, Series A, Pre-Refunded, 7.50%, 3/01/14 ............. 3,135,000 3,135,000
Philadelphia College of Textiles and Science, 6.75%, 4/01/20 ........................ 3,040,000 3,289,736
State System of Higher Education, Series N, MBIA Insured, 5.80%, 6/15/24 ............ 3,000,000 3,172,860
State Systems of Higher Education, Series O, AMBAC Insured, 5.125%, 6/15/24 ......... 1,990,000 1,994,497
Temple University, 7.40%, 10/01/10 .................................................. 30,000 30,343
University of Pennsylvania, 5.50%, 7/15/38 .......................................... 10,000,000 10,271,800
Pennsylvania State IDAR, Economic Revenue, AMBAC Insured, 6.00%, 1/01/12 .............. 4,250,000 4,623,108
Pennsylvania State Pooled Finance Authority Lease Revenue,
Capital Improvement, Series B, MBIA Insured, Pre-Refunded, 8.00%, 11/01/09 ......... 890,000 896,248
Pennsylvania State Turnpike Oil Commission Franchise Tax Revenue,
Series B, AMBAC Insured, 4.75%, 12/01/27 ............................................ 5,235,000 4,974,978
sub. lien, Series B, AMBAC Insured, 5.00%, 12/01/23 ................................. 2,000,000 1,977,440
Pennsylvania State University, Series A, 5.00%, 8/15/22 ............................... 9,610,000 9,466,234
Philadelphia Airport Revenue, Philadelphia Airport System, Series A,
AMBAC Insured, 6.10%, 6/15/25 ...................................................... 5,000,000 5,411,450
</TABLE>
128
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (cont.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN PENNSYLVANIA TAX-FREE INCOME FUND AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (cont.)
BONDS (cont.)
Philadelphia Gas Works Revenue,
11th Series C, AMBAC Insured, 7.25%, 1/01/10 ....................................... $ 795,000 $ 820,050
ETM, 12th Series B, MBIA Insured, 7.00%, 5/15/20 ................................... 1,000,000 1,210,050
First Series A, FSA Insured, 5.00%, 7/01/26 ........................................ 8,000,000 7,824,480
Series A, 6.375%, 7/01/26 .......................................................... 10,100,000 11,091,113
(b) Philadelphia GO, FSA Insured, 5.00%, 3/15/28 ....................................... 14,250,000 13,908,570
Philadelphia Hospitals and Higher Education Facilities Authority Revenue,
Albert Einstein Medical Center, Pre-Refunded, 7.30%, 10/01/08 ...................... 5,225,000 5,805,707
Temple University Hospital, 5.875%, 11/15/23 ....................................... 5,000,000 5,127,700
Philadelphia Hospitals and Higher Educational Facilities Authority Revenue,
Albert Einstein Medical Center, Pre-Refunded, 7.625%, 4/01/11 ...................... 7,755,000 7,937,010
Children's Hospital, Refunding, Series A, 5.00%, 2/15/21 ........................... 2,465,000 2,375,841
Children's Seashore House, Series A, 7.00%, 8/15/17 ................................ 1,000,000 1,092,820
Children's Seashore House, Series B, 7.00%, 8/15/22 ................................ 2,600,000 2,841,332
Frankford Hospital, Series A, 6.00%, 6/01/14 ....................................... 2,500,000 2,612,025
Philadelphia Municipal Authority Gas Works Lease Revenue, 7.625%, 5/01/14 ............ 2,750,000 2,818,613
Philadelphia Municipal Authority Revenue, Lease, Refunding, Series D, 6.30%, 7/15/17 . 2,000,000 2,117,580
Philadelphia Parking Authority Airport Revenue,
AMBAC Insured, 5.00%, 2/01/27 ...................................................... 3,000,000 2,933,610
Refunding, AMBAC Insured, 5.50%, 9/01/18 ........................................... 1,000,000 1,045,070
Philadelphia RDA, Home Improvement Loan Revenue,
Series A, FHA Insured, 7.375%, 6/01/03 ............................................. 80,000 81,000
Series B, FHA Insured, 6.10%, 6/01/17 .............................................. 1,000,000 1,044,640
Philadelphia School District, Series B, AMBAC Insured,
5.50%, 9/01/15 ..................................................................... 5,000,000 5,273,900
5.375%, 4/01/22 .................................................................... 2,995,000 3,052,804
Philadelphia Water and Sewer Revenue, ETM, Series 10, 7.35%, 9/01/04 ................. 6,840,000 7,743,769
Philadelphia Water and Wastewater Revenue, Refunding, 5.75%, 6/15/13 ................. 10,000,000 10,306,900
Pittsburgh Urban RDA,
Mortgage Revenue, Series A, 7.15%, 10/01/27 ........................................ 840,000 899,380
Mortgage Revenue, Series A, 5.25%, 10/01/29 ........................................ 3,345,000 3,347,743
Mortgage Revenue, Series D, 6.25%, 10/01/17 ........................................ 1,695,000 1,819,871
Oliver Garage Project, FGIC Insured, 5.45%, 6/01/28 ................................ 3,500,000 3,617,635
SFMR, Series B, GNMA Secured, 7.375%, 12/01/16 ..................................... 1,965,000 2,025,935
Pittsburgh Water and Sewer System Authority Revenue,
ETM, Refunding, FGIC Insured, 7.25%, 9/01/14 ...................................... 1,250,000 1,533,950
Pottstown Borough Authority Sewer Revenue, FSA Insured,
Pre-Refunded, 7.70%, 11/01/21 ..................................................... 4,000,000 4,029,960
Rose Tree Media School District GO, FGIC Insured, 5.85%, 2/15/17 ..................... 5,000,000 5,328,300
Schuylkill County IDA, Resource Recovery Revenue, Schuylkill Energy Resources
Inc., Pre-Refunded, 6.50%, 1/01/10 ................................................ 16,350,000 16,809,926
Schuylkill County RDA, Lease Revenue, Series A, FGIC Insured, 7.125%, 6/01/13 ........ 1,500,000 1,628,685
Scranton School District GO, AMBAC Insured, 5.20%, 4/01/18 ........................... 5,275,000 5,343,311
South Fork Municipal Authority Hospital Revenue,
Conemaugh Valley Memorial Hospital Project, Series A, MBIA Insured, 5.75%, 7/01/26 . 10,000,000 10,629,500
Good Samaritan Medical Center, Johnstown Project, Refunding, Series B, MBIA Insured,
5.25%, 7/01/26 .................................................................. 5,000,000 5,058,450
Southeastern Pennsylvania Transportation Authority Special Revenue,
FGIC Insured, 5.375%, 3/01/22 ...................................................... 4,000,000 4,116,840
Series A, FGIC Insured, Pre-Refunded, 5.75%, 3/01/20 ............................... 9,660,000 10,683,670
State Public School Building Authority Revenue,
Cornell School District Project, Refunding, Series B, MBIA Insured, 5.375%, 9/01/12 2,165,000 2,264,763
Shenandoah Valley School District Project, Refunding, AMBAC Insured, 7.375%, 9/15/10 1,000,000 1,039,480
University of Pittsburgh Revenue, Higher Education, Refunding, Series B,
MBIA Insured, 5.00%, 6/01/21 ...................................................... 10,000,000 9,932,900
Upper St. Clair Township School District GO, Refunding, 5.20%, 7/15/27 ............... 5,000,000 5,050,350
Westtown Township Sewer Revenue, FSA Insured, 5.25%, 12/15/27 ........................ 3,270,000 3,318,004
Wilkes Barre Area School District GO,
FGIC Insured, 6.375%, 4/01/15 ...................................................... 3,000,000 3,384,900
Refunding, FGIC Insured, 5.25%, 4/01/16 .............................................. 1,385,000 1,412,320
------------
TOTAL BONDS .......................................................................... 782,836,848
------------
</TABLE>
129
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (cont.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN PENNSYLVANIA TAX-FREE INCOME FUND AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(d) ZERO COUPON BONDS .7%
Pennsylvania HFA,
SFM, Series 63A, zero cpn., 4/01/30 .................................................... $ 11,000,000 $ 2,056,010
SFMR, Series 64, zero cpn., 4/01/30 ...................................................... 6,000,000 3,549,120
------------
TOTAL ZERO COUPON BONDS .................................................................. 5,605,130
------------
TOTAL LONG TERM INVESTMENTS (COST $741,559,735) .......................................... 788,441,978
------------
(a) SHORT TERM INVESTMENTS 1.1%
Allegheny County Hospital Development Authority Revenue,
Health Center, Presbyterian, Series A, Weekly VRDN and Put, 2.25%, 3/01/20 ............. 700,000 700,000
Health Center, Presbyterian, Series B, Weekly VRDN and Put, 2.25%, 3/01/20 ............. 460,000 460,000
Health Center, Presbyterian, Series B, Weekly VRDN and Put, 2.55%, 3/01/20 ............. 100,000 100,000
Health Center, Presbyterian, Series D, MBIA Insured, Weekly VRDN and Put, 2.25%, 3/01/20 1,000,000 1,000,000
Presbyterian University Hospital, Series B-1, Weekly VRDN and Put, 3.50%, 3/01/18 ...... 105,000 105,000
Emmaus General Authority Revenue, FSA Insured, Weekly VRDN and Put, 3.00%, 12/01/28 ...... 1,100,000 1,100,000
Erie Higher Education Building Authority College Revenue, Gannon University Project,
Series F, Weekly VRDN and Put, 2.25%, 7/01/13 ......................................... 3,000,000 3,000,000
Northeastern Hospital and Educational Authority Health Care Revenue, Wyoming
Valley Health Care, Refunding, Series A,
AMBAC Insured, Weekly VRDN and Put, 2.95%, 1/01/24 ........................................ 1,300,000 1,300,000
Pennsylvania State Higher Educational Facilities Authority Revenue,
Council of Independent Colleges,
Series A2, Weekly VRDN and Put, 3.00%, 4/01/22 ........................................ 100,000 100,000
Waynesburg College, Weekly VRDN and Put, 3.40%, 4/01/17 ............................... 600,000 600,000
------------
TOTAL SHORT TERM INVESTMENTS (COST $8,465,000) ........................................... 8,465,000
------------
TOTAL INVESTMENTS (COST $750,024,735) 99.5% .............................................. 796,906,978
------------
OTHER ASSETS, LESS LIABILITIES .5% ....................................................... 3,952,570
------------
NET ASSETS 100.0% ........................................................................ $800,859,548
------------
</TABLE>
See glossary of terms on page 134.
(a) Variable rate demand notes (VRDNs) are tax-exempt obligations which contain
a floating or variable interest rate adjustment formula and an unconditional
right of demand to receive payment of the principal balance plus accrued
interest at specified dates.
(b) Sufficient collateral has been segregated for securities traded on a
when-issued or delayed delivery basis.
(d) Zero coupon/step-up bonds. The current effective yield may vary. The
original accretion rate will remain constant.
130
See notes to financial statements.
FRANKLIN TAX-FREE TRUST
Financial Highlights
FRANKLIN PUERTO RICO TAX-FREE INCOME FUND
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28,
---------------------------------------------------------------
CLASS A 1999 1998 1997 1996(1) 1995
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .................. $ 11.86 $ 11.51 $ 11.59 $ 11.31 $ 11.83
---------------------------------------------------------------
Income from investment operations:
Net investment income .............................. .60 .62 .65 .66 .67
Net realized and unrealized gains (losses) ......... .06 .36 .02 .30 (.50)
---------------------------------------------------------------
Total from investment operations .................... .66 .98 .67 .96 .17
---------------------------------------------------------------
Less distributions from:
Net investment income .............................. (.60)(3) (.62) (.65)(3) (.67)(2) (.69)
Net realized gains ................................. (.04) (.01) (.10) (.01) --
---------------------------------------------------------------
Total distributions ................................. (.64) (.63) (.75) (.68) (.69)
---------------------------------------------------------------
Net asset value, end of year ........................ $ 11.88 $ 11.86 $ 11.51 $ 11.59 $ 11.31
---------------------------------------------------------------
Total return* ....................................... 5.68% 8.78% 6.03% 8.68% 1.60%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ..................... $ 218,753 $ 210,325 $ 192,525 $ 190,577 $ 176,888
Ratios to average net assets:
Expenses ........................................... .74% .75% .73% .74% .73%
Net investment income .............................. 4.98% 5.35% 5.62% 5.71% 5.95%
Portfolio turnover rate ............................. 20.19% 7.94% 21.09% 27.99% 18.30%
CLASS C
- ---------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .................. $ 11.87 $ 11.53 $ 11.62 $ 11.32
-------------------------------------------------
Income from investment operations:
Net investment income .............................. .53 .56 .58 .50
Net realized and unrealized gains .................. .06 .34 .02 .30
-------------------------------------------------
Total from investment operations .................... .59 .90 .60 .80
-------------------------------------------------
Less distributions from:
Net investment income .............................. (.53)(4) (.55) (.59) (.49)
Net realized gains ................................. (.04) (.01) (.10) (.01)
-------------------------------------------------
Total distributions ................................. (.57) (.56) (.69) (.50)
-------------------------------------------------
Net asset value, end of year ........................ $ 11.89 $ 11.87 $ 11.53 $ 11.62
-------------------------------------------------
Total return* ....................................... 5.09% 8.07% 5.33% 7.21%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ..................... $ 7,050 $ 3,615 $ 1,679 $ 533
Ratios to average net assets:
Expenses ........................................... 1.30% 1.31% 1.30% 1.32%**
Net investment income .............................. 4.43% 4.78% 5.04% 5.16%**
Portfolio turnover rate ............................. 20.19% 7.94% 21.09% 27.99%
</TABLE>
* Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year. Prior to May
1, 1994, dividends from net investment income were reinvested at the offering
price.
** Annualized
(1) For the period May 1, 1995 (effective date) to February 29, 1996 for
Class C.
(2) Includes distributions in excess of net investment income in the amount
of $.001.
(3) Includes distributions in excess of net investment income in the amount
of $.006.
(4) Includes distributions in excess of net investment income in the amount
of $.004.
See notes to financial statements. 131
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN PUERTO RICO TAX-FREE INCOME FUND AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS 98.7%
Guam Airport Authority Revenue, Series B,
6.60%, 10/01/10 ........................................................................ $ 1,675,000 $ 1,837,542
6.70%, 10/01/23 ........................................................................ 5,800,000 6,366,312
Guam Government GO, Series A,
5.90%, 9/01/05 ......................................................................... 4,575,000 4,619,149
6.00%, 9/01/06 ......................................................................... 1,085,000 1,095,145
Guam Government Limited Obligation Highway Revenue, Refunding, Series A,
FSA Insured, 6.30%, 5/01/12 ........................................................... 5,590,000 6,059,560
Guam Housing Corp. SFR, MBS, Mortgage Guaranteed, Series A, 5.35%, 9/01/18 ............... 5,000,000 5,085,900
Guam Power Authority Revenue, Series A,
6.30%, 10/01/22 ........................................................................ 7,190,000 7,750,532
6.75%, 10/01/24 ........................................................................ 2,680,000 2,988,066
Northern Mariana Islands Commonwealth Ports Authority Seaport Revenue,
Series A, 6.40%, 3/15/28 .............................................................. 7,000,000 6,826,890
Puerto Rico Commonwealth GO,
Pre-Refunded, 6.40%, 7/01/11 ........................................................... 2,400,000 2,740,200
Refunding, MBIA Insured, 5.75%, 7/01/24 ................................................ 2,000,000 2,140,560
Puerto Rico Commonwealth Highway and Transportation Authority Revenue,
Puerto Rico State Infrastructure Bank, 5.00%, 7/01/28 .................................. 2,000,000 1,948,820
Series A, 5.00%, 7/01/38 ............................................................... 1,950,000 1,894,347
Series Q, Pre-Refunded, 7.75%, 7/01/10 ................................................. 350,000 377,468
Series Y, Pre-Refunded, 6.00%, 7/01/22 ................................................. 8,000,000 9,124,240
Puerto Rico Commonwealth IDC, General Purpose Revenue, Series B, 5.375%, 7/01/16 ......... 5,000,000 5,210,950
Puerto Rico Commonwealth Infrastructure Financing Authority Special Tax Revenue, Series A,
7.90%, 7/01/07 ......................................................................... 580,000 599,314
7.75%, 7/01/08 ......................................................................... 300,000 306,738
7.50%, 7/01/09 ......................................................................... 660,000 674,659
Puerto Rico Commonwealth Urban Renewal and Housing Corp. Commonwealth
Appropriation, Refunding, 7.875%, 10/01/04 ............................................ 3,350,000 3,491,303
Puerto Rico Electric Power Authority Revenue,
Refunding, Series U, 6.00%, 7/01/14 .................................................... 700,000 770,056
Series DD, 5.00%, 7/01/28 .............................................................. 1,680,000 1,637,009
Series O, Pre-Refunded, 7.125%, 7/01/14 ................................................ 1,525,000 1,568,402
Series P, Pre-Refunded, 7.00%, 7/01/11 ................................................. 615,000 676,211
Series P, Pre-Refunded, 7.00%, 7/01/21 ................................................. 1,000,000 1,099,530
Series T, Pre-Refunded, 6.375%, 7/01/24 ................................................ 9,000,000 10,278,450
Series X, Pre-Refunded, 6.125%, 7/01/21 ................................................ 7,225,000 8,253,407
Puerto Rico HFC Revenue,
MF Mortgage, Portfolio A-I, 7.50%, 10/01/15 ............................................ 420,000 436,388
MF Mortgage, Portfolio A-I, 7.50%, 4/01/22 ............................................. 1,470,000 1,527,359
Sixth Portfolio, Section 8 Assisted, FHA Mortgage Insured, Pre-Refunded, 7.75%, 12/01/26 2,060,000 2,513,509
Puerto Rico HFC, SFMR, Portfolio No. 1, Series C, GNMA Secured, 6.85%, 10/15/23 .......... 2,320,000 2,445,906
Puerto Rico Housing Bank and Financing Authority SFMR,
Affordable Housing Mortgage, First Portfolio, 6.25%, 4/01/29 ........................... 2,075,000 2,210,083
Homeownership Fifth Portfolio, Pre-Refunded, 7.50%, 12/01/15 ........................... 955,000 1,004,039
Puerto Rico Industrial Medical and Environmental Facilities Higher
Education Revenue, Inter American University, 5.00%, 10/01/22 ......................... 6,500,000 6,481,865
Puerto Rico Industrial Medical and Environmental PCFA, Revenue,
American Airlines Corp., Series A, 6.45%, 12/01/25 ..................................... 2,000,000 2,183,040
PepsiCo Inc. Project, 6.25%, 11/15/13 .................................................. 900,000 986,679
Puerto Rico Industrial Tourist Educational Medical and Environmental
Control Facilities Financing Authority Hospital Revenue,
Dr. Pila Hospital Project, Refunding, 6.125%, 8/01/25 .................................. 2,500,000 2,702,725
Dr. Pila Hospital Project, Refunding, 6.25%, 8/01/32 ................................... 500,000 540,790
Hospital Auxilio Mutuo Obligation, 5.50%, 7/01/17 ...................................... 2,750,000 2,909,720
Hospital Auxilio Mutuo Obligation, Series A, 6.25%, 7/01/24 ............................ 8,445,000 9,366,265
Mennonite General Hospital Project, 5.625%, 7/01/17 .................................... 950,000 969,475
Mennonite General Hospital Project, 6.50%, 7/01/26 ..................................... 5,000,000 5,460,100
Mennonite General Hospital Project, 5.625%, 7/01/27 .................................... 2,000,000 2,022,380
Puerto Rico Industrial Tourist Educational Medical and Environmental
Control Facilities Financing Authority Industrial Revenue,
Guaynabo Municipal Government, 5.625%, 7/01/15 ......................................... 6,550,000 6,670,782
Guaynabo Municipal Government, 5.625%, 7/01/22 ......................................... 3,160,000 3,258,023
Guaynabo Warehouse, Series A, 5.20%, 7/01/24 ........................................... 4,120,000 4,085,310
</TABLE>
132
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN PUERTO RICO TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
Puerto Rico Industrial Tourist Educational Medical and Environmental
Control Facilities Financing Authority Industrial Revenue, (cont.)
Teachers Retirement System Revenue, 5.50%, 7/01/16 .................................. $ 3,175,000 $ 3,303,969
Teachers Retirement System Revenue, 5.50%, 7/01/21 .................................. 6,585,000 6,802,766
Puerto Rico Municipal Finance Agency GO, Series A, 6.50%, 7/01/19 ..................... 2,000,000 2,235,340
Puerto Rico PBA Revenue, Government Facilities, Series A, AMBAC Insured, 5.75%, 7/01/22 1,000,000 1,073,690
Puerto Rico Port Authority Revenue,
Series D, FGIC Insured, 6.00%, 7/01/21 .............................................. 1,250,000 1,287,013
Special Facilities, American Airlines, Series A, 6.30%, 6/01/23 ..................... 5,500,000 5,863,440
Special Facilities, American Airlines, Series A, 6.25%, 6/01/26 ..................... 1,900,000 2,046,224
Puerto Rico Telephone Authority Revenue,
Refunding, Series L, 6.125%, 1/01/22 ................................................ 6,450,000 6,820,553
Series N, 5.50%, 1/01/13 ............................................................ 500,000 517,830
Series N, 5.50%, 1/01/22 ............................................................ 2,375,000 2,442,664
University of Puerto Rico Revenues, Series M, MBIA Insured,
5.50%, 6/01/15 ...................................................................... 4,000,000 4,233,880
5.25%, 6/01/25 ...................................................................... 6,145,000 6,263,906
Virgin Islands HFA, SFR, Refunding, Series A, GNMA Secured,
6.45%, 3/01/16 ...................................................................... 410,000 434,649
6.50%, 3/01/25 ...................................................................... 960,000 1,017,600
Virgin Islands PFA Revenue, senior lien, Fund Loan Notes, Refunding, Series A,
5.50%, 10/01/18 ..................................................................... 3,000,000 3,033,150
5.50%, 10/01/22 ..................................................................... 3,000,000 3,010,050
5.625%, 10/01/25 .................................................................... 3,000,000 3,054,810
Virgin Islands Water and Power Authority Electric System Revenue,
Refunding, 5.30%, 7/01/18 ........................................................... 1,700,000 1,697,824
Refunding, 5.30%, 7/01/21 ........................................................... 1,000,000 992,160
Series A, Pre-Refunded, 7.40%, 7/01/11 .............................................. 5,150,000 5,618,135
Virgin Islands Water and Power Authority Water System Revenue, Refunding,
5.25%, 7/01/12 ...................................................................... 4,000,000 3,950,680
5.50%, 7/01/17 ...................................................................... 4,000,000 3,940,677
------------
TOTAL LONG TERM INVESTMENTS (COST $207,622,364) ....................................... 222,836,208
------------
(a) SHORT TERM INVESTMENTS
Puerto Rico Commonwealth Highway and Transportation Authority Revenue, Series A,
AMBAC Insured, Weekly VRDN and Put, 2.90%, 7/01/28 (COST $100,000) ................. 100,000 100,000
------------
TOTAL INVESTMENTS (COST $207,722,364) 98.7% ........................................... 222,936,208
OTHER ASSETS, LESS LIABILITIES 1.3% ................................................... 2,867,002
------------
NET ASSETS 100.0% ..................................................................... $225,803,210
------------
</TABLE>
See glossary of terms on page 134.
(a) Variable rate demand notes (VRDNs) are tax-exempt obligations which contain
a floating or variable interest rate adjustment formula and an unconditional
right of demand to receive payment of the principal balance plus accrued
interest at specified dates.
See notes to financial statements. 133
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
GLOSSARY OF TERMS
<TABLE>
<S> <C>
1915 ACT - Improvement Bond Act of 1915
ABAG - The Association of Bay Area Governments
AD - Assessment District
AMBAC - American Municipal Bond Assurance Corp.
BIG - Bond Investors Guaranty Insurance Co. (acquired by MBIA in
1989 and no longer does business under this name).
CDA - Community Development Authority/Agency
CDD - Community Development District
CFD - Community Facilities District
COP - Certificate of Participation
CRDA - Community Redevelopment Authority/Agency
DATES - Demand Adjustable Tax-Exempt Securities
EDA - Economic Development Authority
EDC - Economic Development Corp.
EDR - Economic Development Revenue
ETM - Escrow to Maturity
FGIC - Financial Guaranty Insurance Co.
FHA - Federal Housing Authority/Agency
FI/GML - Federally Insured or Guaranteed Mortgage Loans
FNMA - Federal National Mortgage Association
FSA - Financial Security Assistance (some of the securities shown
as FSA Insured were originally issued by Capital Guaranty
Insurance Co. (CGIC) which was acquired by FSA in 1995 and
no longer does business under this name).
GNMA - Government National Mortgage Association
GO - General Obligation
HDA - Housing Development Authority/Agency
HFA - Housing Finance Authority/Agency
HFAR - Housing Finance Authority/Agency Revenue
HFC - Housing Finance Corp.
ID - Improvement District
IDA - Industrial Development Authority/Agency
IDAR - Industrial Development Authority/Agency Revenue
IDB - Industrial Development Board
IDBR - Industrial Development Board Revenue
IDC - Industrial Development Corp.
IDR - Industrial Development Revenue
IPC - Industrial Pollution Control
ISD - Independent School District
LLC - Limited Liability Corporation
LP - Limited Partnership
MAC - Municipal Assistance Corporation
MBIA - Municipal Bond Investors Assurance Corp.
MBS - Mortgage Backed Securities
MF - Multi-Family
MFHR - Multi-Family Housing Revenue
MFMR - Multi-Family Mortgage Revenue
MFR - Multi-Family Revenue
PBA - Public Building Authority
PCC - Pollution Control Corporation
PCFA - Pollution Control Financing Authority
PCR - Pollution Control Revenue
PFA - Public Financing Authority
PUD - Public Utility District
RDA - Redevelopment Authority/Agency
RDAR - Redevelopment Authority/Agency Revenue
SF - Single Family
SFM - Single Family Mortgage
SFMR - Single Family Mortgage Revenue
SFR - Single Family Revenue
UHSD - Unified High School District
USD - Unified School District
VRDN - Variable Rate Demand Notes
</TABLE>
134
FRANKLIN TAX-FREE TRUST
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES
FEBRUARY 28, 1999
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FEDERAL
ARIZONA COLORADO CONNECTICUT INTERMEDIATE-
TAX-FREE TAX-FREE TAX-FREE TERM TAX-FREE
INCOME FUND INCOME FUND INCOME FUND INCOME FUND
------------- ------------- ------------- ----------------
<S> <C> <C> <C> <C>
Assets:
Investments in securities:
Cost .................................... $ 831,274,466 $ 300,358,251 $ 250,313,211 $ 187,361,831
----------------------------------------------------------------------
Value ................................... 881,085,864 318,632,160 265,533,638 194,533,055
Cash ..................................... 17,047 525,388 414,145 144,009
Receivables:
Capital shares sold ..................... 2,483,846 461,207 710,212 614,022
Interest ................................ 11,018,040 4,939,836 3,814,485 2,713,049
----------------------------------------------------------------------
Total assets ........................... 894,604,797 324,558,591 270,472,480 198,004,135
----------------------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased ......... 6,936,018 -- 983,212 1,067,691
Capital shares redeemed ................. 108,617 420,832 209,275 897,359
Affiliates .............................. 522,764 218,475 187,975 143,915
Shareholders ............................ 1,056,459 246,077 347,576 77,110
Distributions to shareholders ............ 1,046,886 373,254 272,804 204,517
Other liabilities ........................ 43,167 19,888 12,593 15,175
----------------------------------------------------------------------
Total liabilities ....................... 9,713,911 1,278,526 2,013,435 2,405,767
----------------------------------------------------------------------
Net assets, at value ................... $ 884,890,886 $ 323,280,065 $ 268,459,045 $ 195,598,368
----------------------------------------------------------------------
Net assets consist of:
Undistributed net investment income ...... $ -- $ -- $ -- $ 66,835
Accumulated distributions in excess of net
investment income ........................ (714,249) (6,782) (150,586) --
Net unrealized appreciation .............. 49,811,398 18,273,909 15,220,427 7,171,224
Accumulated net realized gain (loss) ..... 2,736,594 317,169 (3,557,671) (1,115,408)
Capital shares ........................... 833,057,143 304,695,769 256,946,875 189,475,717
----------------------------------------------------------------------
Net assets, at value ................... $ 884,890,886 $ 323,280,065 $ 268,459,045 $ 195,598,368
----------------------------------------------------------------------
CLASS A:
Net assets, at value ..................... $ 861,019,906 $ 301,381,056 $ 245,016,356 $ 195,598,368
----------------------------------------------------------------------
Shares outstanding ....................... 75,676,165 25,010,763 21,741,974 17,309,260
----------------------------------------------------------------------
Net asset value per share* ............... $ 11.38 $ 12.05 $ 11.27 $ 11.30
----------------------------------------------------------------------
Maximum offering price per share
(net asset value per share / 95.75%) ..... $ 11.89 $ 12.58 $ 11.77 $ 11.56**
----------------------------------------------------------------------
CLASS C:
Net assets, at value ..................... $ 23,870,980 $ 21,899,009 $ 23,442,689 --
----------------------------------------------------------------------
Shares outstanding ....................... 2,084,645 1,808,249 2,074,157 --
----------------------------------------------------------------------
Net asset value per share* ............... $ 11.45 $ 12.11 $ 11.30 --
----------------------------------------------------------------------
Maximum offering price per share
(net asset value per share / 99.00%) ..... $ 11.57 $ 12.23 $ 11.41 --
----------------------------------------------------------------------
</TABLE>
* Redemption price is equal to net asset value less any applicable contingent
deferred sales charge.
** The maximum offering price for Franklin Federal Intermediate-Term Tax-Free
Income Fund is calculated at $11.30 / 97.75%.
See notes to financial statements. 135
FRANKLIN TAX-FREE TRUST
Financial Statements (continued)
STATEMENTS OF ASSETS AND LIABILITIES (CONT.)
FEBRUARY 28, 1999
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN
HIGH YIELD INDIANA MICHIGAN NEW JERSEY
TAX-FREE TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND INCOME FUND
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Investments in securities:
Cost ............................................... $ 6,220,378,766 $ 55,630,869 $ 16,234,216 $ 680,354,419
---------------------------------------------------------------------
Value .............................................. 6,550,576,108 59,316,143 16,852,918 726,783,993
Cash ................................................ 1,522,911 195,746 79,485 1,266,686
Receivables:
Capital shares sold ................................ 10,673,893 39,356 -- 905,719
Interest ........................................... 113,169,061 638,975 228,803 9,585,517
Affiliates ......................................... -- -- 6,280 --
Organization costs .................................. -- -- 693 --
---------------------------------------------------------------------
Total assets ...................................... 6,675,941,973 60,190,220 17,168,179 738,541,915
---------------------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased .................... 11,382,566 970,162 -- 4,939,156
Capital shares redeemed ............................ 7,028,129 4,863 -- 344,899
Affiliates ......................................... 4,093,383 41,568 1,616 472,746
Shareholders ....................................... 9,827,719 91,588 26,403 1,465,108
Distributions to shareholders ....................... 7,680,021 62,412 19,389 752,589
Other liabilities ................................... 264,482 5,804 3,353 34,228
---------------------------------------------------------------------
Total liabilities ................................. 40,276,300 1,176,397 50,761 8,008,726
---------------------------------------------------------------------
Net assets, at value ............................. $ 6,635,665,673 $ 59,013,823 $ 17,117,418 $ 730,533,189
---------------------------------------------------------------------
Net assets consist of:
Undistributed net investment income ................. $ -- $ 67,119 $ 32,280 $ 74,948
Accumulated distributions in excess of
net investment income ............................... (3,528,808) -- -- --
Net unrealized appreciation ......................... 330,197,342 3,685,274 618,702 46,429,574
Accumulated net realized gain (loss) ................ 1,603,569 36,251 (33,373) 200,885
Capital shares ...................................... 6,307,393,570 55,225,179 16,499,809 683,827,782
---------------------------------------------------------------------
Net assets, at value ............................. $ 6,635,665,673 $ 59,013,823 $ 17,117,418 $ 730,533,189
---------------------------------------------------------------------
CLASS A:
Net assets, at value ................................ $ 5,988,204,246 $ 59,013,823 $ 17,117,418 $ 681,818,291
---------------------------------------------------------------------
Shares outstanding .................................. 521,176,095 4,905,278 1,543,179 56,986,626
---------------------------------------------------------------------
Net asset value per share* .......................... $ 11.49 $ 12.03 $ 11.09 $ 11.96
---------------------------------------------------------------------
Maximum offering price per share
(net asset value per share / 95.75%) ................ $ 12.00 $ 12.56 $ 11.58 $ 12.49
---------------------------------------------------------------------
CLASS B:
Net assets, at value ................................ $ 15,486,932 -- -- --
---------------------------------------------------------------------
Shares outstanding .................................. 1,344,656 -- -- --
---------------------------------------------------------------------
Net asset value and maximum offering price per share* $ 11.52 -- -- --
---------------------------------------------------------------------
CLASS C:
Net assets, at value ................................ $ 631,974,495 -- -- $ 48,714,898
---------------------------------------------------------------------
Shares outstanding .................................. 54,646,563 -- -- 4,050,857
---------------------------------------------------------------------
Net asset value per share* .......................... $ 11.56 -- -- $ 12.03
---------------------------------------------------------------------
Maximum offering price per
share (net asset value per share / 99.00%) .......... $ 11.68 -- -- $ 12.15
---------------------------------------------------------------------
</TABLE>
* Redemption price is equal to net asset value less any applicable contingent
deferred sales charge.
136 See notes to financial statements.
FRANKLIN TAX-FREE TRUST
Financial Statements (continued)
STATEMENTS OF ASSETS AND LIABILITIES (CONT.)
FEBRUARY 28, 1999
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN
OREGON PENNSYLVANIA PUERTO RICO
TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
--------------------------------------------------
<S> <C> <C> <C>
Assets:
Investments in securities:
Cost ............................................................... $511,636,176 $750,024,735 $207,722,364
--------------------------------------------------
Value .............................................................. 539,021,851 796,906,978 222,936,208
Cash ................................................................ 177,028 45,510 62,283
Receivables:
Investment securities sold ......................................... 7,435,792 -- --
Capital shares sold ................................................ 574,537 1,079,394 221,783
Interest ........................................................... 6,594,118 13,041,845 3,375,100
--------------------------------------------------
Total assets ...................................................... 553,803,326 811,073,727 226,595,374
--------------------------------------------------
Liabilities:
Payables:
Investment securities purchased .................................... 34,900,794 7,025,754 --
Capital shares redeemed ............................................ 589,162 364,977 48,857
Affiliates ......................................................... 338,940 502,141 155,985
Shareholders ....................................................... 800,637 1,333,422 321,055
Distributions to shareholders ....................................... 524,592 948,234 256,384
Other liabilities ................................................... 22,521 39,651 9,883
--------------------------------------------------
Total liabilities ................................................. 37,176,646 10,214,179 792,164
--------------------------------------------------
Net assets, at value ............................................. $516,626,680 $800,859,548 $225,803,210
--------------------------------------------------
Net assets consist of:
Undistributed net investment income ................................. $ 692,530 $ -- $ --
Accumulated distributions in excess of net investment income ........ -- (831,892) (162,258)
Net unrealized appreciation ......................................... 27,385,675 46,882,243 15,213,844
Accumulated net realized gain (loss) ................................ (103,897) 16,970 299,410
Capital shares ...................................................... 488,652,372 754,792,227 210,452,214
--------------------------------------------------
Net assets, at value ............................................. $516,626,680 $800,859,548 $225,803,210
--------------------------------------------------
CLASS A:
Net assets, at value ................................................ $483,664,265 $758,942,464 $218,753,016
--------------------------------------------------
Shares outstanding .................................................. 40,885,474 72,117,372 18,414,910
--------------------------------------------------
Net asset value per share* .......................................... $ 11.83 $ 10.52 $ 11.88
--------------------------------------------------
Maximum offering price per share (net asset value per share / 95.75%) $ 12.36 $ 10.99 $ 12.41
--------------------------------------------------
CLASS C:
Net assets, at value ................................................ $ 32,962,415 $ 41,917,084 $ 7,050,194
--------------------------------------------------
Shares outstanding .................................................. 2,768,838 3,963,903 592,723
--------------------------------------------------
Net asset value per share* .......................................... $ 11.90 $ 10.57 $ 11.89
--------------------------------------------------
Maximum offering price per share (net asset value per share / 99.00%) $ 12.02 $ 10.68 $ 12.01
--------------------------------------------------
</TABLE>
* Redemption price is equal to net asset value less any applicable contingent
deferred sales charge.
See notes to financial statements. 137
FRANKLIN TAX-FREE TRUST
Financial Statements (continued)
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED FEBRUARY 28, 1999
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FEDERAL
ARIZONA COLORADO CONNECTICUT INTERMEDIATE-
TAX-FREE TAX-FREE TAX-FREE TERM TAX-FREE
INCOME FUND INCOME FUND INCOME FUND INCOME FUND
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment income:
Interest ................................................ $ 49,269,531 $ 16,984,007 $ 13,658,702 $ 8,674,233
-----------------------------------------------------------------
Expenses:
Management fees (Note 3) ................................ 4,124,084 1,615,981 1,313,337 959,067
Distribution fees (Note 3)
Class A ................................................ 765,635 268,284 211,566 164,401
Class C ................................................ 123,567 105,220 97,325 --
Transfer agent fees (Note 3) ............................ 290,820 124,287 92,818 61,054
Custodian fees .......................................... 8,510 2,985 2,553 1,927
Reports to shareholders ................................. 108,236 42,768 34,178 20,895
Registration and filing fees ............................ 26,842 10,736 8,802 51,909
Professional fees ....................................... 21,832 7,782 5,625 4,862
Trustees' fees and expenses ............................. 7,630 2,797 2,185 1,522
Other ................................................... 48,855 27,291 15,498 24,003
-----------------------------------------------------------------
Total expenses ........................................ 5,526,011 2,208,131 1,783,887 1,289,640
Expenses waived/paid by affiliate (Note 3) ............ -- -- -- (57,466)
-----------------------------------------------------------------
Net expenses ......................................... 5,526,011 2,208,131 1,783,887 1,232,174
-----------------------------------------------------------------
Net investment income ............................... 43,743,520 14,775,876 11,874,815 7,442,059
-----------------------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain from investments ...................... 3,918,445 1,022,077 631,807 146,469
Net unrealized appreciation (depreciation) on investments (4,679,698) (713,406) 175,555 632,241
-----------------------------------------------------------------
Net realized and unrealized gain (loss) .................. (761,253) 308,671 807,362 778,710
-----------------------------------------------------------------
Net increase in net assets resulting from operations ..... $ 42,982,267 $ 15,084,547 $ 12,682,177 $ 8,220,769
-----------------------------------------------------------------
</TABLE>
138 See notes to financial statements.
FRANKLIN TAX-FREE TRUST
Financial Statements (continued)
STATEMENTS OF OPERATIONS (CONT.)
FOR THE YEAR ENDED FEBRUARY 28, 1999
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN
HIGH YIELD INDIANA MICHIGAN NEW JERSEY
TAX-FREE TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND INCOME FUND
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment income:
Interest ................................................ $ 403,886,153 $ 3,383,332 $ 680,121 $ 39,922,588
----------------------------------------------------------------------
Expenses:
Management fees (Note 3) ................................ 29,382,074 357,518 82,747 3,411,855
Distribution fees (Note 3)
Class A ................................................ 5,237,134 51,291 12,889 607,142
Class B ................................................ 7,044 -- -- --
Class C ................................................ 3,542,544 -- -- 247,991
Transfer agent fees (Note 3) ............................ 2,668,120 31,999 6,994 337,369
Custodian fees .......................................... 62,220 563 122 7,030
Reports to shareholders ................................. 841,318 13,378 1,869 105,181
Registration and filing fees ............................ 829,229 1,349 7,516 19,699
Professional fees ....................................... 434,957 2,285 1,324 16,146
Trustees' fees and expenses ............................. 56,452 629 227 6,286
Amortization of organization costs ...................... -- -- 300 --
Other ................................................... 226,275 8,258 7,250 39,468
----------------------------------------------------------------------
Total expenses ........................................ 43,287,367 467,270 121,238 4,798,167
Expenses waived/paid by affiliate (Note 3) ............ -- -- (89,028) --
----------------------------------------------------------------------
Net expenses ......................................... 43,287,367 467,270 32,210 4,798,167
----------------------------------------------------------------------
Net investment income ............................... 360,598,786 2,916,062 647,911 35,124,421
----------------------------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from investments ............... 21,319,398 133,302 (33,373) 596,765
Net unrealized appreciation (depreciation) on investments (120,400,244) (141,351) 124,833 2,362,264
----------------------------------------------------------------------
Net realized and unrealized gain (loss) .................. (99,080,846) (8,049) 91,460 2,959,029
----------------------------------------------------------------------
Net increase in net assets resulting from operations ..... $ 261,517,940 $ 2,908,013 $ 739,371 $ 38,083,450
----------------------------------------------------------------------
</TABLE>
See notes to financial statements. 139
FRANKLIN TAX-FREE TRUST
Financial Statements (continued)
STATEMENTS OF OPERATIONS (CONT.)
FOR THE YEAR ENDED FEBRUARY 28, 1999
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN
OREGON PENNSYLVANIA PUERTO RICO
TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
------------------------------------------------
<S> <C> <C> <C>
Investment income:
Interest ................................................ $ 27,260,470 $ 44,955,652 $ 12,559,957
------------------------------------------------
Expenses:
Management fees (Note 3) ................................ 2,429,095 3,734,742 1,223,542
Distribution fees (Note 3)
Class A ................................................ 420,666 676,436 194,649
Class C ................................................ 163,979 216,684 34,779
Transfer agent fees (Note 3) ............................ 194,441 391,362 125,878
Custodian fees .......................................... 4,800 7,665 2,172
Reports to shareholders ................................. 80,440 139,414 35,560
Registration and filing fees ............................ 14,482 17,010 28,482
Professional fees ....................................... 11,230 18,988 9,272
Trustees' fees and expenses ............................. 4,342 6,882 2,095
Other ................................................... 35,645 37,482 3,035
------------------------------------------------
Total expenses ......................................... 3,359,120 5,246,665 1,659,464
------------------------------------------------
Net investment income ................................. 23,901,350 39,708,987 10,900,493
------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain from investments ...................... 1,677,443 1,071,826 836,253
Net unrealized appreciation (depreciation) on investments (1,943,787) (2,242,080) 296,087
------------------------------------------------
Net realized and unrealized gain (loss) .................. (266,344) (1,170,254) 1,132,340
------------------------------------------------
Net increase in net assets resulting from operations ..... $ 23,635,006 $ 38,538,733 $ 12,032,833
------------------------------------------------
</TABLE>
140 See notes to financial statements.
FRANKLIN TAX-FREE TRUST
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED FEBRUARY 28, 1999 AND 1998
<TABLE>
<CAPTION>
FRANKLIN ARIZONA FRANKLIN COLORADO
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
----------------------------------------------------------------
1999 1998 1999 1998
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income ...................................... $ 43,743,520 $ 42,369,055 $ 14,775,876 $ 13,751,416
Net realized gain from investments ......................... 3,918,445 7,063,992 1,022,077 3,599,269
Net unrealized appreciation (depreciation) on investments .. (4,679,698) 12,652,846 (713,406) 5,186,539
----------------------------------------------------------------
Net increase in net assets resulting from operations ...... 42,982,267 62,085,893 15,084,547 22,537,224
Distributions to shareholders from:
Net investment income:
Class A ................................................... (42,890,425) (42,092,588) (14,188,201) (13,602,062)
Class C ................................................... (853,095) (439,780) (709,062) (381,635)
In excess of net investment income:
Class A ................................................... (112,500) (598,203) (6,459) --
Class C ................................................... (2,296) (1,250) (323) --
Net realized gains:
Class A ................................................... (3,662,232) (5,215,511) (1,791,554) (1,419,602)
Class C ................................................... (79,205) (69,925) (102,076) (51,742)
----------------------------------------------------------------
Total distributions to shareholders ......................... (47,599,753) (48,417,257) (16,797,675) (15,455,041)
Capital share transactions: (Note 2)
Class A .................................................... 55,297,029 44,417,210 36,395,512 23,138,001
Class C .................................................... 9,424,466 8,880,489 11,143,387 4,971,534
----------------------------------------------------------------
Total capital share transactions ............................ 64,721,495 53,297,699 47,538,899 28,109,535
Net increase in net assets ................................ 60,104,009 66,966,335 45,825,771 35,191,718
Net assets:
Beginning of year ........................................... 824,786,877 757,820,542 277,454,294 242,262,576
----------------------------------------------------------------
End of year ................................................. $ 884,890,886 $ 824,786,877 $ 323,280,065 $ 277,454,294
----------------------------------------------------------------
Undistributed net investment income (accumulated distributions
in excess of net investment income) included in net assets:
End of year ................................................ $ (714,249) $ (599,453) $ (6,782) $ 121,387
----------------------------------------------------------------
</TABLE>
See notes to financial statements. 141
FRANKLIN TAX-FREE TRUST
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS (CONT.)
FOR THE YEARS ENDED FEBRUARY 28, 1999 AND 1998
<TABLE>
<CAPTION>
FRANKLIN CONNECTICUT FRANKLIN FEDERAL INTERMEDIATE-TERM
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
-------------------------------------------------------------------
1999 1998 1999 1998
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income ............................... $ 11,874,815 $ 10,751,324 $ 7,442,059 $ 5,667,008
Net realized gain (loss) from investments ........... 631,807 2,330,741 146,469 (95,778)
Net unrealized appreciation on investments .......... 175,555 3,355,147 632,241 3,620,765
----------------------------------------------------------------
Net increase in net assets resulting from operations 12,682,177 16,437,212 8,220,769 9,191,995
Distributions to shareholders from:
Net investment income:
Class A ............................................ (11,204,717) (10,477,972) (7,539,385) (5,768,367)
Class C ............................................ (670,098) (293,150) -- --
In excess of net investment income:
Class A ............................................ (53,408) (91,006) -- --
Class C ............................................ (3,194) (2,978) -- --
----------------------------------------------------------------
Total distributions to shareholders .................. (11,931,417) (10,865,106) (7,539,385) (5,768,367)
Capital share transactions: (Note 2)
Class A ............................................. 40,666,725 14,607,058 55,372,039 31,406,147
Class C ............................................. 14,762,426 4,302,474 -- --
----------------------------------------------------------------
Total capital share transactions ..................... 55,429,151 18,909,532 55,372,039 31,406,147
Net increase in net assets ......................... 56,179,911 24,481,638 56,053,423 34,829,775
Net assets:
Beginning of year .................................... 212,279,134 187,797,496 139,544,945 104,715,170
----------------------------------------------------------------
End of year .......................................... $ 268,459,045 $ 212,279,134 $ 195,598,368 $ 139,544,945
----------------------------------------------------------------
Undistributed net investment income (accumulated
distributions in excess of net investment income)
included in net assets:
End of year ........................................... $ (150,586) $ (93,984) $ 66,835 $ 164,161
----------------------------------------------------------------
</TABLE>
142 See notes to financial statements.
FRANKLIN TAX-FREE TRUST
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS (CONT.)
FOR THE YEARS ENDED FEBRUARY 28, 1999 AND 1998
<TABLE>
<CAPTION>
FRANKLIN HIGH YIELD FRANKLIN INDIANA
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
------------------------------------------------------------------
1999 1998 1999 1998
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income ................................... $ 360,598,786 $ 312,993,540 $ 2,916,062 $ 2,875,486
Net realized gain from investments ...................... 21,319,398 37,029,261 133,302 578,277
Net unrealized appreciation (depreciation) on investments (120,400,244) 187,205,403 (141,351) 886,955
------------------------------------------------------------------
Net increase in net assets resulting from operations .... 261,517,940 537,228,204 2,908,013 4,340,718
Distributions to shareholders from:
Net investment income:
Class A ................................................ (332,249,669) (293,671,375) (2,944,395) (2,896,065)
Class B ................................................ (46,213) -- -- --
Class C ................................................ (27,314,370) (16,003,246) -- --
In excess of net investment income:
Class A ................................................ -- (4,570,398) -- --
Net realized gains:
Class A ................................................ (7,966,666) -- (157,423) (97,364)
Class C ................................................ (819,741) -- -- --
------------------------------------------------------------------
Total distributions to shareholders ...................... (368,396,659) (314,245,019) (3,101,818) (2,993,429)
Capital share transactions: (Note 2)
Class A ................................................. 342,918,876 1,028,368,708 4,564,399 2,158,623
Class B ................................................. 15,504,687 -- -- --
Class C ................................................. 217,918,008 215,193,396 -- --
------------------------------------------------------------------
Total capital share transactions ......................... 576,341,571 1,243,562,104 4,564,399 2,158,623
Net increase in net assets ............................. 469,462,852 1,466,545,289 4,370,594 3,505,912
Net assets:
Beginning of year ........................................ 6,166,202,821 4,699,657,532 54,643,229 51,137,317
------------------------------------------------------------------
End of year .............................................. $ 6,635,665,673 $ 6,166,202,821 $ 59,013,823 $ 54,643,229
------------------------------------------------------------------
Undistributed net investment income (accumulated
distributions in excess of net investment income)
included in net assets:
End of year ............................................... $ (3,528,808) $ (4,517,342) $ 67,119 $ 95,452
------------------------------------------------------------------
</TABLE>
See notes to financial statements. 143
FRANKLIN TAX-FREE TRUST
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS (CONT.)
FOR THE YEARS ENDED FEBRUARY 28, 1999 AND 1998
<TABLE>
<CAPTION>
FRANKLIN MICHIGAN FRANKLIN NEW JERSEY
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
----------------------------------------------------------------
1999 1998 1999 1998
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income ............................... $ 647,911 $ 368,771 $ 35,124,421 $ 33,244,244
Net realized gain (loss) from investments ........... (33,373) 21,364 596,765 2,902,623
Net unrealized appreciation on investments .......... 124,833 425,437 2,362,264 14,172,961
----------------------------------------------------------------
Net increase in net assets resulting from operations 739,371 815,572 38,083,450 50,319,828
Distributions to shareholders from:
Net investment income:
Class A ............................................ (659,124) (370,383) (33,973,510) (32,627,862)
Class C ............................................ -- -- (1,728,570) (995,986)
Net realized gains:
Class A ............................................ (21,402) -- -- --
----------------------------------------------------------------
Total distributions to shareholders .................. (680,526) (370,383) (35,702,080) (33,623,848)
Capital share transactions: (Note 2)
Class A ............................................. 7,790,981 4,938,273 42,629,937 46,163,845
Class C ............................................. -- -- 20,454,134 14,421,458
----------------------------------------------------------------
Total capital share transactions ..................... 7,790,981 4,938,273 63,084,071 60,585,303
Net increase in net assets ............................ 7,849,826 5,383,462 65,465,441 77,281,283
Net assets:
Beginning of year .................................... 9,267,592 3,884,130 665,067,748 587,786,465
----------------------------------------------------------------
End of year .......................................... $ 17,117,418 $ 9,267,592 $ 730,533,189 $ 665,067,748
----------------------------------------------------------------
Undistributed net investment income
included in net assets:
End of year .......................................... $ 32,280 $ 43,531 $ 74,948 $ 652,607
----------------------------------------------------------------
</TABLE>
144 See notes to financial statements.
FRANKLIN TAX-FREE TRUST
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS (CONT.)
FOR THE YEARS ENDED FEBRUARY 28, 1999 AND 1998
<TABLE>
<CAPTION>
FRANKLIN OREGON FRANKLIN PENNSYLVANIA
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
----------------------------------------------------------------
1999 1998 1999 1998
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income ................................... $ 23,901,350 $ 21,984,674 $ 39,708,987 $ 38,371,049
Net realized gain from investments ...................... 1,677,443 3,490,454 1,071,826 6,524,504
Net unrealized appreciation (depreciation) on investments (1,943,787) 7,488,709 (2,242,080) 15,000,707
----------------------------------------------------------------
Net increase in net assets resulting from operations ... 23,635,006 32,963,837 38,538,733 59,896,260
Distributions to shareholders from:
Net investment income:
Class A ................................................ (23,518,284) (21,486,828) (38,182,843) (37,844,881)
Class C ................................................ (1,142,332) (516,221) (1,526,144) (900,095)
In excess of net investment income:
Class A ................................................ -- -- (418,611) (393,721)
Class C ................................................ -- -- (16,732) (2,828)
Net realized gains:
Class A ................................................ -- -- (985,591) (9,091,610)
Class C ................................................ -- -- (51,198) (252,851)
----------------------------------------------------------------
Total distributions to shareholders ...................... (24,660,616) (22,003,049) (41,181,119) (48,485,986)
Capital share transactions: (Note 2)
Class A ................................................. 57,633,801 32,371,580 48,325,952 43,708,763
Class C ................................................. 17,049,844 8,533,540 16,135,478 13,647,815
----------------------------------------------------------------
Total capital share transactions ......................... 74,683,645 40,905,120 64,461,430 57,356,578
Net increase in net assets ............................. 73,658,035 51,865,908 61,819,044 68,766,852
Net assets:
Beginning of year ........................................ 442,968,645 391,102,737 739,040,504 670,273,652
----------------------------------------------------------------
End of year .............................................. $ 516,626,680 $ 442,968,645 $ 800,859,548 $ 739,040,504
----------------------------------------------------------------
Undistributed net investment income (accumulated
distributions in excess of net investment income)
included in net assets:
End of year ............................................... $ 692,530 $ 1,451,796 $ (831,892) $ (396,549)
----------------------------------------------------------------
</TABLE>
See notes to financial statements. 145
FRANKLIN TAX-FREE TRUST
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS (CONT.)
FOR THE YEARS ENDED FEBRUARY 28, 1999 AND 1998
<TABLE>
<CAPTION>
FRANKLIN PUERTO RICO
TAX-FREE INCOME FUND
------------------------------
1999 1998
------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income ............................... $ 10,900,493 $ 10,756,182
Net realized gain from investments .................. 836,253 166,654
Net unrealized appreciation on investments .......... 296,087 6,082,031
------------------------------
Net increase in net assets resulting from operations 12,032,833 17,004,867
Distributions to shareholders from:
Net investment income:
Class A ............................................ (10,664,385) (10,578,866)
Class C ............................................ (236,108) (117,117)
In excess of net investment income:
Class A ............................................ (112,508) --
Class C ............................................ (2,491) --
Net realized gains:
Class A ............................................ (682,528) (237,542)
Class C ............................................ (19,507) (2,435)
------------------------------
Total distributions to shareholders .................. (11,717,527) (10,935,960)
Capital share transactions: (Note 2)
Class A ............................................. 8,116,885 11,808,017
Class C ............................................. 3,431,283 1,858,374
------------------------------
Total capital share transactions ..................... 11,548,168 13,666,391
Net increase in net assets ......................... 11,863,474 19,735,298
Net assets:
Beginning of year .................................... 213,939,736 194,204,438
------------------------------
End of year .......................................... $ 225,803,210 $ 213,939,736
------------------------------
Accumulated distributions in excess of net
investment income included in net assets:
End of year .......................................... $ (162,258) $ (47,259)
------------------------------
</TABLE>
146 See notes to financial statements.
FRANKLIN TAX-FREE TRUST
Notes to Financial Statements
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Tax Free Trust (the Trust) is registered under the Investment Company
Act of 1940 as an open-end investment company, consisting of twenty-eight
separate series (the Funds). All Funds included in this report are diversified
except the Franklin Connecticut Tax-Free Income Fund, the Franklin Federal
Intermediate-Term Tax-Free Income Fund and the Franklin Michigan Tax-Free Income
Fund. The Funds' investment objective is to provide tax-free income.
The following summarizes the Funds' significant accounting policies.
a. SECURITY VALUATION
Tax-free bonds generally trade in the over-the-counter market and are valued
within the range of the latest quoted bid and asked prices. In the absence of a
sale or reported bid and asked prices, information with respect to bond and note
transactions, quotations from bond dealers, market transactions in comparable
securities, and various relationships between securities are used to determine
the value of the security. The Trust may utilize a pricing service, bank or
broker/dealer experienced in such matters to perform any of the pricing
functions under procedures approved by the Board of Trustees. Securities for
which market quotations are not readily available are valued at fair value as
determined by management in accordance with procedures established by the Board
of Trustees.
b. INCOME TAXES
No provision has been made for income taxes because each Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute substantially all of its taxable income.
c. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Interest income and estimated expenses are accrued daily. Bond discount and
premium are amortized on an income tax basis. Distributions to shareholders are
recorded on the ex-dividend date.
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class.
Common expenses incurred by the Trust are allocated among the Funds based on the
ratio of net assets of each Fund to the combined net assets. Other expenses are
charged to each Fund on a specific identification basis.
d. ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.
2. SHARES OF BENEFICIAL INTEREST
The classes of shares offered within each of the Funds are indicated below.
Effective January 1, 1999, Class I and Class II were renamed Class A and Class
C, respectively, and the Franklin High Yield Tax-Free Income Fund began offering
a new class of shares, Class B. The shares differ by their initial sales load,
distribution fees, voting rights on matters affecting a single class and the
exchange privilege of each class.
<TABLE>
<CAPTION>
CLASS A CLASS A & CLASS C CLASS A, CLASS B, & CLASS C
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Federal Intermediate-Term Tax-Free Income Fund Arizona Tax-Free Income Fund High Yield Tax-Free Income Fund
Indiana Tax-Free Income Fund Colorado Tax-Free Income Fund
Michigan Tax-Free Income Fund Connecticut Tax-Free Income Fund
New Jersey Tax-Free Income Fund
Oregon Tax-Free Income Fund
Pennsylvania Tax-Free Income Fund
Puerto Rico Tax-Free Income Fund
</TABLE>
147
FRANKLIN TAX-FREE TRUST
Notes to Financial Statements (continued)
2. SHARES OF BENEFICIAL INTEREST (CONT.)
At February 28, 1999, there were an unlimited number of shares authorized (no
par value). Transactions in the Funds' shares were as follows:
<TABLE>
<CAPTION>
FRANKLIN ARIZONA FRANKLIN COLORADO FRANKLIN CONNECTICUT
TAX-FREE INCOME FUND TAX-FREE INCOME FUND TAX-FREE INCOME FUND
---------------------------------------------------------------------------------
CLASS A SHARES: SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Year ended February 28, 1999
Shares sold ........................ 11,526,533 $131,398,899 4,827,831 $ 58,439,307 5,343,819 $ 60,218,484
Shares issued in reinvestment of
distributions ..................... 1,678,671 19,132,729 655,996 7,932,374 494,190 5,562,097
Shares redeemed .................... (8,347,885) (95,234,599) (2,479,532) (29,976,169) (2,231,916) (25,113,856)
---------------------------------------------------------------------------------
Net increase ........................ 4,857,319 $ 55,297,029 3,004,295 $ 36,395,512 3,606,093 $ 40,666,725
---------------------------------------------------------------------------------
Year ended February 28, 1998
Shares sold ........................ 10,989,623 $124,544,786 4,200,877 $ 49,956,273 3,158,359 $ 34,854,687
Shares issued in reinvestment of
distributions ..................... 1,709,572 19,390,926 602,905 7,203,365 434,591 4,800,239
Shares redeemed .................... (8,792,791) (99,518,502) (2,852,691) (34,021,637) (2,268,367) (25,047,868)
---------------------------------------------------------------------------------
Net increase ........................ 3,906,404 $ 44,417,210 1,951,091 $ 23,138,001 1,324,583 $ 14,607,058
---------------------------------------------------------------------------------
CLASS C SHARES:
Year ended February 28, 1999
Shares sold ........................ 1,020,350 $ 11,705,629 1,064,599 $ 12,955,209 1,442,047 $ 16,291,315
Shares issued in reinvestment of
distributions ..................... 48,448 555,594 47,188 573,490 36,934 417,159
Shares redeemed .................... (247,506) (2,836,757) (195,768) (2,385,312) (172,113) (1,946,048)
---------------------------------------------------------------------------------
Net increase ........................ 821,292 $ 9,424,466 916,019 $ 11,143,387 1,306,868 $ 14,762,426
---------------------------------------------------------------------------------
Year ended February 28, 1998
Shares sold ........................ 944,093 $ 10,786,657 465,522 $ 5,579,219 471,457 $ 5,230,031
Shares issued in reinvestment of
distributions ..................... 29,661 338,868 26,102 313,854 15,933 176,704
Shares redeemed .................... (196,079) (2,245,036) (76,937) (921,539) (99,234) (1,104,261)
---------------------------------------------------------------------------------
Net increase ........................ 777,675 $ 8,880,489 414,687 $ 4,971,534 388,156 $ 4,302,474
---------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN
FEDERAL INTERMEDIATE-TERM FRANKLIN HIGH YIELD
TAX-FREE INCOME FUND TAX-FREE INCOME FUND
---------------------------------------------------------
CLASS A SHARES: SHARES AMOUNT SHARES AMOUNT
---------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended February 28, 1999
Shares sold 11,604,328 $130,996,084 109,439,514 $ 1,270,904,703
Shares issued in reinvestment
of distributions 424,605 4,788,679 12,599,576 146,168,778
Shares redeemed (7,120,171) (80,412,724) (92,381,330) (1,074,154,605)
---------------------------------------------------------
Net increase 4,908,762 $ 55,372,039 29,657,760 $ 342,918,876
---------------------------------------------------------
Year ended February 28, 1998
Shares sold 7,621,870 $ 84,314,187 131,051,149 $ 1,501,048,680
Shares issued in reinvestment
of distributions 314,345 3,475,067 10,564,487 120,432,053
Shares redeemed (5,106,923) (56,383,107) (52,168,755) (593,112,025)
---------------------------------------------------------
Net increase 2,829,292 $ 31,406,147 89,446,881 $ 1,028,368,708
---------------------------------------------------------
</TABLE>
148
FRANKLIN TAX-FREE TRUST
Notes to Financial Statements (continued)
2. SHARES OF BENEFICIAL INTEREST (CONT.)
<TABLE>
<CAPTION>
FRANKLIN HIGH YIELD
TAX-FREE INCOME FUND
---------------------------
CLASS B SHARES: SHARES AMOUNT
---------------------------
<S> <C> <C>
Period ended February 28, 1999(1)
Shares sold .................................. 1,351,940 $ 15,588,944
Shares issued in reinvestment of distributions 1,920 22,138
Shares redeemed .............................. (9,204) (106,395)
---------------------------
Net increase .................................. 1,344,656 $ 15,504,687
---------------------------
CLASS C SHARES:
Year ended February 28, 1999
Shares sold .................................. 23,491,348 $ 274,591,698
Shares issued in reinvestment of distributions 1,434,609 16,744,689
Shares redeemed .............................. (6,290,089) (73,418,379)
---------------------------
Net increase .................................. 18,635,868 $ 217,918,008
---------------------------
Year ended February 28, 1998
Shares sold .................................. 20,703,147 $ 237,559,146
Shares issued in reinvestment of distributions 787,176 9,048,976
Shares redeemed .............................. (2,737,903) (31,414,726)
---------------------------
Net increase .................................. 18,752,420 $ 215,193,396
---------------------------
</TABLE>
(1) For the period January 1, 1999 (effective date) to February 28, 1999.
<TABLE>
<CAPTION>
FRANKLIN INDIANA FRANKLIN MICHIGAN FRANKLIN NEW JERSEY
TAX-FREE INCOME FUND TAX-FREE INCOME FUND TAX-FREE INCOME FUND
----------------------------------------------------------------------------------------------
CLASS A SHARES: SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Year ended February 28, 1999
Shares sold ................. 693,824 $ 8,363,007 873,005 $ 9,679,445 9,025,737 $ 107,896,711
Shares issued in reinvestment
of distributions ........... 147,232 1,774,634 34,684 384,353 1,485,157 17,759,368
Shares redeemed ............. (462,563) (5,573,242) (205,659) (2,272,817) (6,947,075) (83,026,142)
----------------------------------------------------------------------------------------------
Net increase ................. 378,493 $ 4,564,399 702,030 $ 7,790,981 3,563,819 $ 42,629,937
----------------------------------------------------------------------------------------------
Year ended February 28, 1998
Shares sold ................. 579,644 $ 6,873,674 551,576 $ 5,829,785 8,712,865 $ 102,237,548
Shares issued in reinvestment
of distributions ........... 134,539 1,599,765 23,331 248,616 1,409,016 16,532,393
Shares redeemed ............. (531,972) (6,314,816) (106,557) (1,140,128) (6,187,043) (72,606,096)
----------------------------------------------------------------------------------------------
Net increase ................. 182,211 $ 2,158,623 468,350 $ 4,938,273 3,934,838 $ 46,163,845
----------------------------------------------------------------------------------------------
CLASS C SHARES:
Year ended February 28, 1999
Shares sold ................. 2,039,721 $ 24,514,544
Shares issued in reinvestment
of distributions ........... 92,442 1,111,258
Shares redeemed ............. (430,504) (5,171,668)
Net increase ................. 1,701,659 $ 20,454,134
Year ended February 28, 1998
Shares sold ................. 1,400,159 $ 16,481,996
Shares issued in reinvestment
of distributions ........... 58,051 685,807
Shares redeemed ............. (232,294) (2,746,345)
---------------------------
Net increase ................. 1,225,916 $ 14,421,458
---------------------------
</TABLE>
149
FRANKLIN TAX-FREE TRUST
Notes to Financial Statements (continued)
2. SHARES OF BENEFICIAL INTEREST (CONT.)
<TABLE>
<CAPTION>
FRANKLIN OREGON FRANKLIN PENNSYLVANIA FRANKLIN PUERTO RICO
TAX-FREE INCOME FUND TAX-FREE INCOME FUND TAX-FREE INCOME FUND
------------------------------------------------------------------------------------------------
CLASS A SHARES: SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Year ended February 28, 1999
Shares sold ................. 7,610,561 $ 90,155,831 10,273,081 $ 108,316,940 2,024,140 $ 24,064,112
Shares issued in reinvestment
of distributions ........... 1,100,982 13,038,139 1,721,278 18,145,017 469,863 5,585,862
Shares redeemed ............. (3,846,398) (45,560,169) (7,413,012) (78,136,005) (1,811,759) (21,533,089)
------------------------------------------------------------------------------------------------
Net increase ................. 4,865,145 $ 57,633,801 4,581,347 $ 48,325,952 682,244 $ 8,116,885
------------------------------------------------------------------------------------------------
Year ended February 28, 1998
Shares sold ................. 5,268,610 $ 61,496,989 9,004,492 $ 94,158,052 2,415,410 $ 28,143,369
Shares issued in reinvestment
of distributions ........... 1,035,752 12,096,370 2,121,558 22,217,555 447,385 5,214,315
Shares redeemed ............. (3,535,934) (41,221,779) (6,956,391) (72,666,844) (1,854,307) (21,549,667)
------------------------------------------------------------------------------------------------
Net increase ................. 2,768,428 $ 32,371,580 4,169,659 $ 43,708,763 1,008,488 $ 11,808,017
------------------------------------------------------------------------------------------------
CLASS C SHARES:
Year ended February 28, 1999
Shares sold ................. 1,560,923 $ 18,592,323 1,872,749 $ 19,847,633 361,675 $ 4,306,325
Shares issued in reinvestment
of distributions ........... 70,444 839,644 96,080 1,017,661 13,159 156,658
Shares redeemed ............. (199,919) (2,382,123) (447,006) (4,729,816) (86,636) (1,031,700)
------------------------------------------------------------------------------------------------
Net increase ................. 1,431,448 $ 17,049,844 1,521,823 $ 16,135,478 288,198 $ 3,431,283
------------------------------------------------------------------------------------------------
Year ended February 28, 1998
Shares sold ................. 784,427 $ 9,219,159 1,410,008 $ 14,834,384 194,122 $ 2,272,453
Shares issued in reinvestment
of distributions ........... 31,773 373,918 73,526 774,170 5,468 63,947
Shares redeemed ............. (90,512) (1,059,537) (186,019) (1,960,739) (40,740) (478,026)
------------------------------------------------------------------------------------------------
Net increase ................. 725,688 $ 8,533,540 1,297,515 $ 13,647,815 158,850 $ 1,858,374
------------------------------------------------------------------------------------------------
</TABLE>
3. TRANSACTIONS WITH AFFILIATES
Certain officers and trustees of the Trust are also officers and/or directors of
Franklin Advisers, Inc. (Advisers), Franklin Investment Advisory Services, Inc.
(Investment Advisory), Franklin/Templeton Distributors, Inc. (Distributors),
Franklin/Templeton Investor Services, Inc. (Investor Services), and Franklin
Templeton Services, Inc. (FT Services), the Funds' investment managers,
principal underwriter, transfer agent, and administrative manager, respectively.
The Franklin Connecticut Tax-Free Income Fund and the remaining funds pay an
investment management fee to Investment Advisory and Advisers, respectively,
based on the average net assets of the Funds as follows:
<TABLE>
<CAPTION>
ANNUALIZED
FEE RATE MONTH-END NET ASSETS
---------------------------------------------------------------
<S> <C>
.625% First $100 million
.500% Over $100 million, up to and including $250 million
.450% In excess of $250 million
</TABLE>
Under agreements with Investment Advisory and Advisers, FT Services provides
administrative services to the Funds. The fee is paid by Investment Advisory and
Advisers based on average daily net assets, and is not an additional expense of
the Funds.
Advisers agreed in advance to waive management fees and assume payment of other
expenses for the Franklin Federal Intermediate-Term Tax-Free Income Fund and the
Franklin Michigan Tax-Free Income Fund, as noted in the Statements of
Operations.
The Funds reimburse Distributors up to .10%, .65%, and .65% per year of their
average daily net assets of Class A, Class B, and Class C, respectively, for
costs incurred in marketing the Funds' shares.
150
FRANKLIN TAX-FREE TRUST
Notes to Financial Statements (continued)
3. TRANSACTIONS WITH AFFILIATES (CONT.)
Distributors received (paid) net commissions on sales of the Funds' shares, and
received contingent deferred sales charges for the year as follows:
<TABLE>
<CAPTION>
FRANKLIN
FRANKLIN FRANKLIN FRANKLIN FEDERAL FRANKLIN FRANKLIN
ARIZONA COLORADO CONNECTICUT INTERMEDIATE- HIGH YIELD INDIANA
TAX-FREE TAX-FREE TAX-FREE TERM TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND INCOME FUND INCOME FUND INCOME FUND
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net commissions received (paid) .... $(76,889) $(151,335) $(197,926) $(347,744) $(3,795,464) $4,517
Contingent deferred sales charges .. $ 12,269 $ 8,464 $ 7,518 $ 4,464 $ 283,409 $ --
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN
MICHIGAN NEW JERSEY OREGON PENNSYLVANIA PUERTO RICO
TAX-FREE TAX-FREE TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND INCOME FUND INCOME FUND
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net commissions received (paid) .... $11,511 $(201,862) $ 132,151 $(108,983) $(10,699)
Contingent deferred sales charges .. $ -- $ 23,450 $ 13,763 $ 16,329 $ 5,057
</TABLE>
The Funds paid transfer agent fees of $4,329,703, of which $3,659,599 was paid
to Investor Services.
4. INCOME TAXES
At February 28, 1999, the Funds had tax basis capital losses which may be
carried over to offset future capital gains. Such losses expire as follows:
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FEDERAL FRANKLIN FRANKLIN
CONNECTICUT INTERMEDIATE- MICHIGAN OREGON
TAX-FREE TERM TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND INCOME FUND
--------------------------------------------------------
<S> <C> <C> <C> <C>
Capital loss carryovers expiring in: 2003 ... $3,162,502 $ -- $ -- $ 36,444
2004 ... 46,957 920,152 -- --
2005 ... 322,502 99,478 -- 67,453
2006 ... -- 95,778 -- --
2007 ... -- -- 33,373 --
--------------------------------------------------------
$3,531,961 $1,115,408 $33,373 $103,897
--------------------------------------------------------
</TABLE>
Distributions of income to shareholders may not equal net investment income due
to differing treatments of dividend distributions for book and tax purposes.
Net realized capital gains (losses) differ for financial statement and tax
purposes primarily due to differing treatment of wash sales.
At February 28, 1999, the net unrealized appreciation based on the cost of
investments for income tax purposes was as follows:
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FEDERAL
ARIZONA COLORADO CONNECTICUT INTERMEDIATE-
TAX-FREE TAX-FREE TAX-FREE TERM TAX-FREE
INCOME FUND INCOME FUND INCOME FUND INCOME FUND
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Investments at cost ............ $831,278,248 $300,359,139 $250,338,921 $187,361,831
--------------------------------------------------------------
Unrealized appreciation ........ $ 51,499,410 $ 18,477,819 $ 15,382,080 $ 7,663,180
Unrealized depreciation ........ (1,691,794) (204,798) (187,363) (491,956)
--------------------------------------------------------------
Net unrealized appreciation .... $ 49,807,616 $ 18,273,021 $ 15,194,717 $ 7,171,224
--------------------------------------------------------------
</TABLE>
151
FRANKLIN TAX-FREE TRUST
Notes to Financial Statements (continued)
4. INCOME TAXES (CONT.)
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN
HIGH YIELD INDIANA MICHIGAN NEW JERSEY
TAX-FREE TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND INCOME FUND
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investments at cost ......... $ 6,220,381,266 $ 55,630,869 $ 16,234,216 $ 680,354,419
------------------------------------------------------------------------------
Unrealized appreciation ..... $ 444,690,683 $ 3,711,562 $ 644,702 $ 46,786,602
Unrealized depreciation ..... (114,495,841) (26,288) (26,000) (357,028)
------------------------------------------------------------------------------
Net unrealized appreciation . $ 330,194,842 $ 3,685,274 $ 618,702 $ 46,429,574
------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN
OREGON PENNSYLVANIA PUERTO RICO
TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
---------------------------------------------------
<S> <C> <C> <C>
Investments at cost ......... $ 511,636,176 $ 750,024,735 $ 207,722,364
---------------------------------------------------
Unrealized appreciation ..... $ 27,593,338 $ 47,377,968 $ 15,264,452
Unrealized depreciation ..... (207,663) (495,725) (50,608)
---------------------------------------------------
Net unrealized appreciation . $ 27,385,675 $ 46,882,243 $ 15,213,844
---------------------------------------------------
</TABLE>
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the year
ended February 28, 1999, were as follows:
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FEDERAL FRANKLIN FRANKLIN
ARIZONA COLORADO CONNECTICUT INTERMEDIATE- HIGH YIELD INDIANA
TAX-FREE TAX-FREE TAX-FREE TERM TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND INCOME FUND INCOME FUND INCOME FUND
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Purchases . $ 174,922,140 $ 80,480,811 $ 67,344,295 $ 73,359,722 $1,693,788,732 $ 14,667,411
Sales ..... $ 119,958,401 $ 37,331,632 $ 13,573,532 $ 26,476,275 $1,178,126,292 $ 10,495,372
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN
MICHIGAN NEW JERSEY OREGON PENNSYLVANIA PUERTO RICO
TAX-FREE TAX-FREE TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND INCOME FUND INCOME FUND
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Purchases .... $ 9,431,400 $104,152,300 $132,382,727 $137,435,546 $ 57,402,546
Sales ........ $ 1,968,903 $ 37,383,597 $ 50,554,688 $ 84,188,349 $ 43,774,393
</TABLE>
6. CREDIT RISK AND DEFAULTED SECURITIES
The Franklin High Yield Tax-Free Income Fund has 38.4% of its portfolio invested
in lower rated and comparable quality unrated high yield securities, which tend
to be more sensitive to economic conditions than higher rated securities. The
risk of loss due to default by the issuer may be significantly greater for the
holders of high yielding securities because such securities are generally
unsecured and are often subordinated to other creditors of the issuer. At
February 28, 1999, the Franklin Federal Intermediate-Term Tax-Free Income Fund
and the Franklin High Yield Tax-Free Income Fund held defaulted securities with
a value aggregating $1,092,000 and $21,060,000 representing .56% and .32%,
respectively, of the Funds' net assets. For information as to specific
securities, see the accompanying Statements of Investments.
For financial reporting purposes, the Funds discontinue accruing income on
defaulted bonds and provide an estimate for losses on interest receivable.
The Funds have investments in excess of 10% of their total net assets in their
respective states or U.S. territories and possessions except the Franklin
Federal Intermediate-Term Tax-Free Income Fund and the Franklin High Yield
Tax-Free Income Fund, which have investments in excess of 10% of their total net
assets in the states of California or New York. Such concentration may subject
the Funds more significantly to economic changes occurring within those states.
152
FRANKLIN TAX-FREE TRUST
Independent Auditors' Report
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES
OF FRANKLIN TAX-FREE TRUST:
In our opinion, the accompanying statements of assets and liabilities, including
the statements of investments, and the related statements of operations and
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of each of the eleven funds included
in the report, which are part of the Franklin Tax-Free Trust, (hereafter
referred to as the "Trust") at February 28, 1999, the results of each of their
operations for the year then ended, the changes in each of their net assets for
each of the two years in the period then ended and each of their financial
highlights for each of the periods presented, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Trust's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at February 28, 1999 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
San Francisco, California
April 2, 1999
153
FRANKLIN TAX-FREE TRUST
Tax Information
Under Section 852(b)(3)(C) of the Internal Revenue Code, the Funds hereby
designate the following amounts as capital gain dividends for the fiscal year
ended February 28, 1999:
<TABLE>
<S> <C>
Franklin Arizona Tax-Free Income Fund ................................................................... $ 3,802,669
Franklin Colorado Tax-Free Income Fund .................................................................. $ 1,022,077
Franklin High Yield Tax-Free Income Fund ................................................................ $ 10,392,475
Franklin Indiana Tax-Free Income Fund ................................................................... $ 72,701
Franklin New Jersey Tax-Free Income Fund ................................................................ $ 200,885
Franklin Pennsylvania Tax-Free Income Fund .............................................................. $ 1,050,917
Franklin Puerto Rico Tax-Free Income Fund ............................................................... $ 836,253
</TABLE>
Under Section 852(b)(5)(A) of the Internal Revenue Code, the Funds hereby
designate 100% of the distributions paid from net investment income as
exempt-interest dividends for the fiscal year ended February 28, 1999.
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