Dear Shareholder:
Enclosed is a Notice of Meeting for a Special Shareholders' Meeting of the
Franklin Michigan Tax-Free Income 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 a Plan of Reorganization that would
result in your shares of Franklin Michigan Tax-Free Income Fund ("Income Fund")
being exchanged for those of a fund called Franklin Michigan Insured Tax-Free
Income Fund ("Insured Fund"). If shareholders of Income Fund approve the
proposal, you will receive Class A shares of Insured Fund equal in value to your
investment in shares of Income Fund. You will no longer be a shareholder of
Income Fund, and you will instead be a shareholder of Insured 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
Income Fund was not sufficient to continue to offer a fund with competitive
performance and high quality service to shareholders over the long term. Insured
Fund has investment goals and investment policies substantially similar to those
of Income Fund, as outlined in the Prospectus/Proxy Statement. Insured Fund is
managed by Franklin Advisers, Inc., the current investment manager of Income
Fund. Insured 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 MICHIGAN 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
Michigan Tax-Free Income Fund ("Income 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. To approve or disapprove a Plan of Reorganization by the Trust, on
behalf of its series, Income Fund and Franklin Michigan Insured Tax-Free Income
Fund ("Insured Fund"), that provides for: (i) the acquisition of substantially
all of the assets of Income Fund in exchange for Class A shares of Insured Fund;
(ii) the distribution of Class A shares of Insured Fund to the shareholders of
Income Fund; and (iii) the liquidation and dissolution of Income 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 Plan of Reorganization is described in
the attached Prospectus/ Proxy Statement. A copy of the Plan of Reorganization
is attached as Exhibit A to the Prospectus/Proxy Statement.
Shareholders of record 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(S) 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>
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PAGE
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<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? 5
Transfer Agency and Custody Services 5
Distribution Services 5
Rule 12b-1 Plans 5
Purchases and Redemptions 6
Dividends and Distributions 6
REASONS FOR THE TRANSACTION 7
INFORMATION ABOUT THE TRANSACTION 7
How will the Transaction be carried out? 7
Who will pay the expenses of the Transaction? 8
What are the tax consequences of the Transaction? 8
What should I know about Insured Fund -- Class A
Shares? 8
What are the capitalizations of the funds and what
might the capitalization be after the Transaction? 9
COMPARISON OF INVESTMENT GOALS AND POLICIES 9
Are there any significant differences between the
investment goals of the funds? 9
How do the types of securities the funds buy and the
investment policies of the funds compare? 9
How do the fundamental investment restrictions of the
funds differ? 11
What are the risk factors associated with investments
in the funds? 11
</TABLE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
VOTING INFORMATION 13
How many votes are necessary to approve the Plan? 13
How do I ensure my vote is accurately recorded? 13
Can I revoke my proxy? 13
What other matters will be voted upon at the Meeting? 13
Who is entitled to vote? 13
What other solicitations will be made? 14
Are there dissenters' rights? 14
INFORMATION ABOUT INSURED FUND 14
INFORMATION ABOUT INCOME FUND 14
PRINCIPAL HOLDERS OF SHARES 15
GLOSSARY OF USEFUL TERMS AND DEFINITIONS 16
EXHIBITS TO PROSPECTUS AND PROXY STATEMENT 17
Exhibit A - Plan of Reorganization A-1
Exhibit B - Prospectus of Franklin Michigan Insured
Tax-Free Income Fund dated July 1, 1998, as amended
January 1, 1999
Exhibit C - Annual Report to Shareholders of Franklin
Michigan Insured Tax-Free Income Fund dated February
28, 1999
</TABLE>
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PROSPECTUS AND PROXY STATEMENT
DATED APRIL 21, 1999
ACQUISITION OF THE ASSETS OF
FRANKLIN MICHIGAN TAX-FREE INCOME FUND
BY AND IN EXCHANGE FOR SHARES OF
FRANKLIN MICHIGAN INSURED TAX-FREE INCOME FUND
This Prospectus/Proxy Statement solicits proxies to be voted at a Special
Shareholders' Meeting (the "Meeting") of Franklin Michigan Tax-Free Income Fund
("Income Fund") to approve or disapprove a Plan of Reorganization (the "Plan").
If shareholders vote to approve the Plan, the net assets of Income Fund will be
acquired by Franklin Michigan Insured Tax-Free Income Fund ("Insured Fund") in
exchange for shares of Franklin Michigan Insured Tax-Free Income Fund -- Class A
("Insured Fund -- Class A Shares"). The Meeting will be held at the principal
offices of Franklin Tax-Free Trust (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, on behalf of Income Fund, is soliciting these proxies.
This Prospectus/Proxy Statement will first be sent to shareholders on or about
May 7, 1999.
If the shareholders vote to approve the Plan, you will receive Insured
Fund -- Class A Shares equal in value to your investment in shares of Income
Fund. Income Fund will then be liquidated.
Like Income Fund, Insured Fund is a series of the Trust, an open-end
management investment company. And, like Income Fund, Insured Fund's investment
goal is to provide investors with as high a level of income exempt from federal
income taxes and from personal income taxes for resident shareholders of
Michigan as is consistent with prudent investing, while seeking the preservation
of shareholders' capital. There are two principal differences between the funds.
One difference is the type of securities in which each fund primarily invests.
Insured Fund primarily invests in insured municipal securities; Income Fund only
invests in investment grade municipal securities. Second, Insured Fund, unlike
Income Fund, is a diversified fund. Diversified funds can not invest as much of
their assets as non-diversified funds can in the securities of any single
issuer.
This Prospectus/Proxy Statement gives the information about the proposed
reorganization and Insured Fund -- Class A Shares that you should know before
investing. You should retain it for future reference. Additional information
about the Insured Fund -- Class A Shares and the proposed reorganization can be
found in the following documents.
- The Prospectus of Insured Fund dated July 1, 1998, as amended January 1,
1999 ("Insured Fund Prospectus"), is attached to and considered a part of
this Prospectus/Proxy Statement.
- The Annual Report to Shareholders of Insured Fund, dated February 28,
1999, contains financial and performance information for Insured Fund and
is attached to and considered a part of this Prospectus/Proxy Statement.
- A Statement of Additional Information dated April 21, 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 Income Fund dated July 1, 1998, as amended January 1,
1999 and supplemented January 12, 1999 (the "Income Fund Prospectus") and Income
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 Income Fund or Insured Fund 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 Plan (attached as Exhibit
A), the Insured Fund Prospectus (attached as Exhibit B), and the Annual Report
of Insured Fund (attached as Exhibit C).
ON WHAT PROPOSAL AM I BEING ASKED TO VOTE?
The Board has approved the Plan (which is attached as Exhibit A) for Income
Fund and recommends that shareholders of Income Fund vote to approve the Plan.
If shareholders vote to approve the Plan, Income Fund's net assets will be
transferred to Insured Fund in exchange for an equal value of Insured
Fund -- Class A Shares. These shares of Insured Fund will then be distributed to
Income Fund's shareholders and Income Fund will be liquidated. (This proposed
transaction is referred to in this Prospectus/Proxy Statement as the
"Transaction.")
This means that your shares of Income Fund will be exchanged for an equal
value of Insured Fund -- Class A Shares. As a result, you will cease to be a
shareholder of Income Fund and will become a shareholder of Insured Fund. This
exchange will occur on the closing date of the Transaction, which is the
specific date on which the Transaction takes place.
Like Income Fund, Insured 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 Income Fund.
For the reasons set forth below under "Reasons for the Transaction," the
Board has concluded that the Transaction is in the best interests of the
shareholders of Income Fund and Insured Fund. The Board also concluded that no
dilution in value would result to the shareholders of Income Fund or Insured
Fund, as a result of the Transaction.
THE BOARD RECOMMENDS THAT YOU
VOTE TO APPROVE THE PLAN.
HOW WILL THE SHAREHOLDER VOTING BE HANDLED?
Shareholders who own shares of Income 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 that they hold and a fractional vote for each
fractional share that they hold. To approve the reorganization, a majority of
the outstanding shares of Income Fund must be voted in favor of the 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 a 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 Income Fund will not recognize any gain
or loss for federal income tax purposes as a result of the exchange of their
shares of Income Fund for Insured 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 more
information about the tax consequences of the Transaction, see "Information
About the Transaction -- What are the tax consequences of the Transaction?"
2
COMPARISONS OF SOME IMPORTANT FEATURES
HOW DO THE INVESTMENT GOALS AND POLICIES OF THE FUNDS COMPARE?
Insured Fund and Income Fund share the identical investment goal of
providing investors with as high a level of income exempt from federal income
taxes and from personal income taxes for resident shareholders of Michigan as is
consistent with prudent investing, while seeking preservation of shareholders'
capital. Both of the funds seek to achieve this goal by trying to invest all of
their assets in municipal securities that pay interest free from federal and
state personal income taxes for Michigan residents. The primary difference
between the investment policies of the funds is that at least 65% of the
municipal securities in which the Insured Fund invests are covered by insurance
guaranteeing the timely payment of principal and interest. The Income Fund
invests in investment grade municipal securities or unrated securities that
Advisers believes are comparable. In addition, unlike Income Fund, which is a
non-diversified fund, Insured Fund is a diversified fund. As a diversified fund,
Insured Fund is required to spread its investments among more issuers.
For more information about the investment goals and policies of the two
funds, see "Comparison of Investment Goals and Policies."
WHAT ARE THE RISKS OF AN INVESTMENT IN THE FUNDS?
As with most investments, investments in Income Fund and Insured 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. As a general principle, an investment in Insured Fund
involves relatively less risk than a similar investment in Income Fund. This is
because Insured Fund invests at least 65% of its assets in insured municipal
securities, which increases the credit safety of its insured investments. The
fact that Insured Fund is a diversified fund may also reduce the relative risks
associated with investments in each of the funds because Insured Fund's
investments may not be as focused as those of Income Fund on single issuers.
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 both funds is the
responsibility of the Board. The Board elects officers of the Trust who are
responsible for the day-to-day operations. Both funds are series of Franklin
Tax-Free Trust, a Massachusetts business trust created in September 1984.
Advisers manages the assets of both 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 Insured Fund's
portfolio is:
Thomas Kenny, Executive Vice President of Advisers. Mr. Kenny has been an
analyst or portfolio manager of the Insured Fund since 1987 and of the Income
Fund since its inception. 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.
3
Sheila Amoroso, Senior Vice President of Advisers. Ms. Amoroso has been an
analyst or portfolio manager of the Insured Fund since 1987 and is not a member
of the management team for the Income Fund. She holds a Bachelor of Science
degree from San Francisco State University. She joined the Franklin Templeton
Group in 1986.
John Pomeroy, Vice President of Advisers. Mr. Pomeroy has been an analyst
or portfolio manager of the Insured Fund since 1989 and of the Income Fund since
1996. He holds a Bachelor of Science degree in Finance from San Francisco State
University. He joined the Franklin Templeton Group in 1986.
As indicated, each of these team members currently manages one or both of
the funds. Francisco Rivera, Portfolio Manager of Advisers and a member of the
management team for the Income Fund, is not a member of the management team for
the Insured 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
the fund's net assets up to and including $100 million; and 1/24 of 1% of the
value of the fund's net assets over $100 million up to and including $250
million; and 9/240 of 1% of the value of the fund's net assets in excess of $250
million. The fee is computed at the close of business on the last business day
of each month. Because Insured Fund has two classes of shares, holders of
Insured 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 INCOME FUND AND INSURED FUND -- CLASS A SHARES
FOR THE 12 MONTH PERIOD ENDED FEBRUARY 28, 1999
<TABLE>
<CAPTION>
ACTUAL INSURED FUND
---------------------------- AFTER TRANSACTION
INCOME FUND INSURED 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)................ None None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees............................... 0.63%(3) 0.47% 0.47%
Rule 12b-1 Fees(4)............................ 0.10% 0.09% 0.09%
Other Expenses................................ 0.21% 0.07% 0.07%
--------- ---------- ------------
Total Fund Operating Expenses................. 0.94%(3) 0.63% 0.63%
--------- ---------- ------------
--------- ---------- ------------
</TABLE>
- ---------------
+ Information provided is for Insured Fund -- Class A Shares.
* 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 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 Insured Fund or Income Fund for
details.
3. For the period shown, Advisers had agreed in advance to waive its management
fees and make certain payments to reduce the Income Fund's expenses. With
this reduction, the Income Fund paid no management fees and total operating
expenses were 0.25%.
4
4. These fees may not exceed 0.15% for Income Fund and 0.10% for Insured Fund.
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 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>
Income Fund............................................. $517 $712 $923 $1,531
Insured Fund............................................ $487 $618 $761 $1,178
Projected Insured Fund (after proposed Transaction)..... $487 $618 $761 $1,178
</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 fund's Net Asset Value or in dividends paid to shareholders and are not
directly charged to your account.
WHERE CAN I FIND MORE FINANCIAL INFORMATION ABOUT THE FUNDS?
The current Annual Report to Shareholders of Insured Fund for the fiscal
year ended February 28, 1999 contains more financial information about Insured
Fund, including per share information under the heading "Financial Highlights,"
and audited financial statements. The Annual Report is attached to and
considered a part of this Prospectus/Proxy Statement. The current Annual Report
to Shareholders of Income Fund for the fiscal year ended February 28, 1999
contains similar information about that fund, and will be provided free of
charge if you request a copy of the SAI relating to this Prospectus/Proxy
Statement.
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 both of the funds.
Bank of New York acts as the custodian of the securities and other assets
of both 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 Income Fund and Insured 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 Insured 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 Income Fund under its plan may not exceed 0.15% per year of the
fund's average daily net assets, although the fund is currently only reimbursing
up to 0.10%. Payments by Insured Fund under its Class A plan may not exceed
0.10% per year of Class A's average daily net assets. All distribution
5
expenses over these amounts 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.
In the case of Insured Fund, which has two 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 Funds' Underwriter" in the SAI for
Insured 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. Both funds generally require
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. Insured Fund shares acquired by Income Fund shareholders
as a result of this Transaction are subject to a Contingent Deferred Sales
Charge to the same extent that the Income Fund shares were subject to a
Contingent Deferred Sales Charge.
Additional information and specific instructions explaining how to buy,
sell, and exchange shares of Income Fund and Insured Fund are outlined in the
current prospectus of each fund under the heading "About Your Account." The
accompanying prospectus of Insured 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. Both funds declare dividends daily from their
net investment income and pay 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. Neither fund pays "interest" nor guarantees any
amount of dividends or return on an investment in its shares.
Capital gains, if any, for both funds 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 alternate 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 Michigan and local income tax. Distributions paid by the
funds from the interest earned on municipal securities of Michigan, or its
political subdivisions, will generally be exempt from Michigan's personal income
taxes.
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.
6
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
Because of the relatively low demand for Income Fund, Advisers recommended
to the Board that Income 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 Income Fund and its
shareholders. The Transaction was also recommended to combine two similar funds
within the Franklin Templeton Group to eliminate duplication of expenses and
internal competition.
The Plan was presented to the Board at a meeting of the Board. At the
meeting, the Board questioned management about the potential benefits and costs
to shareholders of Income Fund. In deciding whether to recommend approval of the
Transaction to shareholders, the Board considered, among other things: the
expense ratios of Income Fund and Insured Fund; the comparative investment
performance of Income Fund and Insured Fund; the compatibility of the investment
goals, policies, restrictions and investments of Income Fund with those of
Insured Fund; the tax consequences of the Transaction; and the significant
experience of Advisers. During the course of its deliberations, the Board also
considered that the expenses of the Transaction will be shared one-quarter by
Income Fund, one-quarter by Insured Fund, and one-half by Advisers.
The Board concluded that the Transaction is in the best interests of the
shareholders of Income Fund and that no dilution of value would result to the
shareholders of Income Fund from the Transaction. It then decided to approve the
Plan and to recommend that shareholders of Income Fund vote to approve the
Transaction. As required by law, the Board members approving the Plan included a
majority of the trustees who are not interested persons of Income Fund.
The Board's 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, on behalf of Insured Fund, also determined that the Transaction
was in the best interests of Insured Fund and its shareholders and that no
dilution would result to such shareholders.
FOR THE REASONS DISCUSSED ABOVE, THE BOARD, ON BEHALF OF INCOME FUND,
RECOMMENDS THAT YOU VOTE FOR THE PLAN. If the Plan is not approved, the Board
will consider other possible courses of action for Income Fund, including
dissolution and liquidation.
INFORMATION ABOUT THE TRANSACTION
This is only a summary of the Plan. You should read the actual Plan. It is
attached as Exhibit A.
HOW WILL THE TRANSACTION BE CARRIED OUT?
If the shareholders of Income Fund approve the Plan, the Transaction will
take place after various conditions are satisfied by the Trust on behalf of both
funds, including the delivery of certain documents. The Trust's officers will
determine the closing date. If the shareholders of Income Fund do not approve
the Plan, the Transaction will not take place.
If shareholders of the Income Fund do approve the Plan on June 23, 1999,
shares of the Income Fund will no longer be offered for sale, except for the
reinvestment of dividend and capital gain
7
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 approve the Plan, Income Fund will deliver
substantially all of its assets to Insured Fund on the closing date. In
exchange, Income Fund will receive Insured Fund -- Class A Shares that have a
value equal to the dollar value of the assets initially delivered to Insured
Fund. Those shares will be distributed pro rata to Income Fund's shareholders of
record as of the close of business on the closing date. The stock transfer books
of Income Fund will be permanently closed as of 1:00 p.m. Pacific time on the
closing date. Income 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 Insured Fund.
To the extent permitted by law, the Trust may amend the Plan without
shareholder approval. The Board, on behalf of either fund, may also decide to
terminate and abandon the Transaction at any time before or, to the extent
permitted by law, after the approval of shareholders of Income 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 Income Fund, 25% by Insured 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 Income Fund and Insured Fund, it is the opinion of
Stradley, Ronon, Stevens & Young, LLP, counsel to the Trust, that shareholders
of Income Fund will not recognize any gain or loss for federal income tax
purposes as a result of the exchange of their shares of Income Fund for shares
of Insured Fund and that Insured Fund will not recognize any gain or loss upon
receipt of Income 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 adviser 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 INSURED FUND -- CLASS A SHARES?
Insured Fund -- Class A Shares will be distributed to shareholders of
Income Fund. Each share will be fully paid and nonassessable when issued with no
personal liability attaching to the ownership thereof. Each Insured
Fund -- Class A Share will have no preemptive or conversion rights, and will be
transferable upon the books of Insured Fund. The shares of Insured Fund will be
recorded electronically in each shareholder's account. Insured Fund will then
send a confirmation to each shareholder. As described in its prospectus, Insured
Fund does not issue share certificates unless requested. Former shareholders of
the Income Fund whose shares are represented by outstanding share certificates
will not be allowed to redeem shares of the Insured Fund until the certificates
have been returned.
The shares of both funds have noncumulative voting rights. This gives
holders of more than 50% of the shares voting the ability to elect all of the
members of the Board. If this happens, holders of the remaining shares voting
will not be able to elect anyone to the Board.
Like Income Fund, Insured Fund does not routinely hold annual shareholders'
meetings. Insured Fund may hold special meetings for matters requiring
shareholder approval. A meeting of that fund's shareholders may also be called
by the Board in its discretion or by shareholders who hold at least 10% of the
fund's outstanding shares.
8
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 Income Fund; (ii) the capitalization of Insured Fund; and
(iii) the projected capitalization of Insured Fund as adjusted to give effect to
the proposed Transaction. The capitalization of Insured Fund is likely to be
different when the Transaction is consummated.
<TABLE>
<CAPTION>
INSURED FUND
INCOME FUND INSURED FUND AFTER TRANSACTION
(UNAUDITED) (UNAUDITED) (PROJECTED)
----------- ------------ -----------------
<S> <C> <C> <C>
Net assets (millions).............................. $17 $1,211 $1,228
Total shares outstanding........................... 1,543,179 98,622,503 100,016,430
Net Asset Value per share.......................... $11.09 $12.28 $12.28
</TABLE>
COMPARISON OF INVESTMENT GOALS AND POLICIES
This section describes key investment goals of Income Fund and Insured
Fund, and certain noteworthy differences between the investment goals and
policies of the two funds. For a complete description of Insured Fund's
investment policies and risks, you should read the Insured 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?
Income Fund and Insured Fund share the same investment goal: to provide
investors with as high a level of income exempt from federal income taxes and
from personal income taxes for resident shareholders of Michigan as is
consistent with prudent investing, while seeking preservation of shareholders'
capital. Each investment goal is 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").
A significant difference between the funds is in the credit quality of
municipal securities in which they invest. Insured Fund invests at least 65% of
its total assets in insured municipal securities. Income Fund only invests in
investment grade securities or unrated securities that Advisers believes are
comparable. Also significant is that Insured Fund is a diversified fund and
Income Fund is a non-diversified fund.
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 federal and Michigan personal income taxes for Michigan
residents. As fundamental policies, they normally invest at least 80% of their
net assets in securities that pay interest free from federal income taxes,
including the federal alternative minimum tax, and Michigan personal income
taxes. Thus, it is possible, although not anticipated, that both funds may have
up to 20% of their assets in securities that pay taxable interest. And, both
funds may also have assets invested in municipal securities that pay interest
subject to the federal alternative minimum income tax. At least 65% of each
fund's total assets are invested in municipal securities of Michigan.
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
9
and, if issued by Michigan or its counties, municipalities, authorities,
agencies, or other subdivisions, or by U.S. territories, Michigan personal
income taxes for Michigan residents.
Quality. Income Fund only invests 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. Insured Fund invests at least 65% of its total assets
in insured municipal securities. Insured municipal securities are covered by an
insurance policy that guarantees the timely payment of principal and interest.
Insured Fund pays insurance premiums either directly or indirectly, which
increases the credit safety of its insured investments but decreases its yield
(and does not guarantee the market value of a security or Insured Fund's shares
or distributions). The balance of Insured Fund's assets may be invested in the
following types of uninsured securities: (i) municipal securities secured by an
escrow or trust account containing direct U.S. government obligations; (ii)
securities rated in one of the top three ratings or unrated securities that
Advisers believes are comparable in quality; or (iii) top rated short-term,
tax-free securities, pending investment in longer-term municipal securities.
Only 20% of Insured Fund's total assets may be invested in the securities
described in (ii) above.
Maturity. Neither fund has a restriction on the maturity -- the time when
the issuer must repay the amount borrowed -- of the securities they may buy.
They also do not have restrictions on their average portfolio maturity.
Variable and floating rate securities. Each fund may invest in top rated
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 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; (ii) securities issued by or guaranteed by the full faith and credit of
the U.S. government; or (iii) municipal securities issued by a state or local
government other than Michigan. Each fund also may invest all of its assets in
securities issued by a U.S. territory such as Guam, Puerto Rico or the Mariana
Islands.
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 either 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.
10
Diversification.
Unlike Income Fund, Insured Fund is a diversified fund under the 1940 Act.
As a diversified fund, the Insured Fund will not buy a security if, with respect
to 75% of its net assets, more than 5% would be in the securities of any single
issuer (with the exception of obligations of the U.S. government) or if it would
result in the fund owning more than 10% of the voting securities of a single
issuer. Insured Fund, however, is not prohibited from investing the remaining
25% of its net assets in the securities of a single issuer. Although Income Fund
may invest a greater portion of its assets in the securities of one issuer than
a diversified fund, it does intend to meet the diversification requirements of
the Internal Revenue Code. Those diversification requirements are similar to the
diversification requirements of the 1940 Act, except that the limitations only
apply to 50% (not 75%) of total assets. As to the remaining 50% of fund assets,
a fund may buy as few as two separate securities each representing 25% of the
value of the fund. Each 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. Economic, business,
political or other changes can affect all securities of a similar type. A
non-diversified fund, such as Income Fund, may be more sensitive to these
changes.
HOW DO THE FUNDAMENTAL INVESTMENT RESTRICTIONS OF THE FUNDS DIFFER?
Except with respect to investments in other investment companies, the funds
have adopted the same restrictions as fundamental policies, which may not be
changed without the approval of a Majority Vote. Neither fund is generally
permitted to purchase securities of other investment companies. Both funds may
do so, however, in connection with a merger, consolidation or reorganization.
Insured Fund also may purchase the securities of an investment company managed
by Advisers or its affiliates if granted an exemption under the 1940 Act, which
allows the fund to invest in shares of one or more investment companies of the
type generally referred to as money market funds. Income Fund may only purchase
securities of another investment company using its uninvested daily cash
balances and then only to invest in shares of the 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 funds total net assets or (ii) $2.5 million, or (B)
more than 3% of the outstanding shares of any such money market fund.
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 investment in the funds may involve more risk than
an investment in a fund that does not focus on the securities of a single state.
Interest Rate, Income, Credit, Market, and Call Risks.
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.
11
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 or 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. The credit risks may not be as
great for investors in the Insured Fund. This is because 65% of the assets of
the Insured Fund are invested in insured municipal securities. These investments
are covered by an insurance policy that guarantees timely payment of principal
and interest. The Insured Fund buys insured municipal securities only if they
are covered by policies provided by AAA-rated municipal bond insurers.
Currently, there are four municipal bond insurers with a AAA rating. A change in
the credit rating of any one or more of the municipal bond insurers that insure
securities in the fund's portfolio may affect the value of the securities 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. 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 those securities may
lower the fund's income and its distributions to shareholders.
State Risks.
Since each fund invests heavily in municipal securities of Michigan, events
in that state are likely to affect each fund's investments and 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 Michigan'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.
For more specific information on the economy and financial strength of
Michigan, please see "What Are the Risks of Investing in the Funds?" in the
current SAI for each of the funds.
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.
Diversification.
A potential difference in the risks associated with investments in each of
the funds arises from the fact that Income Fund, unlike Insured Fund, is
non-diversified. To the extent a fund's investments are not diversified, the
fund may be more susceptible than a fully diversified fund to adverse economic,
political, business, or regulatory developments affecting a single issuer or
industry. This, in turn, can affect the fund's share price.
12
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 PLAN?
The affirmative vote of a majority of the holders of all of the outstanding
shares of Income Fund is necessary to approve the Plan. Each shareholder will be
entitled to one vote for each full share, and a fractional vote for each
fractional share, of Income Fund held at the close of business on April 19, 1999
(the "Record Date"). If sufficient votes to approve the Plan 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 entitled to vote
at the Meeting and present in person or by proxy (whether or not sufficient to
constitute quorum) may adjourn the Meeting.
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 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
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 Income Fund expressly revoking your proxy, by signing and
forwarding to Income Fund 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 does not intend to bring any matters before the Meeting other
than described in this proxy. It is not aware of any other matters to be brought
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 Income Fund on the Record Date will be entitled
to vote at the Meeting. On the Record Date, there were 1,531,553.565 outstanding
shares of Income Fund.
13
WHAT OTHER SOLICITATIONS WILL BE MADE?
Income Fund will request broker-dealer firms, custodians, nominees and
fiduciaries to forward proxy material to the beneficial owners of the shares of
record. Income 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
Income Fund, without extra pay, may conduct additional solicitations by
telephone, personal interviews and other means. Income 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, of
$2,000. The costs of any such additional solicitation and of any adjourned
session will be shared one-quarter by Income Fund, one-quarter by Insured Fund,
and one-half by Advisers.
ARE THERE DISSENTERS' RIGHTS?
Shareholders of Income Fund will not be entitled to any "dissenters'
rights" since the Transaction involves two series of an open-end investment
company 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 Insured 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 INSURED FUND
Information about Insured Fund is included in the Insured Fund Prospectus,
which is attached to and considered a part of this Prospectus/Proxy Statement.
Additional information about Insured Fund is included in its SAI, dated July 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 Insured Fund's SAI and other information by calling
1-800/DIAL BEN(R) or by writing to Insured Fund at 777 Mariners Island Blvd.,
P.O. Box 7777, San Mateo, CA 94403-7777. Insured Fund's Annual Report to
Shareholders for the fiscal year ended February 28, 1999 is attached to and
considered a part of this Prospectus/Proxy Statement.
Insured 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 INCOME FUND
Information about Income Fund is included in the Income Fund Prospectus and
Income Fund's SAI dated July 1, 1998, as supplemented April 1, 1999, and in the
Income Fund's Annual Report to Shareholders dated February 28, 1999. These
documents have been filed with the SEC and the Income Fund Prospectus is
incorporated by reference herein. You may request free copies of these documents
and other information 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 Income 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.
14
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 Insured Fund and Income
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 Insured Fund. As of the Record Date, Franklin
Resources, Inc., Corporate Accounting, 555 Airport Blvd., 4th Floor, Burlingame,
CA 94010 held 16% of the outstanding shares of Income Fund.
15
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 Income Fund and Insured Fund
Board -- The Board of Trustees of the Trust
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 both 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 Income Fund and Insured Fund
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.
16
EXHIBITS TO PROSPECTUS AND
PROXY STATEMENT
<TABLE>
<CAPTION>
EXHIBIT
- -------
<S> <C>
A Plan of Reorganization by Franklin Tax-Free Trust, on behalf
of its series Franklin Michigan Tax-Free Income Fund and
Franklin Michigan Insured Tax-Free Income Fund
B Prospectus of Franklin Michigan Insured Tax-Free Income
Fund, dated July 1, 1998, as amended January 1, 1999
C Annual Report to Shareholders of Franklin Michigan Insured
Tax-Free Income Fund, dated February 28, 1999
</TABLE>
17
EXHIBIT A
PLAN OF REORGANIZATION
PLAN OF REORGANIZATION (the "Plan"), made by Franklin Tax-Free Trust (the
"Trust") as of this 28th day of April, 1999, on behalf of its series FRANKLIN
MICHIGAN TAX-FREE INCOME FUND ("Income Fund") and FRANKLIN MICHIGAN INSURED
TAX-FREE INCOME FUND ("Insured Fund") (collectively, the "Funds"), with a
principal place of business at 777 Mariners Island Boulevard, San Mateo,
California 94404.
The Plan will consist of (i) the acquisition by Insured Fund of
substantially all of the property, assets and goodwill of Income Fund in
exchange solely for shares of beneficial interest, no par value, of Insured
Fund -- Class A ("Insured Fund Shares"); (ii) the distribution of Insured Fund
Shares to the shareholders of Income Fund according to their respective
interests; and (iii) the subsequent dissolution of Income 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 Plan
hereinafter set forth.
PLAN
In order to consummate the Plan, the following actions shall be taken by
the Trust on behalf of the Funds:
1. SALE AND TRANSFER OF ASSETS, LIQUIDATION AND DISSOLUTION OF INCOME FUND.
(a) Subject to the terms and conditions of this Plan, the Trust on behalf
of the Income Fund shall convey, transfer and deliver to Insured Fund at the
Closing all of Income 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 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 Income 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 Income Fund, if any, at the Closing Date, for which contingent and
other appropriate liabilities reserves shall be established on Income Fund's
books (hereinafter "Net Assets"). Income 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 Plan, the Trust on behalf
of Insured Fund shall at the Closing deliver to Income Fund the number of
Insured Fund Shares, determined by dividing the aggregate Net Assets of Income
Fund on the Closing Date by the net asset value per share of Insured 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, the Trust shall dissolve the Income
Fund and distribute pro rata to the shareholders of record of Income Fund as of
the close of business on the Closing Date, the Insured Fund Shares to be
delivered to Income Fund pursuant to this Section 1. Such liquidation and
distribution shall be accomplished by the establishment of accounts on the share
records of the Trust relating to Income Fund and noting in such accounts the
type and amounts of such Insured Fund Shares that such former Income Fund
shareholders are due based on their respective holdings of Income Fund as of the
close of business on the Closing Date. Fractional Insured 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 Income Fund shall be entitled to surrender the
same to the transfer agent for the Insured Fund in exchange for the number of
Insured Fund Shares into
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which the shares of the Income Fund theretofore represented by the certificate
or certificates so surrendered shall have been converted. Certificates for
Insured 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 Income Fund shall
be deemed for all the Insured Fund's purposes to evidence ownership of the
number of Insured Fund's Shares into which the shares of beneficial interest of
the Income Fund (which prior to the Closing were represented thereby) have been
converted.
2. VALUATION.
(a) The value of Income Fund's Net Assets to be transferred to Insured Fund
hereunder shall be computed as of 1:00 p.m. Pacific time on the Closing Date
using the valuation procedures set forth in Income Fund's currently effective
prospectus.
(b) The net asset value of a share of Insured 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 Insured Fund's currently effective prospectus.
(c) The net asset value of a share of Income 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 Income Fund's currently effective
prospectus.
3. CLOSING AND CLOSING DATE.
The Closing Date shall be August 26, 1999, or such later date as determined
by the Trust's officers. The Closing shall take place at the principal office of
the Trust at 2:00 p.m. Pacific time on the Closing Date. The Trust on behalf of
the Income Fund shall have provided for delivery, as of the Closing, of Income
Fund's Net Assets to be transferred to the Trust's Custodian, Bank of New York,
Mutual Funds Division, 90 Washington Street, New York, NY 10286. Also, the Trust
on behalf of Income Fund shall produce at the Closing a list of names and
addresses of the shareholders of record of Income Fund's shares and the number
of shares 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. The
Trust on behalf of Insured Fund shall issue and deliver a certificate or
certificates evidencing the shares of the Insured Fund to be delivered to said
transfer agent registered in such manner as the Trust on behalf of Income Fund
may request, or provide evidence satisfactory to Income Fund that such Insured
Fund Shares have been registered in an account on the books of Insured Fund in
such manner as the Trust on behalf of Income Fund may request.
4. REPRESENTATIONS AND WARRANTIES BY THE TRUST ON BEHALF OF INCOME FUND.
The Trust makes the following representations and warranties about Income
Fund:
(a) Income Fund is a series of the Trust, a business trust organized under
the laws of the Commonwealth of Massachusetts on September 18, 1984 and 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"), as an open-end, management investment company and all its 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. The Trust is authorized to
issue an unlimited number of shares of beneficial interest of each series.
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(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., fairly present the financial position of Income 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 Trust has the necessary power and authority to conduct Income
Fund's business as such business is now being conducted.
(e) The Trust on behalf of Income Fund 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 its execution of or
performance under this Plan.
(f) The Trust has elected to treat Income 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 Income 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 THE TRUST ON BEHALF OF INSURED FUND.
The Trust makes the following representations and warranties about Insured
Fund:
(a) Insured Fund is a series of the Trust, a business trust organized under
the laws of the Commonwealth of Massachusetts on September 18, 1984 and validly
existing and in good standing under the laws of that commonwealth. The Trust is
duly registered under the 1940 Act as an 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) The Trust is authorized to issue an unlimited number of shares of
Insured Fund, no par value, each outstanding share of which is fully paid,
non-assessable, fully transferable, and has full voting rights. Insured Fund
Shares to be issued pursuant to this Plan will be fully paid, non-assessable,
freely transferable and have full voting rights.
(c) At the Closing, Insured Fund Shares will be eligible for offering to
the public in those states of the United States and jurisdictions in which the
shares of Income Fund are presently eligible for offering to the public, and
there are a sufficient number of Insured Fund Shares registered under the 1933
Act to permit the transfers contemplated by this Plan to be consummated.
(d) 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, fairly present the financial position of Insured 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) The Trust has the necessary power and authority to conduct Insured
Fund's business as such business is now being conducted.
(f) The Trust on behalf of Insured Fund 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
its execution of or performance under this Plan.
(g) The Trust has elected to treat Insured Fund as a RIC for federal income
tax purposes under Part I of Subchapter M of the Code, and Insured Fund has
qualified as a RIC for each taxable year since its inception and will qualify as
a RIC as of the Closing Date.
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6. REPRESENTATIONS AND WARRANTIES BY THE TRUST ON BEHALF OF THE FUNDS.
The Trust makes the following representations and warranties about both
Income Fund and Insured Fund:
(a) The statement of assets and liabilities to be created by the Trust for
each of the Funds as of 1:00 p.m. Pacific time on the Closing Date for the
purpose of determining the number of Insured Fund Shares to be issued pursuant
to Section 1 of this Plan will accurately reflect the Net Assets in the case of
Income Fund and the net assets in the case of Insured Fund, and outstanding
shares, as of such date, in conformity with generally accepted accounting
principles applied on a consistent basis.
(b) At the Closing, the Funds 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 the Trust's current effective prospectuses
relating to Income Fund and Insured Fund, there is no material suit, judicial
action, or legal or administrative proceeding pending or threatened against the
Funds.
(d) There are no known actual or proposed deficiency assessments with
respect to any taxes payable by the Funds.
(e) It anticipates that consummation of this Plan will not cause either of
the Funds to fail to conform to the requirements of Subchapter M of the Code for
federal income taxation as a RIC at the end of each Fund's fiscal year.
7. INTENTIONS OF THE TRUST ON BEHALF OF THE FUNDS.
(a) The Trust intends to operate each Fund's respective business as
presently conducted between the date hereof and the Closing.
(b) The Trust intends that the Income Fund will not acquire the Insured
Fund Shares for the purpose of making distributions thereof to anyone other than
Income Fund's shareholders.
(c) The Trust intends that, by the Closing, all of the Funds' federal and
other tax returns and reports required by law to be filed 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.
(d) The Trust intends to mail to each shareholder of record of Income Fund
entitled to vote at the meeting of its shareholders at which action on this 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.
(e) The Trust intends to file with the U.S. Securities and Exchange
Commission a registration statement on Form N-14 under the 1933 Act relating to
the Insured 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 Income 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
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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 ON BEHALF OF THE FUNDS.
The consummation of the Plan shall be subject to the following conditions:
(a) That: (i) all the representations and warranties 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) performance of all obligations required by this Plan to
be performed by the Trust and the Funds shall occur prior to the Closing; and
(iii) the Trust shall execute a certificate signed by the President and by the
Secretary or equivalent officer to the foregoing effect.
(b) 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 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.
(c) That the Plan contemplated hereby shall have been adopted and approved
by the appropriate action of the shareholders of Income Fund at an annual or
special meeting or any adjournment thereof.
(d) That a distribution or distributions shall have been declared for both
parties, prior to the Closing Date that, together with all previous
distributions, shall have the effect of distributing to shareholders of each
party (i) all net investment income and all 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.
(e) That there shall be delivered to the Trust on behalf of Income Fund and
Insured Fund an opinion from Messrs. Stradley, Ronon, Stevens & Young, LLP,
counsel to the Trust, to the effect that, provided the acquisition contemplated
hereby is carried out in accordance with this Plan and based upon certificates
of the officers of the Trust with regard to matters of fact:
(1) The acquisition by Insured Fund of substantially all the assets of
Income Fund as provided for herein in exchange for Insured Fund Shares will
qualify as a reorganization within the meaning of Section 368(a)(1)(C) of
the Code, and Income Fund and Insured 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 Income Fund upon the
transfer of substantially all of its assets to Insured Fund in exchange
solely for voting shares of Insured 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 Insured Fund upon the
receipt of substantially all of the assets of Income Fund in exchange
solely for voting shares of Insured Fund (Section 1032(a));
(4) The basis of the assets of Income Fund received by Insured Fund
will be the same as the basis of such assets to Income Fund immediately
prior to the exchange (Section 362(b));
(5) The holding period of the assets of Income Fund received by
Insured Fund will include the period during which such assets were held by
Income Fund (Section 1223(2));
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(6) No gain or loss will be recognized to the shareholders of Income
Fund upon the exchange of their shares in Income Fund for voting shares of
Insured Fund (Section 354(a));
(7) The basis of the Insured Fund Shares received by Income Fund's
shareholders shall be the same as the basis of the shares of Income Fund
exchanged therefor (Section 358(a)(1));
(8) The holding period of Insured Fund Shares received by Income
Fund's shareholders (including fractional shares to which they may be
entitled) will include the holding period of Income Fund's shares
surrendered in exchange therefor, provided that Income Fund's shares were
held as a capital asset on the date of the exchange (Section 1223(1)); and
(9) Insured 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 Income 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.
(f) That there shall be delivered to the Trust on behalf of the Insured
Fund 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) Income Fund is a series of the Trust, which was organized 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
Income Fund, no par value. Assuming that the initial shares were issued in
accordance with the 1940 Act and the Amended and Restated Agreement and
Declaration of Trust and By-laws of the Trust, and that all other
outstanding shares of Income Fund were sold, issued and paid for in
accordance with the terms of Income 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 Income Fund's currently effective
prospectus, such counsel does not know of any material suit, action, or
legal or administrative proceeding pending or threatened against Income
Fund, the unfavorable outcome of which would materially and adversely
affect Income Fund;
(5) All actions required to be taken by the Trust and/or Income Fund
to authorize and effect the Plan contemplated hereby have been duly
authorized by all necessary action on the part of the Trust and Income
Fund; and
(6) Neither the execution, delivery nor performance of this Plan by
the Trust and/or Income Fund violates any provision of the Trust's 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 Income Fund is otherwise bound; this
Plan is the legal, valid and binding obligation of the Trust and Income
Fund and is enforceable against the Trust and/or Income Fund in accordance
with its terms.
In giving the opinions set forth above, 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 Income Fund.
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(g) That there shall be delivered to the Trust on behalf of the Income Fund
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) Insured Fund is a series of the Trust, which was organized 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
Insured Fund, no par value. Assuming that the initial capital shares of
Insured Fund were issued in accordance with the 1940 Act, and the Amended
and Restated Agreement and Declaration of Trust and By-laws of the Trust,
and that all other outstanding shares of Insured Fund were sold, issued and
paid for in accordance with the terms of Insured Fund's prospectus in
effect at the time of such sales, each such outstanding share of Insured
Fund is fully paid, non-assessable, freely 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 Insured Fund's currently effective
prospectus, such counsel does not know of any material suit, action, or
legal or administrative proceeding pending or threatened against Insured
Fund, the unfavorable outcome of which would materially and adversely
affect Insured Fund;
(5) Insured Fund Shares to be issued pursuant to the terms of this
Plan have been duly authorized and, when issued and delivered as provided
in this Plan, will have been validly issued and fully paid and will be
non-assessable by Insured Fund;
(6) All actions required to be taken by the Trust and/or Insured Fund
to authorize the Plan contemplated hereby have been duly authorized by all
necessary action on the part of Insured Fund;
(7) Neither the execution, delivery nor performance of the Plan by the
Trust and/or Insured Fund violates any provision of the Trust's Amended and
Restated Agreement and Declaration of Trust or its 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 Insured Fund is otherwise bound;
this Plan is the legal, valid and binding obligation of the Trust and
Insured Fund and is enforceable against the Trust and/or Insured Fund in
accordance with its terms; and
(8) The Trust's registration statement of which the prospectus dated
July 1, 1998, as amended January 1, 1999 of Insured Fund is a part (the
"Prospectus") is, at the time of the signing of this 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 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 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, 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 Insured Fund.
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(h) That the Trust's Registration Statement with respect to the Insured
Fund Shares to be delivered to the Income Fund's shareholders in accordance with
this 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.
(i) That the Insured Fund Shares to be delivered hereunder shall be
eligible for sale by Insured Fund with each state commission or agency with
which such eligibility is required in order to permit the Insured Fund Shares
lawfully to be delivered to each Income Fund shareholder.
(j) That, at the Closing, there shall be transferred to Insured Fund
aggregate Net Assets of Income 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 Income Fund on the Closing Date.
9. EXPENSES.
The expenses of entering into and carrying out the provisions of this Plan
shall be borne one quarter by Income Fund, one quarter by Insured Fund, and one
half by Franklin Advisers, Inc.
10. TERMINATION; POSTPONEMENT; WAIVER; ORDER.
(a) Anything contained in this Plan to the contrary notwithstanding, this
Plan may be terminated and abandoned at any time (whether before or after
approval thereof by the shareholders of Income Fund) prior to the Closing or the
Closing may be postponed by the Trust on behalf of either party by resolution of
the Board of Trustees, if circumstances develop that, in the opinion of the
Board, make proceeding with the Plan inadvisable.
(b) If the transactions contemplated by this Plan have not been consummated
by December 31, 1999, the Plan shall automatically terminate on that date,
unless a later date is agreed to by the Trust on behalf of Insured Fund and
Income Fund.
(c) In the event of termination of this Plan pursuant to the provisions
hereof, the same shall become void and have no further effect, and neither the
Trust, Income Fund nor Insured Fund, nor their trustees, officers, agents or
shareholders shall have any liability in respect of this Plan.
(d) At any time prior to the Closing, any of the terms or conditions of
this Plan may be waived by the party who is entitled to the benefit thereof by
action taken by the Trust's Board of Trustees if, in the judgment of such Board
of Trustees, such action or waiver will not have a material adverse effect on
the benefits intended under this Plan to its shareholders, on behalf of whom
such action is taken.
(e) If any order or orders of the U.S. Securities and Exchange Commission
with respect to this 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 on behalf of the Income Fund or Insured Fund to be acceptable, such
terms and conditions shall be binding as if a part of this Plan without further
vote or approval of the shareholders of Income Fund, unless such terms and
conditions shall result in a change in the method of computing the number of
Insured Fund Shares to be issued to Income Fund in which event, unless such
terms and conditions shall have been included in the proxy solicitation material
furnished to the shareholders of Income Fund prior to the meeting at which the
transactions contemplated by this Plan shall have been approved, this Plan shall
not be consummated and shall terminate unless the Trust on behalf of Income Fund
shall promptly call a special meeting of shareholders at which such conditions
so imposed shall be submitted for approval.
11. ENTIRE PLAN AND AMENDMENTS.
This Plan embodies the entire plan of the Trust on behalf of the Funds and
there are no agreements, understandings, restrictions, or warranties between the
parties other than those set forth herein or herein
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provided for. This Plan may be amended only in writing. Neither this Plan nor
any interest herein may be assigned without the prior written consent of the
other party.
12. NOTICES.
Any notice, report, or demand required or permitted by any provision of
this Plan shall be in writing and shall be deemed to have been given if
delivered or mailed, first class postage prepaid, addressed to the Trust at 777
Mariners Island Boulevard, P. O. Box 7777, San Mateo, CA 94403-7777, Attention:
Secretary.
13. GOVERNING LAW.
This Plan shall be governed by and carried out in accordance with the laws
of the Commonwealth of Massachusetts.
IN WITNESS WHEREOF, Franklin Tax-Free Trust, on behalf of Franklin Michigan
Insured Tax-Free Income Fund and Franklin Michigan Tax-Free Income Fund, has
executed this Plan by its duly authorized officer, all as of the date and year
first-above written.
<TABLE>
<S> <C>
FRANKLIN TAX-FREE TRUST,
ON BEHALF OF FRANKLIN MICHIGAN
INSURED 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 MICHIGAN
TAX-FREE INCOME FUND
Attest:
/s/ LEIANN NUZUM By: /s/ DEBORAH R. GATZEK
- ----------------------------------------------------- -----------------------------------------------------
Assistant Secretary Deborah R. Gatzek
Vice President and Secretary
</TABLE>
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179 PROXY
PROSPECTUS
FRANKLIN
TAX-FREE
TRUST
JULY 1, 1998 AS AMENDED JANUARY 1, 1999
INVESTMENT STRATEGY
TAX-FREE INCOME
Franklin Arizona Insured Tax-Free Income Fund
Franklin Florida Insured Tax-Free Income Fund
Franklin Insured Tax-Free Income Fund
Franklin Massachusetts Insured Tax-Free Income Fund
Franklin Michigan Insured Tax-Free Income Fund
Franklin Minnesota Insured Tax-Free Income Fund
Franklin Ohio Insured Tax-Free Income Fund
Class A & C
Please read this prospectus before investing, and keep it for future reference.
It contains important information, including how each fund invests and the
services available to shareholders.
To learn more about each fund and its policies, you may request a copy of the
funds' Statement of Additional Information ("SAI"), dated July 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 TAX-FREE TRUST
- ------------------------------------------------------------------------------
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 FUNDS
Expense Summary .................................................. 2
Financial Highlights ............................................. 4
How Do the Funds Invest Their Assets? ............................ 16
What Are the Risks of Investing in the Funds? .................... 20
Who Manages the Funds? ........................................... 22
How Taxation Affects the Funds and Their Shareholders ............ 26
How Is the Trust Organized? ...................................... 29
ABOUT YOUR ACCOUNT
How Do I Buy Shares? ............................................. 30
May I Exchange Shares for Shares of Another Fund? ................ 37
How Do I Sell Shares? ............................................ 40
What Distributions Might I Receive From the Funds? ............... 42
Transaction Procedures and Special Requirements .................. 43
Services to Help You Manage Your Account ......................... 47
What If I Have Questions About My Account? ....................... 50
GLOSSARY
Useful Terms and Definitions ..................................... 50
FRANKLIN
TAX-FREE
TRUST
July 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(R)
ABOUT THE FUNDS
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in a fund.
It is based on the historical expenses of each fund for the fiscal year ended
February 28, 1998. Each fund's actual expenses may vary.
<TABLE>
<CAPTION>
ARIZONA FLORIDA INSURED MASSACHUSETTS MICHIGAN MINNESOTA OHIO
FUND FUND FUND FUND FUND FUND FUND
- ----------------------------------------------------------------------------------------------------------------------------
A. SHAREHOLDER TRANSACTION EXPENSES+
CLASS A1
Maximum Sales Charge
<S> <C> <C> <C> <C> <C> <C> <C>
(as a percentage of Offering Price) 4.25% 4.25% 4.25% 4.25% 4.25% 4.25% 4.25%
Paid at time of purchase++ 4.25% 4.25% 4.25% 4.25% 4.25% 4.25% 4.25%
Paid at redemption++++ ... NONE NONE NONE NONE NONE NONE NONE
Exchange Fee (per transaction) NONE NONE $5.00* NONE NONE NONE NONE
CLASS C1
Maximum Sales Charge
(as a percentage of Offering Price) - - 1.99% 1.99% 1.99% 1.99% 1.99%
Paid at time of purchase+++ - - 1.00% 1.00% 1.00% 1.00% 1.00%
Paid at redemption++++ ... - - 0.99% 0.99% 0.99% 0.99% 0.99%
Exchange Fee (per transaction) - - NONE* NONE NONE NONE NONE
B. ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
CLASS A
Management Fees ........... 0.63%** 0.63%** 0.47% 0.52% 0.47% 0.50% 0.49%
Rule 12b-1 Fees*** ........ 0.10% 0.10% 0.08% 0.08% 0.08% 0.08% 0.09%
Other Expenses ............ 0.09% 0.07% 0.06% 0.08% 0.08% 0.07% 0.06%
------------------------------------------------------------------------------
Total Fund Operating Expenses 0.82%** 0.80%** 0.61% 0.68% 0.63% 0.65% 0.64%
==============================================================================
CLASS C
Management Fees ........... - - 0.47% 0.52% 0.47% 0.50% 0.49%
Rule 12b-1 Fees*** ........ - - 0.65% 0.65% 0.65% 0.65% 0.65%
Other Expenses ............ - - 0.06% 0.08% 0.08% 0.07% 0.06%
------------------------------------------------------------------------------
Total Fund Operating Expenses - - 1.18% 1.25% 1.20% 1.22% 1.20%
==============================================================================
</TABLE>
<TABLE>
<CAPTION>
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 $1,000 that you invest in a fund.
ARIZONA FLORIDA INSURED MASSACHUSETTS MICHIGAN MINNESOTA OHIO
FUND FUND FUND FUND FUND FUND FUND
- ----------------------------------------------------------------------------------------------------------------
CLASS A
<S> <C> <C> <C> <C> <C> <C> <C>
1 Year**** ................ $ 51 $ 50 $ 48 $ 49 $ 49 $ 49 $ 49
3 Years ................... $ 68 $ 67 $ 61 $ 63 $ 62 $ 62 $ 62
5 Years ................... $ 86 $ 85 $ 75 $ 79 $ 76 $ 77 $ 77
10 Years .................. $ 140 $ 137 $ 115 $ 124 $ 118 $ 120 $ 119
CLASS C
1 Year .................... - - $ 32 $ 32 $ 32 $ 32 $ 32
3 Years ................... - - $ 47 $ 49 $ 48 $ 48 $ 48
5 Years ................... - - $ 74 $ 78 $ 75 $ 76 $ 75
10 Years .................. - - $ 152 $ 160 $ 154 $ 156 $ 154
</TABLE>
For the same Class C investment, you would pay projected expenses of $22
for the Insured, Michigan, Minnesota and Ohio funds, and $23 for the
Massachusetts Fund, 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.
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 of each class and are not
directly charged to your account.
1Before January 1, 1999, Class A shares were designated Class I and Class C
shares were designated Class II.
+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
++There is no front-end sales charge if you invest $1 million or more in Class A
shares.
+++Although Class C has a lower front-end sales charge than Class A, its Rule
12b-1 fees are higher. Over time you may pay more for Class C shares. Please see
"How Do I Buy Shares? - Choosing a Share Class."
++++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. 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.
*There is a $5 fee for exchanges by Market Timers.
**For the period shown, Advisers had agreed in advance to limit its management
fees. With this reduction, management fees were 0.11% for the Arizona Fund and
0.18% for the Florida Fund and total fund operating expenses were 0.30% for the
Arizona Fund and 0.35% for the Florida Fund.
***For the Arizona and Florida funds, these fees may not exceed 0.15%. For the
remaining funds, these fees may not exceed 0.10% for Class A and 0.65% for Class
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.
****Assumes a Contingent Deferred Sales Charge will not apply.
FINANCIAL HIGHLIGHTS
This table summarizes each fund's financial history. The information has been
audited by PricewaterhouseCoopers LLP, the funds' independent auditor. The audit
report covering each of the most recent five years appears in the Trust's Annual
Report to Shareholders for the fiscal year ended February 28, 1998. The Annual
Report to Shareholders also includes more information about each fund's
performance. For a free copy, please call Fund Information.
ARIZONA FUND
<TABLE>
<CAPTION>
YEAR ENDED FEB. 28
-------------------------------------------
1998 1997 1996 1995 19941
-------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ............. $10.36 $10.36 $ 9.80 $10.28 $10.00
-------------------------------------------
Income from investment operations:
Net investment income ......................... .54 .55 .55 .55 .34
Net realized and unrealized gains (losses) .... .42 - .57 (.48) .27
-------------------------------------------
Total from investment operations ............... .96 .55 1.12 .07 .61
-------------------------------------------
Less distributions from:
Net investment income ......................... (.55) (.55) (.56) (.55) (.33)
--------------------------------------------
Net asset value, end of year ................... $10.77 $10.36 $10.36 $ 9.80 $10.28
============================================
Total return* .................................. 9.53% 5.55% 11.64% .94% 6.04%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................ $58,059 $39,693 $38,199 $20,794 $12,895
Ratios to average net assets:
Expenses ...................................... .30% .25% .16% .10% .03%**
Expenses excluding waiver and payments by affiliate .82% .86% .86% .96% .83%**
Net investment income ......................... 5.11% 5.45% 5.51% 5.80% 4.85%**
Portfolio turnover rate ........................ 17.44% 18.27% 4.12% 44.61% 62.88%
</TABLE>
FLORIDA FUND
<TABLE>
<CAPTION>
YEAR ENDED FEB. 28
-------------------------------------------
1998 1997 1996 1995 19941
-------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ............. $ 9.99 $10.02 $ 9.53 $10.07 $10.00
-------------------------------------------
Income from investment operations:
Net investment income ......................... .53 .53 .53 .52 .34
Net realized and unrealized gains (losses) .... .44 (.03) .49 (.53) .06
-------------------------------------------
Total from investment operations ............... .97 .50 1.02 (.01) .40
-------------------------------------------
Less distributions from:
Net investment income ......................... (.53) (.53) (.53) (.53) (.33)
--------------------------------------------
Net asset value, end of year ................... $10.43 $ 9.99 $10.02 $ 9.53 $10.07
===========================================
Total return* .................................. 9.94% 5.17% 10.95% .21% 3.97%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................ $101,506 $77,177 $69,583 $46,847 $32,150
Ratios to average net assets:
Expenses ...................................... .35% .35% .35% .35% -
Expenses excluding waiver and payments by affiliate .80% .80% .82% .88% .83%**
Net investment income ......................... 5.16% 5.36% 5.37% 5.61% 4.97%**
Portfolio turnover rate ........................ 8.08% 32.23% 24.36% 43.71% 28.72%
</TABLE>
INSURED FUND
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------------------------------------------
YEAR ENDED FEB. 28
--------------------------------------------------------------------------------------
<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 $12.15 $12.27 $11.97 $12.45 $12.43 $11.68 $11.41 $11.26 $11.08 $11.12
---------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income .66 .69 .71 .71 .73 .74 .74 .78 .78 .78
Net realized and
unrealized gains (losses) .29 (.11) .30 (.48) .02 .75 .30 .16 .20 .03
---------------------------------------------------------------------------------------
Total from investment
operations .95 .58 1.01 .23 .75 1.49 1.04 .94 .98 .81
---------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.66) (.70) (.71) (.71) (.73) (.74) (.77) (.79) (.80) (.85)
In excess of net
investment income (.01) - - - - - - - - -
Net realized gains (.12) - - - - - - - - -
---------------------------------------------------------------------------------------
Total distributions (.79) (.70) (.71) (.71) (.73) (.74) (.77) (.79) (.80) (.85)
---------------------------------------------------------------------------------------
Net asset value, $12.31 $12.15 $12.27 $11.97 $12.45 $12.43 $11.68 $11.41 $11.26 $11.08
end of year =======================================================================================
Total return* 8.09% 4.88% 8.66% 2.03% 5.93% 12.93% 9.29% 8.38% 8.81% 7.38%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
(millions) $1,685 $1,662 $1,705 $1,683 $1,803 $1,539 $1,131 $850 $711 $551
Ratios to average net assets:
Expenses .61% .60% .60% .59% .52% .53% .53% .53% .54% .58%
Net investment income 5.44% 5.68% 5.81% 6.00% 5.79% 6.22% 6.55% 6.95% 6.92% 7.01%
Portfolio turnover rate 27.77% 18.66% 13.52% 14.42% 6.85% 7.95% 6.35% 9.76% 11.96% 12.79%
</TABLE>
INSURED FUND (CONT.)
<TABLE>
<CAPTION>
CLASS C
---------------------------
YEAR ENDED FEB. 28
---------------------------
<S> <C> <C> <C>
1998 1997 19962
---------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ......................... $12.21 $12.31 $11.98
---------------------------
Income from investment operations:
Net investment income ..................................... .60 .62 .54
Net realized and unrealized gains (losses) ................ .29 (.09) .32
---------------------------
Total from investment operations ........................... .89 .53 .86
---------------------------
Less distributions from:
Net investment income ..................................... (.60) (.63) (.53)
Net realized gains ........................................ (.12) - -
---------------------------
Total distributions ........................................ (.72) (.63) (.53)
---------------------------
Net asset value, end of year ............................... $12.38 $12.21 $12.31
===========================
Total return* .............................................. 7.52% 4.42% 7.32%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............................ $38,057 $21,521 $8,152
Ratios to average net assets:
Expenses .................................................. 1.18% 1.17% 1.18%**
Net investment income ..................................... 4.86% 5.10% 5.21%**
Portfolio turnover rate .................................... 27.77% 18.66% 13.52%
</TABLE>
MASSACHUSETTS FUND
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------------------
YEAR ENDED FEB. 28
----------------------------------------------------------------------------------------
<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 $11.54 $11.65 $11.34 $11.81 $11.73 $11.03 $10.76 $10.72 $10.59 $10.61
----------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income .61 .63 .66 .66 .67 .69 .68 .72 .72 .71
Net realized and
unrealized gains .35 (.10) .31 (.47) .09 .69 .31 .04 .12 (.02)
(losses) ----------------------------------------------------------------------------------------
Total from investment
operations .96 .53 .97 .19 .76 1.38 .99 .76 .84 .69
----------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.61) (.64)3 (.66) (.66) (.68) (.68) (.72) (.72) (.71) (.71)
In excess of net
investment income (.01) - - - - - - - - -
Net realized gains (.13) - - - - - - - - -
----------------------------------------------------------------------------------------
Total distributions (.75) (.64) (.66) (.66) (.68) (.68) (.72) (.72) (.71) (.71)
----------------------------------------------------------------------------------------
Net asset value, $11.75 $11.54 $11.65 $11.34 $11.81 $11.73 $11.03 $10.76 $10.72 $10.59
end of year ========================================================================================
Total return* 8.50% 4.75% 8.80% 1.83% 6.39% 12.61% 9.34% 7.10% 7.82% 6.56%
RATIOS/SUPPLEMENTAL DATA
Net assets, end
of year (000's) $328,147 $325,065$301,529 $288,331 $307,013 $278,510 $218,336$152,622 $123,906 $109,851
Ratios to average
net assets:
Expenses .68% .68% .69% .67% .60% .64% .67% .70% .72% .75%
Expenses excluding
waiver and payments .68% .68% .69% .67% .60% .64% .67% .70% .72% .79%
by affiliate
Net investment income 5.21% 5.51% 5.67% 5.89% 5.69% 6.09% 6.40% 6.72% 6.65% 6.81%
Portfolio turnover rate 30.46% 29.22% 10.29% 16.90% 13.82% 9.65% 7.49% 11.47% 14.14% 22.97%
</TABLE>
MASSACHUSETTS FUND (CONT.)
<TABLE>
<CAPTION>
CLASS C
---------------------------
YEAR ENDED FEB. 28
---------------------------
<S> <C> <C> <C>
1998 1997 19962
---------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ......................... $11.59 $11.69 $11.36
---------------------------
Income from investment operations:
Net investment income ..................................... .55 .57 .50
Net realized and unrealized gains (losses) ................ .34 (.09) .32
---------------------------
Total from investment operations ........................... .89 .48 .82
---------------------------
Less distributions from:
Net investment income ..................................... (.55) (.58)3 (.49)
Net realized gains ........................................ (.13) - -
---------------------------
Total distributions ........................................ (.68) (.58) (.49)
---------------------------
Net asset value, end of year ............................... $11.80 $11.59 $11.69
===========================
Total return* .............................................. 7.86% 4.22% 7.36%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............................ $13,937 $6,378 $2,759
Ratios to average net assets:
Expenses .................................................. 1.25% 1.25% 1.26%**
Net investment income ..................................... 4.59% 4.96% 5.06%**
Portfolio turnover rate .................................... 30.46% 29.22% 10.29%
</TABLE>
MICHIGAN FUND
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------------------
YEAR ENDED FEB. 28
----------------------------------------------------------------------------------------
<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 $12.00 $12.09 $11.76 $12.24 $12.18 $11.41 $11.19 $11.06 $10.89 $10.89
----------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income .63 .66 .68 .69 .70 .71 .71 .75 .75 .74
Net realized and
unrealized gains (losses) .34 (.09) .34 (.48) .07 .77 .25 .12 .15 .03
---------------------------------------------------------------------------------------
Total from investment
operations .97 .57 1.02 .21 .77 1.48 .96 .87 .90 .77
----------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.63) (.66)4 (.69)3 (.69) (.71) (.71) (.74) (.74) (.73) (.77)
In excess of net
investment income (.01) - - - - - - - - -
Net realized gains (.13) - - - - - - - - -
----------------------------------------------------------------------------------------
Total distributions (.77) (.66) (.69) (.69) (.71) (.71) (.74) (.74) (.73) (.77)
----------------------------------------------------------------------------------------
Net asset value, end $12.20 $12.00 $12.09 $11.76 $12.24 m $12.18 $11.41 $11.19 $11.06 $10.89
of year ========================================================================================
Total return* 8.37% 4.90% 8.86% 1.87% 6.18% 13.23% 8.78% 7.93% 8.21% 7.15%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
(millions) $1,143 $1,112 $1,115 $1,038 $1,055 $882 $666 $515 $428 $370
Ratios to average net assets:
Expenses .63% .62% .62% .61% .54% .58% .59% .61% .63% .67%
Net investment income 5.24% 5.52% 5.65% 5.87% 5.66% 6.09% 6.45% 6.72% 6.72% 6.86%
Portfolio turnover rate 20.08% 30.03% 9.38% 9.12% 3.21% 2.04% 10.80% 4.17% 7.93% 9.83%
</TABLE>
MICHIGAN FUND (CONT.)
<TABLE>
<CAPTION>
CLASS C
----------------------------
YEAR ENDED FEB. 28
----------------------------
<S> <C> <C> <C>
1998 1997 19962
----------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ......................... $12.07 $12.14 $11.77
----------------------------
Income from investment operations:
Net investment income ..................................... .57 .59 .51
Net realized and unrealized gains (losses) ................ .33 (.07) .37
----------------------------
Total from investment operations ........................... .90 .52 .88
----------------------------
Less distributions from:
Net investment income ..................................... (.57) (.59) (.51)
Net realized gains ........................................ (.13) - -
----------------------------
Total distributions ........................................ (.70) (.59) (.51)
----------------------------
Net asset value, end of year ............................... $12.27 $12.07 $12.14
============================
Total return* .............................................. 7.70% 4.44% 7.58%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............................ $32,873 $20,162 $6,683
Ratios to average net assets:
Expenses .................................................. 1.20% 1.19% 1.20%**
Net investment income ..................................... 4.67% 4.94% 5.03%**
Portfolio turnover rate .................................... 20.08% 30.03% 9.38%
</TABLE>
MINNESOTA FUND
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------------------
YEAR ENDED FEB. 28
----------------------------------------------------------------------------------------
<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 $12.01 $12.14 $11.88 $12.33 $12.35 $11.68 $11.44 $11.40 $11.24 $11.26
----------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income .64 .65 .67 .69 .70 .73 .73 .76 .77 .76
Net realized and
unrealized gains (losses) .25 (.12) .27 (.45) (.01) .67 .28 .07 .18 .01
----------------------------------------------------------------------------------------
Total from investment
operations .89 .53 .94 .24 .69 1.40 1.01 .83 .95 .77
----------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.64) (.66) (.68) (.69)7 (.71) (.73) (.77) (.79) (.79) (.79)
Net realized gains (.10) - - - - - - - - -
----------------------------------------------------------------------------------------
Total distributions (.74) (.66) (.68) (.69) (.71) (.73) (.77) (.79) (.79) (.79)
----------------------------------------------------------------------------------------
Net asset value, $12.16 $12.01 $12.14 $11.88 $12.33 $12.35 $11.68 $11.44 $11.40 $11.24
end of year ========================================================================================
Total return* 7.60% 4.54% 8.06% 2.12% 5.42% 12.23% 8.95% 7.29% 8.39% 6.90%
RATIOS/SUPPLEMENTAL DATA
Net assets, end
of year (000's) $495,315 $482,128$492,139 $479,934 $499,619 $445,767 $357,279$284,779 $235,058 $183,867
Ratios to average net assets:
Expenses .65% .66% .66% .66% .60% .63% .65% .67% .70% .75%
Expenses excluding
waiver and payments
by affiliate .65% .66% .66% .66% .60% .63% .65% .67% .70% .76%
Net investment income 5.29% 5.47% 5.58% 5.81% 5.67% 6.12% 6.43% 6.62% 6.68% 6.80%
Portfolio turnover rate 14.87% 14.40% 17.72% 17.59% 13.42% 5.58% 3.14% 9.12% 4.55% 15.19%
</TABLE>
MINNESOTA FUND (CONT.)
<TABLE>
<CAPTION>
CLASS C
----------------------------
YEAR ENDED FEB. 28
----------------------------
<S> <C> <C> <C>
1998 1997 19962
----------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ......................... $12.05 $12.17 $11.89
----------------------------
Income from investment operations:
Net investment income ..................................... .57 .59 .50
Net realized and unrealized gains (losses) ................ .26 (.12) .28
----------------------------
Total from investment operations ........................... .83 .47 .78
----------------------------
Less distributions from:
Net investment income ..................................... (.57) (.59) (.50)
Net realized gains ........................................ (.10) - -
----------------------------
Total distributions ........................................ (.67) (.59) (.50)
----------------------------
Net asset value, end of year ............................... $12.21 $12.05 $12.17
============================
Total return* .............................................. 7.04% 3.98% 6.67%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............................ $10,131 $4,844 $1,152
Ratios to average net assets:
Expenses .................................................. 1.22% 1.23% 1.25%**
Net investment income ..................................... 4.72% 4.87% 4.94%**
Portfolio turnover rate .................................... 14.87% 14.40% 17.72%
</TABLE>
OHIO FUND
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------------------
YEAR ENDED FEB. 28
----------------------------------------------------------------------------------------
<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 $12.19 $12.22 $11.90 $12.40 $12.34 $11.55 $11.33 $11.17 $11.02 $10.93
----------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income .64 .66 .68 .69 .70 .72 .71 .75 .75 .74
Net realized and
unrealized gains (losses).33 (.03) .33 (.50) .07 .78 .28 .17 .14 .08
----------------------------------------------------------------------------------------
Total from investment
operations .97 .63 1.01 .19 .77 1.50 .99 .92 .89 .82
----------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.64)6 (.66)5 (.69)3 (.69) (.71) (.71) (.77) (.76) (.74) (.73)
Net realized gains (.07) - - - - - - - - -
----------------------------------------------------------------------------------------
Total distributions (.71) (.66) (.69) (.69) (.71) (.71) (.77) (.76) (.74) (.73)
----------------------------------------------------------------------------------------
Net asset value, $12.45 $12.19 $12.22 $11.90 $12.40 $12.34 $11.55 $11.33 $11.17 $11.02
end of year ========================================================================================
Total return* 8.22% 5.35% 8.66% 1.74% 6.08% 13.26% 8.86% 8.28% 8.00% 7.58%
RATIOS/SUPPLEMENTAL DATA
Net assets, end
of year (000's) $741,079 $698,360$685,783 $652,545 $686,398 $564,758 $409,044$273,119 $224,722 $203,230
Ratios to average net assets:
Expenses .64% .64% .64% .63% .56% .59% .62% .65% .65% .71%
Net investment income 5.24% 5.43% 5.58% 5.83% 5.59% 6.05% 6.36% 6.67% 6.71% 6.80%
Portfolio turnover rate 12.84% 14.95% 11.47% 11.76% 7.29% 2.87% 1.16% 4.44% 10.80% 32.48%
</TABLE>
OHIO FUND (CONT.)
<TABLE>
<CAPTION>
CLASS C
----------------------------
YEAR ENDED FEB. 28
----------------------------
<S> <C> <C> <C>
1998 1997 19962
----------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ......................... $12.24 $12.26 $11.90
----------------------------
Income from investment operations:
Net investment income ..................................... .58 .59 .52
Net realized and unrealized gains (losses) ................ .34 (.02) .35
----------------------------
Total from investment operations ........................... .92 (.57) .87
----------------------------
Less distributions from:
Net investment income ..................................... (.58) (.59) (.51)
Net realized gains ........................................ (.07) - -
----------------------------
Total distributions ........................................ (.65) (.59) (.51)
----------------------------
Net asset value, end of year ............................... $12.51 $12.24 $12.26
============================
Total return* .............................................. 7.66% 4.79% 7.43%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............................ $28,178 $15,786 $6,085
Ratios to average net assets:
Expenses .................................................. 1.20% 1.20% 1.22%**
Net investment income ..................................... 4.67% 4.80% 4.99%**
Portfolio turnover rate .................................... 12.84% 14.95% 11.47%
</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
1For the period April 30, 1993 (effective date) to February 28, 1994.
2For the period May 1, 1995 (effective date) to February 29, 1996.
3Includes distributions in excess of net investment income in the amount of
$.001.
4Includes distributions in excess of net investment income in the amount of
$.002.
5Includes distributions in excess of net investment income in the amount of
$.003.
6Includes distributions in excess of net investment income in the amount of
$.007.
7Includes distributions from net realized gains of $.004.
HOW DO THE FUNDS INVEST THEIR ASSETS?
A QUICK LOOK AT THE FUNDS
FRANKLIN INSURED
TAX-FREE INCOME FUND
GOAL: High current income free from federal income taxes.
STRATEGY: Invests primarily in municipal securities covered by insurance
guaranteeing the timely payment of principal and interest and whose interest
is free from federal income taxes.
STATE SPECIFIC INSURED
TAX-FREE INCOME FUNDS
GOAL: High current tax-free income for residents of the fund's state.
STRATEGY: Invest primarily in municipal securities covered by insurance
guaranteeing the timely payment of principal and interest and whose interest is
free from federal and state personal income taxes, if any, for residents of the
fund's state.
WHAT IS THE MANAGER'S APPROACH?
Advisers tries to select securities that it believes will provide the best
balance between risk and return within each fund's range of allowable
investments. Advisers considers a number of factors including general market and
economic conditions, the credit quality of the issuer, and the cost of insurance
when selecting securities for each fund.
To provide tax-free income to shareholders, Advisers typically uses a buy and
hold strategy. This means it holds securities in a fund's portfolio for income
purposes, rather than trading securities for capital gains. Advisers may sell a
security at any time, however, when Advisers believes doing so could help the
fund meet its goals.
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. Each
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 funds may be appropriate for investors in higher tax brackets who seek high
current income that is free from federal and, for the state funds, state
personal income taxes.
The value of each 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 FUNDS IN MORE DETAIL
WHAT ARE THE FUNDS' GOALS?
The investment goal of each fund is to provide 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. Each state fund also tries
to provide a maximum level of income that is exempt from personal income taxes,
if any, for resident shareholders of the fund's state. These goals are
fundamental, which means that they may not be changed without shareholder
approval.
WHAT KINDS OF SECURITIES DO THE FUNDS BUY?
Each 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 funds meet their investment goals because they
generally pay interest free from federal income tax. Municipal securities issued
by a fund's state or that state's counties, municipalities, authorities,
agencies, or other subdivisions, as well as municipal securities issued by U.S.
territories such as Guam, Puerto Rico, or the Mariana Islands, also generally
pay interest free from state personal income taxes, if any, for residents of the
fund's state.
Each fund normally invests:
at least 80% of its net assets in securities that pay interest free from
federal income taxes, including the federal alternative minimum tax (this
policy is fundamental);
at least 80% of its net assets in securities that pay interest free from the
personal income taxes, if any, of its state, although each fund tries to
invest all of its assets in these securities (this policy is fundamental and
applies only to the state funds); and
at least 65% of its total assets in municipal securities of its state.
Unlike the state funds, however, the Franklin Insured Tax-Free Income Fund is
diversified nationally and will not invest more than 25% of its total assets
in the municipal securities of any one state or territory.
While each fund tries to invest 100% of its assets in municipal securities whose
interest is free from federal and, for the state funds, state personal income
taxes, it is possible, although not anticipated, that a 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 each 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 rated in the highest rating category are "top rated."
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.
Each fund invests at least 65% of its total assets in insured municipal
securities. Each fund pays insurance premiums either directly or indirectly,
which increases the credit safety of its insured investments, but decreases
its yield. It is important to note that the insurance does not guarantee the
market value of a security, or a fund's shares or distributions, and shares
of a fund are not insured.
Each fund may invest the balance of its assets in the following types of
uninsured securities: (i) municipal securities secured by an escrow or trust
account containing direct U.S. government obligations; (ii) securities rated
in one of the top three ratings or unrated securities that Advisers believes
are comparable in quality; or (iii) top rated short-term, tax-free
securities, pending investment in longer-term municipal securities. Each fund
may only invest up to 20% of its total assets in the type of securities
described in (ii) above.
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 funds have no restrictions on the maturity of the securities they may
buy or on their 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 a fund's income when interest rates fall. Of course, a fund's income from
its variable rate investments may also increase if interest rates rise.
Each fund may invest in top rated 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.
Each 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 FUNDS' OTHER INVESTMENT STRATEGIES AND PRACTICES?
TEMPORARY INVESTMENTS. When Advisers believes unusual or adverse economic,
market or other conditions exist, it may invest a fund's portfolio 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; (ii) securities issued by or guaranteed by the full
faith and credit of the U.S. government; or (iii) for the state funds, municipal
securities issued by a state or local government other than the fund's state, or
by a U.S. territory such as Guam, Puerto Rico or the Mariana Islands.
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. Non-diversified funds may invest
a greater portion of their assets in the securities of one issuer than
diversified funds. 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 Arizona and Florida funds are non-diversified funds, although they
intend to meet certain diversification requirements for tax purposes. The
other funds are all diversified. Each 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. Each 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 each fund's investment policies, including those described
above, please see "How Do the Funds Invest Their Assets?" and "Investment
Restrictions" in the SAI.
Generally, the policies and restrictions discussed in this prospectus and in the
SAI apply when a fund makes an investment. In most cases, a 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 FUNDS?
Like all investments, an investment in a fund involves risks. The risks of each
fund are basically the same as those of other investments in municipal
securities of similar quality, although an investment in one of the state funds
may involve more risk than an investment in a fund that does not focus on
securities of a single state. Because each fund holds many securities, it is
likely to be less risky than any one, or few, directly held municipal
investments.
GENERAL RISK. There is no assurance that a fund will meet its investment goal. A
fund's share price, and the value of your investment, may change. Generally,
when the value of a fund's investments go down, so does the fund's share price.
Similarly, when the value of a fund's investments go up, so does the fund's
share price. Since the value of a fund's shares can go up or down, it is
possible to lose money by investing in a 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 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 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, a fund may have to replace it with a lower-yielding security.
STATE RISKS. Since each state fund invests heavily in municipal securities of
its state, events in that state are likely to affect the fund's investments and
its performance. These events may include:
o economic or political policy changes;
o tax base erosion;
o state constitutional limits on tax increases;
o budget deficits and other financial difficulties; and
o changes in the ratings assigned to municipal issuers.
A negative change in any one of these or other areas could affect the ability of
a state'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.
To the extent the Franklin Insured Tax-Free Income Fund is invested in a state,
events in that state may effect its investments and its performance.
For more specific information on the economy and financial strength of the
funds' various states, please see "What Are the Risks of Investing in the
Funds?" in the SAI.
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.
YEAR 2000. When evaluating current and potential portfolio positions, Year 2000
is one of the factors Advisers considers.
Advisers will rely upon public filings and other statements made by issuers
about their Year 2000 readiness. Advisers, of course, cannot audit each issuer
and its major suppliers to verify their Year 2000 readiness.
If an issuer in which a 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 a 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 Funds?" for more information.
WHO MANAGES THE FUNDS?
THE BOARD. The Board oversees the management of each fund and elects its
officers. The officers are responsible for each fund's day-to-day operations.
The Board also monitors each 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. Advisers manages each fund's assets and makes its investment
decisions. Advisers 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, Advisers 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 funds' Code of Ethics.
MANAGEMENT TEAM. The team responsible for the day-to-day management of each
fund's portfolio is:
Thomas Kenny
Executive Vice President of Advisers
Mr. Kenny has been an analyst or portfolio manager for the Arizona and
Florida funds since their inception and the Massachusetts, Michigan,
Minnesota, Insured and Ohio funds since 1987. Mr. Kenny 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.
John Pomeroy
Portfolio Manager of Advisers
Mr. Pomeroy has been an analyst or portfolio manager for the Arizona and
Florida funds since their inception and the Massachusetts, Michigan,
Minnesota, Insured and Ohio funds since 1989. Mr. Pomeroy holds a Bachelor of
Science degree in Finance from San Francisco State University. He joined the
Franklin Templeton Group in 1986. He is a member of several securities
industry-related committees and associations.
Sheila Amoroso
Vice President of Advisers
Ms. Amoroso has been an analyst or portfolio manager for the Michigan,
Minnesota, Insured and Massachusetts funds since 1987. Ms. Amoroso 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.
Stella Wong
Vice President of Advisers
Ms. Wong has been an analyst or portfolio manager for the Florida Fund since
its inception and the Ohio Fund since 1986. Ms. Wong holds a Master's degree
in Financial Planning from Golden Gate University and a Bachelor of Science
degree in Business Administration 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.
Carrie Higgins
Portfolio Manager of Advisers
Ms. Higgins has been an analyst or portfolio manager for the Arizona and
Michigan Funds since their inception. Ms. Higgins holds a Bachelor of Science
degree in Economics from the University of California at Davis. She joined
the Franklin Templeton Group in 1990. She is a member of several securities
industry-related committees
and associations.
MANAGEMENT FEES. During the fiscal year ended February 28, 1998, management fees
paid to Advisers and total operating expenses, as a percentage of average
monthly net assets, were as follows:
TOTAL
MANAGEMENT OPERATING EXPENSES
------------------
FEES CLASS A CLASS C
- ----------------------------------------------------------------------
Arizona Fund ................... 0.11%* 0.30%* -
Florida Fund ................... 0.18%* 0.35%* -
Insured Fund ................... 0.47% 0.61% 1.18%
Massachusetts Fund ............. 0.52% 0.68% 1.25%
Michigan Fund .................. 0.47% 0.63% 1.20%
Minnesota Fund ................. 0.50% 0.65% 1.22%
Ohio Fund ...................... 0.49% 0.64% 1.20%
*Management fees, before any advance waiver, totaled 0.63% for the Arizona and
Florida funds. Total operating expenses were 0.82% for the Arizona Fund and
0.80% for the Florida Fund. Under an agreement by Advisers to limit its fees,
the Arizona and Florida funds paid the management fees and total operating
expenses shown. Advisers may end this arrangement at any time upon notice to the
Board.
PORTFOLIO TRANSACTIONS. Advisers tries to obtain the best execution on all
transactions. If Advisers 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 Do the Funds Buy
Securities for Their Portfolios?" in the SAI for more information.
ADMINISTRATIVE SERVICES. Under an agreement with Advisers, FT Services provides
certain administrative services and facilities for each fund. During the fiscal
year ended February 28, 1998, administration fees paid to FT Services, as a
percentage of average daily net assets, were as follows:
ADMINISTRATION
FEES
- -------------------------------------------------
Arizona Fund ................... 0.15%
Florida Fund ................... 0.15%
Insured Fund ................... 0.11%
Massachusetts Fund ............. 0.14%
Michigan Fund .................. 0.12%
Minnesota Fund ................. 0.14%
Ohio Fund ...................... 0.14%
These fees are paid by Advisers. They are not a separate expense of the funds.
Please see "Investment Management and Other Services" in the SAI for more
information.
YEAR 2000 PROBLEM. The funds' 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 funds' operations could be adversely affected if
the computer systems used by Advisers, its service providers and other third
parties it does business with are not Year 2000 ready. For example, the funds'
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.
Advisers 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 funds' ability to reduce the effects of the Year 2000
problem is also very much dependent upon the efforts of third parties over which
the funds and Advisers 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 Arizona and Florida funds under their plans may not exceed 0.15%
per year of the fund's average daily net assets. Payments by the remaining funds
under their Class A plans 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 C plans, a 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.
A 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 plans. 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
Funds' Underwriter" in the SAI.
<TABLE>
<CAPTION>
HOW TAXATION AFFECTS THE FUNDS AND THEIR SHAREHOLDERS
ON AUGUST 5, 1997, PRESIDENT CLINTON SIGNED INTO LAW THE TAXPAYER RELIEF ACT OF
1997 (THE "1997 ACT"). THIS NEW LAW MAKES SWEEPING CHANGES TO THE CODE. BECAUSE
MANY OF THESE CHANGES ARE COMPLEX, THEY ARE DISCUSSED IN THE SAI.
-------------------------------------------
<S> <C>
TAXATION OF THE FUNDS' INVESTMENTS. Each HOW DO THE FUNDS
fund invests your money in the municipal EARN INCOME AND GAINS?
and other securities described in the
section "How Do the Funds Invest Their Each fund earns interest and other income
Assets?" Special tax rules may apply when (the fund's "income") on its investments.
determining the income and gains that each When a fund sells a security for a price
fund earns on its investments. These rules that is higher than it paid, it has a
may, in turn, affect the amount of gain. When a fund sells a security for a
distributions that a fund pays to you. price that is lower than it paid, it has
These special tax rules are discussed in a loss. If a fund has held the security
the SAI. for more than one year, the gain or loss
will be a long-term capital gain or loss.
TAXATION OF THE FUNDS. As a regulated If a fund has held the security for one
investment company, each fund generally year or less, the gain or loss will be a
pays no federal income tax on the income short-term capital gain or loss. A
and gains that it distributes to you. fund's gains and losses are netted
together, and, if the fund has a net gain (the
fund's "gains"), that gain will
generally be distributed to you.
-------------------------------------------
TAXATION OF SHAREHOLDERS
-------------------------------------------
DISTRIBUTIONS. Distributions made to you WHAT IS A DISTRIBUTION?
from interest income on municipal
securities will be exempt from the regular As a shareholder, you will receive your
federal income tax. Distributions made to share of a fund's income and gains on its
you from other income on temporary investments. A fund's interest income on
investments, short-term capital gains, or municipal securities is paid to you as
ordinary income from the sale of market exempt-interest dividends. A fund's
discount bonds will be taxable to you as ordinary income and short-term capital
ordinary dividends, whether you receive gains are paid to you as ordinary
them in cash or in additional shares. dividends. A fund's long-term capital
Distributions made to you from interest on gains are paid to you as capital gain
certain private activity bonds, while distributions. If a fund pays you an
still exempt from the regular federal amount in excess of its income and gains,
income tax, are a preference item when this excess will generally be treated as
determining your alternative minimum tax. a non-taxable distribution. These
The fund will send you a statement in amounts, taken together, are what we call
January of the current year that reflects a fund's distributions to you.
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.
A fund's statement for the prior year will
tell you how much of your capital gain
distribution represents 28% rate gain. The
remainder of the capital gain distribution
represents 20% rate gain.
-------------------------------------------
DIVIDENDS-RECEIVED DEDUCTION. It is anticipated that no portion of the funds'
distributions will qualify for the corporate dividends-received deduction.
-------------------------------------------
REDEMPTIONS AND EXCHANGES. If you redeem WHAT IS A REDEMPTION?
your shares or if you exchange your shares
in the funds for shares in another A redemption is a sale by you to the fund
Franklin Templeton Fund, you will of some or all of your shares in the
generally have a gain or loss that the IRS fund. The price per share you receive
requires you to report on your income tax when you redeem fund shares may be more
return. If you exchange fund shares held or less than the price at which you
for 90 days or less and pay no sales purchased those shares. An exchange of
charge, or a reduced sales charge, for the shares in the fund for shares of another
new shares, all or a portion of the sales Franklin Templeton Fund is treated as a
charge you paid on the purchase of the redemption of fund shares and then a
shares you exchanged is not included in purchase of shares of the other fund.
their cost for purposes of computing gain When you redeem or exchange your shares,
or loss on the exchange. If you hold your you will generally have a gain or loss,
shares for six months or less, any loss depending upon whether the amount you
you have will be disallowed to the extent receive for your shares is more or less
of any exempt-interest dividends paid on than your cost or other basis in the
your shares. Any such loss not disallowed shares.
will be treated as a long-term capital
loss to the extent of any long-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 IRS 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 funds, 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 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 be exempt from that state's personal income taxes. A
state does not, however, grant tax-free treatment to interest on investments in
municipal securities of other states. Corporate taxpayers subject to a state's
corporate income or franchise tax may be subject to special rules. The holding
of fund shares may also be subject to state and local intangibles taxes. Each
fund in which you are a shareholder 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 a fund.
-------------------------------------------
BACKUP WITHHOLDING. When you open an WHAT IS A BACKUP
account, IRS regulations require that you WITHHOLDING?
provide your taxpayer identification
number ("TIN"), certify that it is Backup withholding occurs when a fund is
correct, and certify that you are not required to withhold and pay over to the
subject to backup withholding under IRS IRS 31% of your distributions and
rules. If you fail to provide a correct redemption proceeds. You can avoid backup
TIN or the proper tax certifications, the withholding by providing the fund with
IRS requires the fund to withhold 31% of your TIN, and by completing the tax
all the distributions (including ordinary certifications on your shareholder
dividends and capital gain distributions), application that you were asked to sign
and redemption proceeds paid to you. The when you opened your account. However, if
fund is also required to begin backup the IRS instructs the fund to begin
withholding on your account if the IRS backup withholding, it is required to do
instructs the fund to do so. The fund so even if you provided the fund with
reserves the right not to open your your TIN and these tax certifications,
account, or, alternatively, to redeem your and backup withholding will remain in
shares at the current Net Asset Value, place until the fund is instructed by the
less any taxes withheld, if you fail to IRS that it is no longer required.
provide a correct TIN, fail to provide the
proper tax certifications, or the IRS
instructs the fund to begin backup
withholding on your account.
-------------------------------------------
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 FUNDS. FOR A MORE COMPLETE
DISCUSSION OF THESE RULES AND RELATED MATTERS, PLEASE SEE "ADDITIONAL
INFORMATION ON DISTRIBUTIONS AND TAXES" AND "APPENDICES - STATE TAX
TREATMENT" IN THE SAI.
</TABLE>
HOW IS THE TRUST ORGANIZED?
The funds are series of Franklin Tax-Free Trust (the "Trust"), an open-end
management investment company, commonly called a mutual fund. It was organized
as a Massachusetts business trust in September 1984, and is registered with the
SEC. Except for the Arizona and Florida funds, each fund offers two classes of
shares: Franklin Insured Tax-Free Income Fund - Class A, Franklin Massachusetts
Insured Tax-Free Income Fund - Class A, Franklin Michigan Insured Tax-Free
Income Fund - Class A, Franklin Minnesota Insured Tax-Free Income Fund - Class
A, Franklin Ohio Insured Tax-Free Income Fund Class A, and Franklin Insured
Tax-Free Income Fund - Class C, Franklin Massachusetts Insured Tax-Free Income
Fund - Class C, Franklin Michigan Insured Tax-Free Income Fund - Class C,
Franklin Minnesota Insured Tax-Free Income Fund - Class C, and Franklin Ohio
Insured Tax-Free Income Fund - Class C. All shares of the Arizona and Florida
funds are considered Class A shares. Additional series and 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. Shares of each class of a
series have the same voting and other rights and preferences as the other
classes and series of the Trust for matters that affect the Trust as a whole.
The Trust has noncumulative voting rights. This gives holders of more than 50%
of the shares voting the ability to elect all of the members of the Board. If
this happens, holders of the remaining shares voting will not be able to elect
anyone to the Board.
The Trust does not intend to hold annual shareholder meetings. The Trust or a
series of the Trust 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. PLEASE KEEP IN MIND THAT NONE OF THE FUNDS,
EXCEPT THE INSURED FUND, CURRENTLY ALLOW INVESTMENTS BY MARKET TIMERS.
1. Read this prospectus carefully.
2. Determine how much you would like to invest. The funds' minimum
investments are:
o To open a regular account ............................ $1,000
o To open a custodial account for a minor ............. $ 100
(an UGMA/UTMA account)
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 C*
- --------------------------------------------------------------------------------
o Front-end sales charge of 4.25% or o Front-end sales charge of 1%
less
o Contingent Deferred Sales Charge of o Contingent Deferred Sales Charge of 1%
1% on purchases of $1 million or on shares you sell within 18
more sold within one year months
o Lower annual expenses than Class C o Higher annual expenses than Class A
due to lower Rule 12b-1 fees due to higher Rule 12b-1 fees.
o No maximum purchase amount o Maximum purchase amount of $999,999.
We invest any investment of $1
million or more in Class A shares,
since there is no front-end sales
charge and Class A's annual
expenses are lower.
*Before January 1, 1999, Class A shares were designated Class I and Class C
shares were designated Class II.
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.
TOTAL SALES CHARGE AMOUNT PAID
AS A PERCENTAGE OF TO 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 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. 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 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.
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.
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
pro-gram. 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 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 C purchases - up to 1% of the purchase price.
3. 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 2 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 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 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 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.
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. Currently, none of the funds, except
the Insured Fund, allow investments by Market Timers. Some of our other funds
also may 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 funds, such as "Advisor Class" or "Class Z" shares. Because the
funds do not currently offer an Advisor Class, you may exchange Advisor Class
shares of any Franklin Templeton Fund for Class A shares of a 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 a 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 funds are not bound to meet any redemption request in less
than the seven day period prescribed by law. Neither the funds nor their 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 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 a 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 FUNDS?
Each 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.
Each fund declares dividends daily from its net investment income and pay them
monthly on or about the 20th day of the month. Your account may begin to receive
dividends on the day after we receive your investment and will continue to
receive dividends through the day we receive a request to sell your shares.
Capital gains, if any, may be distributed twice a year. The amount of these
distributions will vary and there is no guarantee the fund will pay dividends.
The funds do not pay "interest" or guarantee any fixed rate of return on an
investment in its shares.
Please keep in mind that if you invest in a 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.
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 a 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 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 reinvestment 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.
HOW AND WHEN SHARES ARE PRICED
The funds are 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. Each 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 funds
accept 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 a fund. Under
the plan, you can have money transferred automatically from your checking or
savings account to a 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 a 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 a 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 numbers
are as follows:
CODE NUMBER
---------------------
CLASS A CLASS C
- -------------------------------------------------
Arizona Fund ........... 177 -
Florida Fund ........... 178 -
Insured Fund ........... 121 221
Massachusetts Fund ..... 118 218
Michigan Fund .......... 119 219
Minnesota Fund ......... 120 220
Ohio Fund .............. 122 222
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 funds 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 funds' financial reports.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the funds 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 funds 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 funds, Distributors and Advisers 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
ADVISERS - Franklin Advisers, Inc., the funds' investment manager
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS A AND CLASS C - Each fund, except the Arizona and Florida funds, offers
two classes of shares, designated "Class A" and "Class C." 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. Shares of the Arizona and
Florida funds are considered Class A shares for redemption, exchange and other
purposes.
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 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 shares within the Contingency Period.
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the funds' principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Trustees."
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 funds' administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the funds'
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. 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.
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 higher 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 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
CONTENTS
Shareholder Letter ....................................................... 1
Special Feature:
A Word About
Municipal Bond Insurance ................................................. 4
Fund Reports
Franklin Arizona Insured
Tax-Free Income Fund .................................................... 6
Franklin Florida Insured
Tax-Free Income Fund .................................................... 10
Franklin Insured
Tax-Free Income Fund .................................................... 15
Franklin Massachusetts Insured
Tax-Free Income Fund .................................................... 20
Franklin Michigan Insured
Tax-Free Income Fund .................................................... 25
Franklin Minnesota Insured
Tax-Free Income Fund .................................................... 30
Franklin Ohio Insured
Tax-Free Income Fund .................................................... 35
Municipal Bond Ratings ................................................... 40
Financial Highlights &
Statement of Investments ................................................. 42
Financial Statements ..................................................... 90
Notes to Financial Statements ............................................ 98
Independent Auditors' Report ............................................. 103
Tax Information .......................................................... 104
[FUND CATEGORY PYRAMID GRAPH]
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.
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. Depending on your federal and state tax rates, a taxable
investment would need to offer a higher yield, called the taxable equivalent
yield, to match the yield on a
*Source: The Bond Buyer, February 28, 1999.
2
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.
3
A WORD ABOUT MUNICIPAL BOND INSURANCE
[SPECIAL FEATURE GRAPHIC]
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.
[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>
[PIECHART]
INSURERS' MARKET SHARE*
12/31/98
<TABLE>
<S> <C>
MBIA 35.4%
FSA 22.0%
FGIC 21.5%
AMBAC 19.6%
OTHER 1.5%
</TABLE>
*Source: The Bond Buyer, 1999.
5
PORTFOLIO BREAKDOWN
Franklin Arizona Insured
Tax-Free Income Fund
2/28/99
<TABLE>
<CAPTION>
% OF TOTAL
LONG-TERM
SECTOR INVESTMENTS
- ------ -----------
<S> <C>
Education 27.9%
Utilities 22.5%
Housing 10.7%
Hospitals 10.5%
Prerefunded 7.5%
Other Revenue 6.0%
Road Improvement 5.2%
Industrial 3.9%
General Obligation 3.2%
Certificates of Participation 1.4%
Miscellaneous 0.7%
Sales Tax 0.5%
</TABLE>
FRANKLIN ARIZONA INSURED
TAX-FREE INCOME FUND
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. 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 bolstered 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 currency 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
(1.) For investors subject to the federal 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.
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.
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: 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 43 of
this report.
6
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.
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 number of insured bonds offered the
fund opportunities to purchase new issues and maintain portfolio
diversification. Notable purchases during the fund's fiscal year included Mesa
GO, Glendale IDA - Midwestern University, Maricopa County GO - Chandler Unified
School District #80 and Arizona Health Facilities Authority Hospital System
Revenue - Northern Arizona Healthcare System.
Franklin Arizona Insured Tax-Free Income Fund's Class A share price, as measured
by net asset value, increased seven cents, from $10.77 on February 28, 1998, to
$10.84 on February 28, 1999. Asset growth was strong during the fund's fiscal
year -- assets increased 39%, from $58.0 million on February 28, 1998, to $80.7
million on February 28, 1999. At the same time, the total number of the fund's
positions increased from 66 to 84, giving the fund an increasingly diversified
and stable asset base. Education, comprising 27.9% of the fund's total long-term
investments, remained the fund's largest sector holding. We found value in the
hospital sector during the 12 months under review, as we felt the bonds were
cheap relative to other sectors in the market. The hospital sector increased
from 4.5% of total long-term investments on February 28, 1998, to 10.5% on
February 28, 1999.
Please keep in mind that the fund can distribute only what it earns. Due to the
low interest-rate environment, 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 another
dividend cut is scheduled for March 1999.
Going forward, we believe the municipal bond supply in 1999 should be
approximately the same as in 1998. This, combined with strong demand for Arizona
bonds, should continue to make the state's municipal securities attractive
investments for investors seeking tax-free income. We will continue our fiscally
responsible 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 Insured
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 4.4 cents
January 4.4 cents
February 4.4 cents
----------
TOTAL 52.8 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.
7
FRANKLIN ARIZONA INSURED
TAX-FREE INCOME FUND
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 $10.84 $10.77
DISTRIBUTIONS
-------------
Dividend Income $0.528
</TABLE>
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 higher initial sales charge; thus actual
total returns may be slightly lower. 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 3.68%. The fee waiver may be
discontinued at any time upon notification to the fund's Board of Trustees.
PERFORMANCE
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR 5-YEAR (4/30/93)
- ------- ------ ------ ---------
<S> <C> <C> <C>
Cumulative Total Return(1) +5.75% +37.64% +45.95%
Average Annual Total Return(2) +1.24% +5.67% +5.91%
Distribution Rate(3) 4.45%
Taxable Equivalent Distribution Rate(4) 7.76%
30-Day Standardized Yield(5) 3.81%
Taxable Equivalent Yield(4) 6.64%
</TABLE>
(1.) Cumulative total return represents the change in value of an investment
over the periods indicated and does not include the 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 4.2 cent per
share monthly dividend and the maximum offering price of $11.32 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.
Past performance is not predictive of future results.
8
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).
AVERAGE ANNUAL TOTAL RETURN
2/28/99
<TABLE>
<CAPTION>
CLASS A
- -------
<S> <C>
1-Year +1.24%
5-Year +5.67%
Since Inception (4/30/93) +5.91%
</TABLE>
The following line graph compares the performance of the Franklin Arizona
Insured 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 4/30/93 to 2/28/99.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Fund No. Inception 4/30/93
0177
- ----------------------------------------------------------------------------------------------------
Franklin Arizona Lehman Brothers CPI
Insured Tax-Free Municipal Bond Index
Income Fund-Class A
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
4/30/93 $9,579 $10,000 $10,000
5/31/93 $9,646 0.56% $10,056 0.14% $10,014
6/30/93 $9,837 1.67% $10,224 0.14% $10,028
7/31/93 $9,837 0.13% $10,237 0.00% $10,028
8/31/93 $10,053 2.08% $10,450 0.28% $10,056
9/30/93 $10,183 1.14% $10,569 0.21% $10,077
10/31/93 $10,187 0.19% $10,589 0.41% $10,119
11/30/93 $10,047 -0.88% $10,496 0.07% $10,126
12/31/93 $10,334 2.11% $10,718 0.00% $10,126
1/31/94 $10,477 1.14% $10,840 0.27% $10,153
2/28/94 $10,147 -2.59% $10,559 0.34% $10,187
3/31/94 $9,518 -4.07% $10,129 0.34% $10,222
4/30/94 $9,613 0.85% $10,215 0.14% $10,236
5/31/94 $9,707 0.87% $10,304 0.07% $10,244
6/30/94 $9,612 -0.61% $10,241 0.34% $10,278
7/31/94 $9,848 1.83% $10,429 0.27% $10,306
8/31/94 $9,864 0.35% $10,465 0.40% $10,347
9/30/94 $9,666 -1.47% $10,312 0.27% $10,375
10/31/94 $9,425 -1.78% $10,128 0.07% $10,383
11/30/94 $9,185 -1.81% $9,945 0.13% $10,396
12/31/94 $9,480 2.20% $10,163 0.00% $10,396
1/31/95 $9,870 2.86% $10,454 0.40% $10,438
2/28/95 $10,240 2.91% $10,758 0.40% $10,479
3/31/95 $10,382 1.15% $10,882 0.33% $10,514
4/30/95 $10,388 0.12% $10,895 0.33% $10,549
5/31/95 $10,764 3.19% $11,243 0.20% $10,570
6/30/95 $10,600 -0.87% $11,145 0.20% $10,591
7/31/95 $10,660 0.95% $11,251 0.00% $10,591
8/31/95 $10,817 1.27% $11,394 0.26% $10,618
9/30/95 $10,899 0.63% $11,465 0.20% $10,640
10/31/95 $11,078 1.45% $11,632 0.33% $10,675
11/30/95 $11,345 1.66% $11,825 -0.07% $10,667
12/31/95 $11,494 0.96% $11,938 -0.07% $10,660
1/31/96 $11,555 0.76% $12,029 0.59% $10,723
2/29/96 $11,429 -0.68% $11,947 0.32% $10,757
3/31/96 $11,227 -1.28% $11,794 0.52% $10,813
4/30/96 $11,189 -0.28% $11,761 0.39% $10,855
5/31/96 $11,184 -0.04% $11,757 0.19% $10,876
6/30/96 $11,348 1.09% $11,885 0.06% $10,882
7/31/96 $11,445 0.91% $11,993 0.19% $10,903
8/31/96 $11,417 -0.02% $11,990 0.19% $10,924
9/30/96 $11,651 1.40% $12,158 0.32% $10,959
10/31/96 $11,783 1.13% $12,296 0.32% $10,994
11/30/96 $12,031 1.83% $12,521 0.19% $11,015
12/31/96 $11,957 -0.42% $12,468 0.00% $11,015
1/31/97 $11,953 0.19% $12,492 0.32% $11,050
2/28/97 $12,064 0.92% $12,607 0.31% $11,084
3/31/97 $11,872 -1.33% $12,439 0.25% $11,112
4/30/97 $11,996 0.84% $12,544 0.12% $11,125
5/31/97 $12,192 1.51% $12,733 -0.06% $11,119
6/30/97 $12,328 1.07% $12,869 0.12% $11,132
7/31/97 $12,715 2.77% $13,226 0.12% $11,145
8/31/97 $12,555 -0.94% $13,101 0.19% $11,166
9/30/97 $12,706 1.19% $13,257 0.25% $11,194
10/31/97 $12,773 0.64% $13,342 0.25% $11,222
11/30/97 $12,853 0.59% $13,421 -0.06% $11,216
12/31/97 $13,066 1.46% $13,617 -0.12% $11,202
1/31/98 $13,207 1.03% $13,757 0.19% $11,223
2/28/98 $13,202 0.03% $13,761 0.19% $11,245
3/31/98 $13,219 0.09% $13,774 0.19% $11,266
4/30/98 $13,150 -0.45% $13,712 0.18% $11,286
5/31/98 $13,378 1.58% $13,928 0.18% $11,307
6/30/98 $13,420 0.39% $13,983 0.12% $11,320
7/31/98 $13,463 0.25% $14,017 0.12% $11,334
8/31/98 $13,668 1.55% $14,235 0.12% $11,347
9/30/98 $13,837 1.25% $14,413 0.12% $11,361
10/31/98 $13,829 0.00% $14,413 0.24% $11,388
11/30/98 $13,885 0.35% $14,463 0.00% $11,388
12/31/98 $13,890 0.25% $14,499 -0.06% $11,381
1/31/99 0.96% $14,023 1.19% $14,672 0.24% $11,409
2/28/99 -0.44% $13,980 -0.44% $14,607 0.12% $11,422
Total 39.80% 46.07% 14.22%
Return
- ----------------------------------------------------------------------------------------------------
</TABLE>
*Source: Standard and Poor's Micropal.
Past performance is not predictive of future results.
9
FRANKLIN FLORIDA INSURED TAX-FREE INCOME FUND
Your Fund's Goal: Franklin Florida Insured Tax-Free Income Fund seeks to provide
high, current income exempt from regular federal income tax through a portfolio
consisting primarily of insured Florida municipal bonds.(1) In addition, the
fund's shares are free from Florida's annual intangibles tax.
STATE UPDATE
[FLORIDA STATE GRAPHIC] Broad population growth represented one of the
demographic trends that drove Florida's economy during the year under review.
The state's population rose from 10th among the states in 1960 to fourth in
1990, where it remained, as of the end of the reporting period. Two age groups,
seniors and the youthful population, dominated this trend, whereas the main
segment of the working age population (25-44) is projected to decrease from 30%
in 1990 to 23% in 2010.
The high proportion of seniors -- 18.5% of the population was 65 and older
compared with 12.7% nationally in 1997 -- heightens the risk that Medicaid and
other health care service costs will increase more rapidly than elsewhere in the
nation. However, the relatively high income level of many seniors contributed
significantly to spending, and thus sales tax revenue somewhat offset senior
health care-related expenses. The rise in Florida's 5- to 17-year-old population
has proved more costly, necessitating large investments to support the state
school system. In 1998, education-directed debt issues accounted for 63% of the
state's $12.9 billion total debt outstanding.(2)
Florida's stable financial picture over the past several years, based on
relatively moderate debt levels and a services-based economy that continues to
expand faster than
(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.
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.
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: Standard & Poor's CreditWeek Municipal, April 6, 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 46 of
this report.
10
the nation's, contributed to its AA+ general obligation debt rating by Standard
and Poor's, a national credit rating agency.(3) Although the state has no
personal income tax, the sales tax, which comprises 60% of Florida's revenues,
grew by a healthy 5.5% in 1996 and 6.8% in 1997. While figures for 1998 were not
available at the end of the reporting period, the sales tax is projected to grow
7.0% in 1999.(2) The state also makes yearly deposits to its Budget
Stabilization Fund, reducing its dependence on the sales tax.
PORTFOLIO NOTES
Franklin Florida Insured Tax-Free Income Fund's Class A share price, as measured
by net asset value, increased 10 cents, from $10.43 on February 28, 1998, to
$10.53 on February 28, 1999. The fund's total net assets also increased, from
$101.5 million, to $124.5 million over the same period.
Throughout the year under review, falling interest rates prompted Florida
municipalities to refinance outstanding debt and vigorously issue new bonds, as
demonstrated by the state's 27% issuance increase compared with the previous
reporting period. Florida also participated in the national trend of
municipalities offering greater amounts of insured debt, with over 50% of
municipal debt coming to market insured during the reporting period.
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.
DIVIDEND DISTRIBUTIONS*
Franklin Florida Insured
Tax-Free Income Fund
3/1/98 - 2/28/99
<TABLE>
<CAPTION>
DIVIDEND
MONTH PER SHARE
- ----- ----------
<S> <C>
March 4.3 cents
April 4.3 cents
May 4.3 cents
June 4.3 cents
July 4.3 cents
August 4.3 cents
September 4.3 cents
October 4.3 cents
November 4.3 cents
December 4.3 cents
January 4.3 cents
February 4.3 cents
----------
TOTAL 51.6 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.
(3.) This does not indicate Standard & Poor's rating of the fund.
11
PORTFOLIO BREAKDOWN
Franklin Florida Insured
Tax-Free Income Fund
2/28/99
<TABLE>
<CAPTION>
% OF TOTAL
LONG-TERM
SECTOR INVESTMENTS
- ------ -----------
<S> <C>
Utilities 36.9%
Hospitals 13.4%
Other Revenue 13.1%
Prerefunded 11.9%
Housing 6.0%
Certificates of Participation 5.0%
Industrial 2.9%
Health Care 2.8%
Sales Tax 2.6%
General Obligation 2.1%
Transportation 2.0%
Special Assessment 1.3%
</TABLE>
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.
The large demand for Florida municipal bonds allowed yields to remain
significantly lower than national levels. Despite the appetite for the state's
debt, credit spreads, the higher yields paid to investors for the project risk,
widened toward the close of 1998. This enabled us to take advantage of
attractive opportunities in the market. Purchases during the reporting period
included Clearwater Gas System Revenue; Indian Trace Community Development
District; Martin County Health Facilities Authority Hospital Revenue - Martin
Memorial Medical Center Project; Miami Dade County School Board Certificates of
Participation; and South Miami Health Facilities Authority Hospital Revenue
Baptist Health System Obligation Group. We believe that Florida's strong economy
and conservative financial practices make the state an attractive investment,
going forward.
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of February 28, 1999, 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.
12
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.
FRANKLIN FLORIDA INSURED TAX-FREE INCOME FUND
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 +$0.10 $10.53 $10.43
DISTRIBUTIONS
-------------
Dividend Income $0.516
</TABLE>
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 higher initial sales charge; thus actual
total returns may be slightly lower. 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 3.77%. The fee waiver may be
discontinued at any time upon notification to the fund's Board of Trustees.
PERFORMANCE
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR 5-YEAR (4/30/93)
- ------- ------ ------- ---------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) +6.01% +36.30% +41.71%
Average Annual Total Return(2) +1.54% +5.46% +5.38%
Distribution Rate(3) 4.47%
Taxable Equivalent Distribution Rate(4) 7.40%
30-Day Standardized Yield(5) 3.79%
Taxable Equivalent Yield(4) 6.27%
</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.
(3) Distribution rate is based on an annualization of the current 4.1 cent per
share monthly dividend and the maximum offering price of $11.00 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.
13
FRANKLIN FLORIDA INSURED 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, 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 +1.54%
5-Year +5.46%
Since Inception (4/30/93) +5.38%
</TABLE>
The following line graph compares the performance of the Franklin Florida
Insured 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 4/30/93 to 2/28/99.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Fund No. Inception 4/30/93
0178
- -----------------------------------------------------------------------------------------------------
Franklin Florida Lehman Brothers CPI
Insured Tax-Free Municipal Bond
Income Fund-Class A Index
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
4/30/93 $9,579 $10,000 $10,000
5/31/93 $9,550 0.56% $10,056 0.14% $10,014
6/30/93 $9,703 1.67% $10,224 0.14% $10,028
7/31/93 $9,722 0.13% $10,237 0.00% $10,028
8/31/93 $9,921 2.08% $10,450 0.28% $10,056
9/30/93 $10,024 1.14% $10,569 0.21% $10,077
10/31/93 $10,059 0.19% $10,589 0.41% $10,119
11/30/93 $9,910 -0.88% $10,496 0.07% $10,126
12/31/93 $10,207 2.11% $10,718 0.00% $10,126
1/31/94 $10,319 1.14% $10,840 0.27% $10,153
2/28/94 $9,949 -2.59% $10,559 0.34% $10,187
3/31/94 $9,309 -4.07% $10,129 0.34% $10,222
4/30/94 $9,382 0.85% $10,215 0.14% $10,236
5/31/94 $9,446 0.87% $10,304 0.07% $10,244
6/30/94 $9,359 -0.61% $10,241 0.34% $10,278
7/31/94 $9,635 1.83% $10,429 0.27% $10,306
8/31/94 $9,569 0.35% $10,465 0.40% $10,347
9/30/94 $9,369 -1.47% $10,312 0.27% $10,375
10/31/94 $9,056 -1.78% $10,128 0.07% $10,383
11/30/94 $8,846 -1.81% $9,945 0.13% $10,396
12/31/94 $9,201 2.20% $10,163 0.00% $10,396
1/31/95 $9,599 2.86% $10,454 0.40% $10,438
2/28/95 $9,968 2.91% $10,758 0.40% $10,479
3/31/95 $10,056 1.15% $10,882 0.33% $10,514
4/30/95 $10,070 0.12% $10,895 0.33% $10,549
5/31/95 $10,444 3.19% $11,243 0.20% $10,570
6/30/95 $10,289 -0.87% $11,145 0.20% $10,591
7/31/95 $10,357 0.95% $11,251 0.00% $10,591
8/31/95 $10,491 1.27% $11,394 0.26% $10,618
9/30/95 $10,570 0.63% $11,465 0.20% $10,640
10/31/95 $10,769 1.45% $11,632 0.33% $10,675
11/30/95 $11,001 1.66% $11,825 -0.07% $10,667
12/31/95 $11,159 0.96% $11,938 -0.07% $10,660
1/31/96 $11,185 0.76% $12,029 0.59% $10,723
2/29/96 $11,057 -0.68% $11,947 0.32% $10,757
3/31/96 $10,863 -1.28% $11,794 0.52% $10,813
4/30/96 $10,812 -0.28% $11,761 0.39% $10,855
5/31/96 $10,816 -0.04% $11,757 0.19% $10,876
6/30/96 $10,978 1.09% $11,885 0.06% $10,882
7/31/96 $11,084 0.91% $11,993 0.19% $10,903
8/31/96 $11,076 -0.02% $11,990 0.19% $10,924
9/30/96 $11,296 1.40% $12,158 0.32% $10,959
10/31/96 $11,392 1.13% $12,296 0.32% $10,994
11/30/96 $11,603 1.83% $12,521 0.19% $11,015
12/31/96 $11,539 -0.42% $12,468 0.00% $11,015
1/31/97 $11,509 0.19% $12,492 0.32% $11,050
2/28/97 $11,629 0.92% $12,607 0.31% $11,084
3/31/97 $11,436 -1.33% $12,439 0.25% $11,112
4/30/97 $11,557 0.84% $12,544 0.12% $11,125
5/31/97 $11,727 1.51% $12,733 -0.06% $11,119
6/30/97 $11,861 1.07% $12,869 0.12% $11,132
7/31/97 $12,257 2.77% $13,226 0.12% $11,145
8/31/97 $12,118 -0.94% $13,101 0.19% $11,166
9/30/97 $12,254 1.19% $13,257 0.25% $11,194
10/31/97 $12,368 0.64% $13,342 0.25% $11,222
11/30/97 $12,457 0.59% $13,421 -0.06% $11,216
12/31/97 $12,656 1.46% $13,617 -0.12% $11,202
1/31/98 $12,794 1.03% $13,757 0.19% $11,223
2/28/98 $12,787 0.03% $13,761 0.19% $11,245
3/31/98 $12,803 0.09% $13,774 0.19% $11,266
4/30/98 $12,769 -0.45% $13,712 0.18% $11,286
5/31/98 $12,946 1.58% $13,928 0.18% $11,307
6/30/98 $12,999 0.39% $13,983 0.12% $11,320
7/31/98 $13,053 0.25% $14,017 0.12% $11,334
8/31/98 $13,245 1.55% $14,235 0.12% $11,347
9/30/98 $13,374 1.25% $14,413 0.12% $11,361
10/31/98 $13,391 0.00% $14,413 0.24% $11,388
11/30/98 $13,483 0.35% $14,463 0.00% $11,388
12/31/98 $13,500 0.25% $14,499 -0.06% $11,381
1/31/99 0.88% $13,619 1.19% $14,672 0.24% $11,409
2/28/99 -0.46% $13,574 -0.44% $14,607 0.12% $11,422
Total 35.74% 46.07% 14.22%
Return
- -----------------------------------------------------------------------------------------------------
</TABLE>
*Source: Standard and Poor's Micropal.
Past performance is not predictive of future results.
14
FRANKLIN INSURED TAX-FREE INCOME FUND
Your Fund's Goal: Franklin Insured Tax-Free Income Fund seeks to provide high,
current income exempt from regular federal income tax through a portfolio
consisting primarily of insured municipal bonds.(1)
PORTFOLIO NOTES
During the reporting period, municipal bonds traded at attractive levels
compared with the 30-year Treasury bond. At times, we were able to purchase
insured municipal bonds at nominal yields that were actually higher than the
30-year government bond yield. Historically the yield ratio between high-grade
municipal bonds and the 30-year Treasury bond has been about 85%. At the end of
the year under review, we could purchase insured bonds with long maturities at
approximately 95% of the 30-year Treasury bond yield.
This unusually high ratio is largely a result of a combination of events that
changed the supply-and-demand environment for government and municipal bonds.
First, there was a flight to the 30-year Treasury bond as Asia, Russia and most
recently Brazil experienced economic stress, which contributed to the 30-year
Treasury bond's yield declines. Furthermore, as our own domestic stock market
experienced volatility during the period, we again saw a shift of assets into
long-term government bonds. At the same time, the 1998 volume of municipal bond
issuance -- more than $280 billion in new supply -- was the second highest in
history. This prevented municipal bond yields from decreasing at the same rate
as government bond yields. In short, we saw unusually large demand for the
30-year government bond, driving down its yield, and a large municipal bond
supply that caused the yield spread of the two to increase. Although municipal
bonds lagged Treasuries during the investors' flight to
(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.
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.
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 49 of
this report.
15
PORTFOLIO BREAKDOWN
Franklin Insured
Tax-Free Income Fund
2/28/99
<TABLE>
<CAPTION>
% OF TOTAL
LONG-TERM
SECTOR INVESTMENTS
- ------ -----------
<S> <C>
Utilities 23.3%
Prerefunded 17.9%
Hospitals 15.1%
Health Care 10.1%
Education 8.7%
Transportation 8.0%
General Obligation 5.0%
Housing 4.2%
Certificates
of Participation 3.5%
Other Revenue 2.3%
Sales Tax 1.0%
Industrial 0.8%
Special Assessment 0.1%
</TABLE>
quality, as fundamentals reverse, we expect that municipals should close the gap
with Treasuries.
As interest rates declined, we continued to see bonds become prerefunded. When
an outstanding bond becomes prerefunded, it will be called at its first call
date. In most cases, prerefunded bonds are backed by an escrow of U.S.
Treasuries and thus have a substantial price increase -- depending on their call
date.
To extend the fund's income earning potential and protect the share value, over
the 12-month reporting period we continued our focus of selling prerefunded
securities with approximately five years left to the call date. Overall, the
fund's prerefunded bonds comprised 17.9% of the fund's total long-term
investments on February 28, 1999. Recent purchases in the fund included Atlanta,
GA General Obligation, North Carolina Medical Care Commission Health Care
Facilities Revenue, Novant Health Project and Jefferson County, KY Health System
Revenue - Alliant Health System Inc.
In 1999, the lower interest-rate environment should continue to put some
pressure on the fund's overall income earnings. Please keep in mind that the
fund can distribute only what it earns, so the fund's dividend distributions may
have to be decreased in the future if interest rates remain at current or lower
levels. In addition, it was difficult for the fund to generate enough capital
losses to offset the gains realized from the bond sales. Thus, the fund made
distributions totaling 9.24 cents per share in long-term capital gains and 0.77
cents per share in short-term capital gains in June and December. The fund may
make another capital gain distribution in June 1999. It is important to note
that we have not changed our philosophy of investing for income and share value
stability. We believe that on a comparative basis the fund should rank favorably
to other investment alternatives.
Looking forward, insured funds should offer value as municipal bond insurers
continue to face a very competitive business environment, which has resulted in
a lower cost of insurance -- more than 50% of 1998's new issuance was insured.
Also, with lower interest rates some investors have elected to seek higher
yielding securities, which has resulted in a narrowing of the yield spread
between insured bonds and lower quality bonds. Thus, on a comparative basis,
insured bonds remain attractive.
16
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 Insured Tax-Free Income Fund
3/1/98 - 2/28/99
<TABLE>
<CAPTION>
DIVIDENDS PER SHARE
------------------------
MONTH CLASS A CLASS C
- ----- ------- -------
<S> <C> <C>
March 5.5 cents 4.91 cents
April 5.5 cents 4.92 cents
May 5.5 cents 4.92 cents
June 5.3 cents 4.72 cents
July 5.3 cents 4.77 cents
August 5.3 cents 4.77 cents
September 5.3 cents 4.77 cents
October 5.3 cents 4.75 cents
November 5.3 cents 4.75 cents
December 5.2 cents 4.65 cents
January 5.2 cents 4.65 cents
February 5.2 cents 4.65 cents
---------- -----------
TOTAL 63.9 CENTS 57.23 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.
17
FRANKLIN INSURED TAX-FREE INCOME FUND
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 $12.26 $12.31
DISTRIBUTIONS
-------------
Dividend Income $0.6390
Long-Term Capital Gain $0.0924
Short-Term Capital Gain $0.0077
TOTAL $0.7391
</TABLE>
<TABLE>
<CAPTION>
CLASS C CHANGE 2/28/99 2/28/98
- ------- ------ ------- -------
<S> <C> <C> <C>
Net Asset Value -$0.05 $12.33 $12.38
DISTRIBUTIONS
-------------
Dividend Income $0.5723
Long-Term Capital Gain $0.0924
Short-Term Capital Gain $0.0077
TOTAL $0.6724
</TABLE>
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. Past expense reductions by the fund's
manager increased the fund's total returns.
PERFORMANCE
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR 5-YEAR 10-YEAR (4/3/85)
- ------- ------ ------ ------- ---------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) +5.72% +32.92% +107.61% +203.38%
Average Annual Total Return(2) +1.20% +4.95% +7.11% +7.97%
Distribution Rate(3) 4.78%
Taxable Equivalent Distribution Rate(4) 7.91%
30-Day Standardized Yield(5) 3.83%
Taxable Equivalent Yield(4) 6.34%
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS C 1-YEAR 3-YEAR (5/1/95)
- ------- ------ ------ ---------
<S> <C> <C> <C>
Cumulative Total Return(1) +5.12% +18.03% +26.68%
Average Annual Total Return(2) +3.04% +5.34% +6.09%
Distribution Rate(3) 4.31%
Taxable Equivalent Distribution Rate(4) 7.14%
30-Day Standardized Yield(5) 3.38%
Taxable Equivalent Yield(4) 5.60%
</TABLE>
Franklin Insured Tax-Free Income Fund paid distributions derived from long-term
capital gains totaling 9.24 cents ($0.0924) 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).
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.
Past performance is not predictive of future results.
18
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 +1.20%
5-Year +4.95%
10-Year +7.11%
Since Inception (4/3/85) +7.97%
</TABLE>
The following line graph compares the performance of the Franklin Insured
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. Inception 4/3/85
0121
- -----------------------------------------------------------------------------------------------------
Date Franklin Insured Lehman Brothers CPI
Tax-Free Income Municipal Bond Index
Fund-Class A
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
3/1/89 9,576 $10,000 $10,000
3/31/89 9,574 -0.24% $9,976 0.58% $10,058
4/30/89 9,789 2.37% $10,212 0.65% $10,123
5/31/89 9,988 2.08% $10,425 0.57% $10,181
6/30/89 10,118 1.36% $10,567 0.24% $10,206
7/31/89 10,204 1.36% $10,710 0.24% $10,230
8/31/89 10,157 -0.98% $10,605 0.16% $10,246
9/30/89 10,100 -0.30% $10,574 0.32% $10,279
10/31/89 10,196 1.22% $10,703 0.48% $10,329
11/30/89 10,330 1.75% $10,890 0.24% $10,353
12/31/89 10,419 0.82% $10,979 0.16% $10,370
1/31/90 10,333 -0.47% $10,928 1.03% $10,477
2/28/90 10,450 0.89% $11,025 0.47% $10,526
3/31/90 10,447 0.03% $11,028 0.55% $10,584
4/30/90 10,351 -0.72% $10,949 0.16% $10,601
5/31/90 10,592 2.18% $11,187 0.23% $10,625
6/30/90 10,685 0.88% $11,286 0.54% $10,682
7/31/90 10,863 1.48% $11,453 0.38% $10,723
8/31/90 10,601 -1.45% $11,287 0.92% $10,822
9/30/90 10,682 0.06% $11,294 0.84% $10,913
10/31/90 10,841 1.81% $11,498 0.60% $10,978
11/30/90 11,069 2.01% $11,729 0.22% $11,002
12/31/90 11,103 0.44% $11,781 0.00% $11,002
1/31/91 11,284 1.34% $11,939 0.60% $11,068
2/28/91 11,357 0.87% $12,042 0.15% $11,085
3/31/91 11,401 0.04% $12,047 0.15% $11,102
4/30/91 11,565 1.34% $12,209 0.15% $11,118
5/31/91 11,640 0.89% $12,317 0.30% $11,152
6/30/91 11,635 -0.10% $12,305 0.29% $11,184
7/31/91 11,792 1.22% $12,455 0.15% $11,201
8/31/91 11,888 1.32% $12,620 0.29% $11,233
9/30/91 12,047 1.30% $12,784 0.44% $11,283
10/31/91 12,123 0.90% $12,899 0.15% $11,299
11/30/91 12,117 0.28% $12,935 0.29% $11,332
12/31/91 12,362 2.15% $13,213 0.07% $11,340
1/31/92 12,408 0.23% $13,243 0.15% $11,357
2/29/92 12,424 0.03% $13,247 0.36% $11,398
3/31/92 12,460 0.04% $13,253 0.51% $11,456
4/30/92 12,560 0.89% $13,370 0.14% $11,472
5/31/92 12,747 1.18% $13,528 0.14% $11,488
6/30/92 12,914 1.68% $13,756 0.36% $11,530
7/31/92 13,384 3.00% $14,168 0.21% $11,554
8/31/92 13,200 -0.98% $14,029 0.28% $11,586
9/30/92 13,225 0.65% $14,121 0.28% $11,619
10/31/92 13,005 -0.98% $13,982 0.35% $11,659
11/30/92 13,318 1.79% $14,232 0.14% $11,676
12/31/92 13,499 1.02% $14,378 -0.07% $11,667
1/31/93 13,681 1.16% $14,544 0.49% $11,725
2/28/93 14,078 3.62% $15,071 0.35% $11,766
3/31/93 13,990 -1.06% $14,911 0.35% $11,807
4/30/93 14,083 1.01% $15,062 0.28% $11,840
5/31/93 14,142 0.56% $15,146 0.14% $11,856
6/30/93 14,384 1.67% $15,399 0.14% $11,873
7/31/93 14,407 0.13% $15,419 0.00% $11,873
8/31/93 14,698 2.08% $15,740 0.28% $11,906
9/30/93 14,861 1.14% $15,919 0.21% $11,931
10/31/93 14,884 0.19% $15,949 0.41% $11,980
11/30/93 14,837 -0.88% $15,809 0.07% $11,989
12/31/93 15,097 2.11% $16,143 0.00% $11,989
1/31/94 15,241 1.14% $16,327 0.27% $12,021
2/28/94 14,941 -2.59% $15,904 0.34% $12,062
3/31/94 14,460 -4.07% $15,257 0.34% $12,103
4/30/94 14,520 0.85% $15,386 0.14% $12,120
5/31/94 14,617 0.87% $15,520 0.07% $12,128
6/30/94 14,568 -0.61% $15,425 0.34% $12,170
7/31/94 14,801 1.83% $15,708 0.27% $12,202
8/31/94 14,838 0.35% $15,763 0.40% $12,251
9/30/94 14,699 -1.47% $15,531 0.27% $12,284
10/31/94 14,509 -1.78% $15,255 0.07% $12,293
11/30/94 14,270 -1.81% $14,978 0.13% $12,309
12/31/94 14,557 2.20% $15,308 0.00% $12,309
1/31/95 14,895 2.86% $15,746 0.40% $12,358
2/28/95 15,248 2.91% $16,204 0.40% $12,408
3/31/95 15,374 1.15% $16,390 0.33% $12,448
4/30/95 15,411 0.12% $16,410 0.33% $12,490
5/31/95 15,757 3.19% $16,933 0.20% $12,515
6/30/95 15,678 -0.87% $16,786 0.20% $12,540
7/31/95 15,755 0.95% $16,946 0.00% $12,540
8/31/95 15,898 1.27% $17,161 0.26% $12,572
9/30/95 15,975 0.63% $17,269 0.20% $12,597
10/31/95 16,171 1.45% $17,519 0.33% $12,639
11/30/95 16,395 1.66% $17,810 -0.07% $12,630
12/31/95 16,541 0.96% $17,981 -0.07% $12,621
1/31/96 16,633 0.76% $18,118 0.59% $12,696
2/29/96 16,564 -0.68% $17,995 0.32% $12,736
3/31/96 16,401 -1.28% $17,764 0.52% $12,803
4/30/96 16,359 -0.28% $17,714 0.39% $12,852
5/31/96 16,385 -0.04% $17,707 0.19% $12,877
6/30/96 16,548 1.09% $17,900 0.06% $12,885
7/31/96 16,657 0.91% $18,063 0.19% $12,909
8/31/96 16,683 -0.02% $18,060 0.19% $12,934
9/30/96 16,887 1.40% $18,313 0.32% $12,975
10/31/96 17,037 1.13% $18,519 0.32% $13,017
11/30/96 17,272 1.83% $18,858 0.19% $13,041
12/31/96 17,225 -0.42% $18,779 0.00% $13,041
1/31/97 17,250 0.19% $18,815 0.32% $13,083
2/28/97 17,373 0.92% $18,988 0.31% $13,124
3/31/97 17,211 -1.33% $18,735 0.25% $13,156
4/30/97 17,336 0.84% $18,893 0.12% $13,172
5/31/97 17,534 1.51% $19,178 -0.06% $13,164
6/30/97 17,689 1.07% $19,383 0.12% $13,180
7/31/97 18,107 2.77% $19,920 0.12% $13,196
8/31/97 17,956 -0.94% $19,733 0.19% $13,221
9/30/97 18,140 1.19% $19,968 0.25% $13,254
10/31/97 18,251 0.64% $20,096 0.25% $13,287
11/30/97 18,378 0.59% $20,214 -0.06% $13,279
12/31/97 18,629 1.46% $20,509 -0.12% $13,263
1/31/98 18,788 1.03% $20,720 0.19% $13,288
2/28/98 18,780 0.03% $20,727 0.19% $13,314
3/31/98 18,818 0.09% $20,745 0.19% $13,339
4/30/98 18,764 -0.45% $20,652 0.18% $13,363
5/31/98 19,034 1.58% $20,978 0.18% $13,387
6/30/98 19,128 0.39% $21,060 0.12% $13,403
7/31/98 19,179 0.25% $21,113 0.12% $13,419
8/31/98 19,435 1.55% $21,440 0.12% $13,435
9/30/98 19,660 1.25% $21,708 0.12% $13,451
10/31/98 19,665 0.00% $21,708 0.24% $13,484
11/30/98 19,733 0.35% $21,784 0.00% $13,484
12/31/98 19,756 0.25% $21,838 -0.06% $13,476
1/31/99 0.91% $19,936 1.19% $22,098 0.24% $13,508
2/28/99 -0.40% $19,882 -0.44% $22,001 0.12% $13,524
Total 98.82% 120.01% 35.24%
Return
- -----------------------------------------------------------------------------------------------------
</TABLE>
AVERAGE ANNUAL TOTAL RETURN
2/28/99
<TABLE>
<CAPTION>
CLASS C
- -------
<S> <C>
1-Year +3.04%
3-Year +5.34%
Since Inception (5/1/95) +6.09%
</TABLE>
The following line graph compares the performance of the Franklin Insured
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>
- ---------------------------------------------------------------------------------------------------------------------
Fund No. Inception 5/1/95
221
- ---------------------------------------------------------------------------------------------------------------------
Date Franklin Insured Lehman Brothers CPI
Tax-Free Income Municipal Bond Index
Fund-Class C
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
5/1/95 $9,901 $10,000 $10,000
5/31/95 $10,122 3.19% $10,319 0.20% $10,020
6/30/95 $10,075 -0.87% $10,229 0.20% $10,040
7/31/95 $10,119 0.95% $10,326 0.00% $10,040
8/31/95 $10,206 1.27% $10,458 0.26% $10,066
9/29/95 $10,259 0.63% $10,523 0.20% $10,086
10/31/95 $10,379 1.45% $10,676 0.33% $10,120
11/30/95 $10,509 1.66% $10,853 -0.07% $10,112
12/29/95 $10,605 0.96% $10,957 -0.07% $10,105
1/31/96 $10,659 0.76% $11,041 0.59% $10,165
2/29/96 $10,610 -0.68% $10,966 0.32% $10,198
3/29/96 $10,502 -1.28% $10,825 0.52% $10,251
4/30/96 $10,478 -0.28% $10,795 0.39% $10,291
5/31/96 $10,489 -0.04% $10,791 0.19% $10,310
6/28/96 $10,589 1.09% $10,908 0.06% $10,316
7/31/96 $10,662 0.91% $11,008 0.19% $10,336
8/30/96 $10,665 -0.02% $11,005 0.19% $10,356
9/30/96 $10,790 1.40% $11,159 0.32% $10,389
10/31/96 $10,880 1.13% $11,286 0.32% $10,422
11/29/96 $11,024 1.83% $11,492 0.19% $10,442
12/31/96 $10,989 -0.42% $11,444 0.00% $10,442
1/31/97 $10,999 0.19% $11,466 0.32% $10,475
2/28/97 $11,081 0.92% $11,571 0.31% $10,508
3/31/97 $10,963 -1.33% $11,417 0.25% $10,534
4/30/97 $11,047 0.84% $11,513 0.12% $10,547
5/31/97 $11,167 1.51% $11,687 -0.06% $10,540
6/30/97 $11,260 1.07% $11,812 0.12% $10,553
7/31/97 $11,519 2.77% $12,139 0.12% $10,565
8/31/97 $11,419 -0.94% $12,025 0.19% $10,586
9/30/97 $11,529 1.19% $12,168 0.25% $10,612
10/31/97 $11,594 0.64% $12,246 0.25% $10,639
11/30/97 $11,668 0.59% $12,318 -0.06% $10,632
12/31/97 $11,831 1.46% $12,498 -0.12% $10,619
1/31/98 $11,916 1.03% $12,627 0.19% $10,640
2/28/98 $11,915 0.03% $12,631 0.19% $10,660
3/31/98 $11,924 0.09% $12,642 0.19% $10,680
4/30/98 $11,884 -0.45% $12,585 0.18% $10,699
5/31/98 $12,058 1.58% $12,784 0.18% $10,719
6/30/98 $12,112 0.39% $12,834 0.12% $10,731
7/31/98 $12,139 0.25% $12,866 0.12% $10,744
8/31/98 $12,295 1.55% $13,065 0.12% $10,757
9/30/98 $12,431 1.25% $13,229 0.12% $10,770
10/31/98 $12,429 0.00% $13,229 0.24% $10,796
11/30/98 $12,466 0.35% $13,275 0.00% $10,796
12/31/98 $12,475 0.25% $13,308 -0.06% $10,789
1/31/99 0.86% $12,582 1.19% $13,466 0.24% $10,815
2/28/99 -0.44% $12,542 -0.44% $13,407 0.12% $10,828
Total 25.42% 34.07% 8.28%
Return
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
*Source: Standard and Poor's Micropal.
Past performance is not predictive of future results.
19
FRANKLIN MASSACHUSETTS INSURED TAX-FREE INCOME FUND
Your Fund's Goal: Franklin Massachusetts Insured Tax-Free Income Fund seeks to
provide high, current income exempt from regular federal and Massachusetts state
personal income taxes through a portfolio consisting primarily of insured
Massachusetts municipal bonds.(1)
COMMONWEALTH UPDATE
[MASSACHUSETTS STATE GRAPHIC] During the year under review, the mood in
Massachusetts was upbeat, and rightly so. Following the severe recession in the
early '90s, the state's economy dramatically rebounded. At that time, the
reserve fund was significantly pared, but has since received successive cash
infusions. Reserves and the undesignated balance from the last surplus,
approximately $1.2 billion as of year-end 1998, were likely the result of
policies initiated during tough times. Other indicators of fiscal health
included employment levels that have grown at more than a 2% rate for the last
several years, driving the unemployment rate to 3.4% in June 1998, when the
national rate was 4.5%.(2) A two-tiered tax cut initiative, targeted at earned
and unearned income, should help spur further expansion.
Balanced against favorable economic events, the commonwealth maintained one of
the nation's highest debt levels, 7.7% of personal income compared with the 1.9%
national median.(2) The debt burden is likely to remain elevated due to the
enormous capital demands of the Central Artery/Ted Williams Tunnel project. The
commonwealth may have to issue significant levels of debt, as the next phase is
expected to be more capital intensive at a time of reduced federal funding.
Funding for the Artery seems justified, however, as Massachusetts has the
fastest-growing economy in the northeast, and the nation's fourth-highest per
capita income level.(3) Other upcoming initiatives include appropriations for a
convention center, highway improve-
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.
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.
2. Source: Moody's Investors Service, Municipal Credit Research, August 26,
1998.
3. Source: Standard & Poor's CreditWeek Municipal, December 14, 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 65 of
this report.
20
ments, prisons and schools. Although these projects may incur more debt, they
should generate still more job growth in the construction sector.
Moody's, a national credit rating agency, assigned Massachusetts a "stable"
outlook and Aa3 rating due to the state's strong reserves, revenues continually
exceeding estimates and conservative fiscal policies forged in the midst of the
last cyclical downturn.(4)
PORTFOLIO NOTES
During the reporting period, the fund diligently sought to buy municipal
securities that provided the best relative value consistent with our 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. By actively managing the fund's
exposure to prerefunded bonds and reinvesting the proceeds in current coupons
with longer call protection, we helped protect the fund's share value and
maintain a competitive yield.
During the period, the fund found value in and purchased Amesbury General
Obligation, Massachusetts State Industrial Finance Agency Revenue - College of
the Holy Cross and Massachusetts State Industrial Finance Agency Revenue - WGBH
Educational Foundation. The fund also took advantage of its ability to buy
uninsured bonds by investing in two high quality, AA-rated credits at relatively
attractive yields. These securities were Massachusetts State Health and
Education Facilities Authority Revenue for Wellesley College and Boston College.
These purchases maintained diversification in a broad range of credits, which
helped reduce the fund's exposure to risk and volatility that may affect any one
credit.
PORTFOLIO BREAKDOWN
Franklin Massachusetts Insured
Tax-Free Income Fund
2/28/99
<TABLE>
<CAPTION>
% OF TOTAL
LONG-TERM
SECTOR INVESTMENTS
- ------ -----------
<S> <C>
Hospitals 28.0%
Education 24.5%
Prerefunded 12.1%
Transportation 11.9%
General Obligation 9.4%
Housing 8.3%
Utilities 3.8%
Health Care 1.2%
Certificates of Participation 0.8%
</TABLE>
(4) This does not indicate Moody's rating of the fund.
21
We continue to closely monitor the supply of Massachusetts insured municipal
bonds. In 1998, the commonwealth issued a total of $10.3 billion, of which 56%
was insured. Compared with 1997, total issuance increased by 32.9%. Because
supply outpaced demand throughout the year, we acquired the above securities at
relatively attractive yields. Looking ahead, the lower borrowing costs may
prompt issuers to refund additional issues, increasing the new-issue supply.
Also, we will carefully track the commonwealth's debt management ability, as
borrowing may increase with pressure to meet routine infrastructure needs and to
fund the Central Artery Tunnel Project, now estimated to cost $11.6 billion to
complete.
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 Massachusetts Insured Tax-Free Income Fund
3/1/98 - 2/28/99
<TABLE>
<CAPTION>
DIVIDENDS PER SHARE
------------------------
MONTH CLASS A CLASS C
- ----- ---------- -----------
<S> <C> <C>
March 4.9 cents 4.34 cents
April 4.9 cents 4.34 cents
May 4.9 cents 4.34 cents
June 4.9 cents 4.34 cents
July 4.9 cents 4.32 cents
August 4.9 cents 4.32 cents
September 4.9 cents 4.32 cents
October 4.9 cents 4.35 cents
November 4.9 cents 4.35 cents
December 4.9 cents 4.35 cents
January 4.9 cents 4.35 cents
February 4.9 cents 4.35 cents
---------- -----------
TOTAL 58.8 CENTS 52.07 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.
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.
FRANKLIN MASSACHUSETTS INSURED TAX-FREE INCOME FUND
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 $11.71 $11.75
DISTRIBUTIONS
-------------
Dividend Income $0.5880
Long-Term Capital Gain $0.0324
Short-Term Capital Gain $0.0360
TOTAL $0.6564
</TABLE>
<TABLE>
<CAPTION>
CLASS C CHANGE 2/28/99 2/28/98
- ------- ------ ------- -------
<S> <C> <C> <C>
Net Asset Value -$0.04 $11.76 $11.80
DISTRIBUTIONS
-------------
Dividend Income $0.5207
Long-Term Capital Gain $0.0324
Short-Term Capital Gain $0.0360
TOTAL $0.5891
</TABLE>
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.
PERFORMANCE
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR 5-YEAR 10-YEAR (4/3/85)
- ------- ------ ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return(1) +5.36% +32.70% +103.30% +177.96%
Average Annual Total Return(2) +0.89% +4.91% +6.89% +7.30%
Distribution Rate(3) 4.66%
Taxable Equivalent Distribution Rate(4) 8.20%
30-Day Standardized Yield(5) 3.75%
Taxable Equivalent Yield(4) 6.60%
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS C 1-YEAR 3-YEAR (5/1/95)
- ------- ------ ------ ---------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) +4.74% +17.74% +26.41%
Average Annual Total Return(2) +2.70% +5.24% +6.04%
Distribution Rate(3) 4.22%
Taxable Equivalent Distribution Rate(4) 7.43%
30-Day Standardized Yield(5) 3.33%
Taxable Equivalent Yield(4) 5.86%
</TABLE>
Franklin Massachusetts Insured Tax-Free Income Fund paid distributions derived
from long-term capital gains totaling 3.24 cents ($0.0324) 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).
(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 Massachusetts state personal income tax bracket of 43.2%,
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.
23
FRANKLIN MASSACHUSETTS INSURED 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 +0.89%
5-Year +4.91%
10-Year +6.89%
Since Inception (4/3/85) +7.30%
</TABLE>
The following line graph compares the performance of the Franklin Massachusetts
Insured 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. Inception 4/3/85
0118
- -----------------------------------------------------------------------------------------
Date Franklin Massachusetts Lehman Brothers CPI
Insured Tax-Free Municipal Bond
Income Fund-Class A Index
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
3/1/89 $ 9,575 $10,000 $10,000
3/31/89 $ 9,556 -0.24% $ 9,976 0.58% $10,058
4/30/89 $ 9,738 2.37% $10,212 0.65% $10,123
5/31/89 $ 9,947 2.08% $10,425 0.57% $10,181
6/30/89 $10,075 1.36% $10,567 0.24% $10,206
7/31/89 $10,176 1.36% $10,710 0.24% $10,230
8/31/89 $10,091 -0.98% $10,605 0.16% $10,246
9/30/89 $10,053 -0.30% $10,574 0.32% $10,279
10/31/89 $10,137 1.22% $10,703 0.48% $10,329
11/30/89 $10,268 1.75% $10,890 0.24% $10,353
12/31/89 $10,343 0.82% $10,979 0.16% $10,370
1/31/90 $10,246 -0.47% $10,928 1.03% $10,477
2/28/90 $10,351 0.89% $11,025 0.47% $10,526
3/31/90 $10,351 0.03% $11,028 0.55% $10,584
4/30/90 $10,244 -0.72% $10,949 0.16% $10,601
5/31/90 $10,459 2.18% $11,187 0.23% $10,625
6/30/90 $10,548 0.88% $11,286 0.54% $10,682
7/31/90 $10,716 1.48% $11,453 0.38% $10,723
8/31/90 $10,517 -1.45% $11,287 0.92% $10,822
9/30/90 $10,497 0.06% $11,294 0.84% $10,913
10/31/90 $10,628 1.81% $11,498 0.60% $10,978
11/30/90 $10,840 2.01% $11,729 0.22% $11,002
12/31/90 $10,871 0.44% $11,781 0.00% $11,002
1/31/91 $11,065 1.34% $11,939 0.60% $11,068
2/28/91 $11,116 0.87% $12,042 0.15% $11,085
3/31/91 $11,168 0.04% $12,047 0.15% $11,102
4/30/91 $11,324 1.34% $12,209 0.15% $11,118
5/31/91 $11,397 0.89% $12,317 0.30% $11,152
6/30/91 $11,408 -0.10% $12,305 0.29% $11,184
7/31/91 $11,567 1.22% $12,455 0.15% $11,201
8/31/91 $11,663 1.32% $12,620 0.29% $11,233
9/30/91 $11,802 1.30% $12,784 0.44% $11,283
10/31/91 $11,888 0.90% $12,899 0.15% $11,299
11/30/91 $11,888 0.28% $12,935 0.29% $11,332
12/31/91 $12,116 2.15% $13,213 0.07% $11,340
1/31/92 $12,171 0.23% $13,243 0.15% $11,357
2/29/92 $12,167 0.03% $13,247 0.36% $11,398
3/31/92 $12,197 0.04% $13,253 0.51% $11,456
4/30/92 $12,305 0.89% $13,370 0.14% $11,472
5/31/92 $12,468 1.18% $13,528 0.14% $11,488
6/30/92 $12,656 1.68% $13,756 0.36% $11,530
7/31/92 $13,069 3.00% $14,168 0.21% $11,554
8/31/92 $12,896 -0.98% $14,029 0.28% $11,586
9/30/92 $12,915 0.65% $14,121 0.28% $11,619
10/31/92 $12,671 -0.98% $13,982 0.35% $11,659
11/30/92 $12,990 1.79% $14,232 0.14% $11,676
12/31/92 $13,183 1.02% $14,378 -0.07% $11,667
1/31/93 $13,365 1.16% $14,544 0.49% $11,725
2/28/93 $13,747 3.62% $15,071 0.35% $11,766
3/31/93 $13,743 -1.06% $14,911 0.35% $11,807
4/30/93 $13,845 1.01% $15,062 0.28% $11,840
5/31/93 $13,889 0.56% $15,146 0.14% $11,856
6/30/93 $14,112 1.67% $15,399 0.14% $11,873
7/31/93 $14,144 0.13% $15,419 0.00% $11,873
8/31/93 $14,405 2.08% $15,740 0.28% $11,906
9/30/93 $14,545 1.14% $15,919 0.21% $11,931
10/31/93 $14,576 0.19% $15,949 0.41% $11,980
11/30/93 $14,522 -0.88% $15,809 0.07% $11,989
12/31/93 $14,738 2.11% $16,143 0.00% $11,989
1/31/94 $14,893 1.14% $16,327 0.27% $12,021
2/28/94 $14,653 -2.59% $15,904 0.34% $12,062
3/31/94 $14,163 -4.07% $15,257 0.34% $12,103
4/30/94 $14,194 0.85% $15,386 0.14% $12,120
5/31/94 $14,275 0.87% $15,520 0.07% $12,128
6/30/94 $14,243 -0.61% $15,425 0.34% $12,170
7/31/94 $14,452 1.83% $15,708 0.27% $12,202
8/31/94 $14,484 0.35% $15,763 0.40% $12,251
9/30/94 $14,337 -1.47% $15,531 0.27% $12,284
10/31/94 $14,176 -1.78% $15,255 0.07% $12,293
11/30/94 $13,951 -1.81% $14,978 0.13% $12,309
12/31/94 $14,204 2.20% $15,308 0.00% $12,309
1/31/95 $14,563 2.86% $15,746 0.40% $12,358
2/28/95 $14,923 2.91% $16,204 0.40% $12,408
3/31/95 $15,035 1.15% $16,390 0.33% $12,448
4/30/95 $15,094 0.12% $16,410 0.33% $12,490
5/31/95 $15,393 3.19% $16,933 0.20% $12,515
6/30/95 $15,333 -0.87% $16,786 0.20% $12,540
7/31/95 $15,434 0.95% $16,946 0.00% $12,540
8/31/95 $15,563 1.27% $17,161 0.26% $12,572
9/30/95 $15,664 0.63% $17,269 0.20% $12,597
10/31/95 $15,848 1.45% $17,519 0.33% $12,639
11/30/95 $16,046 1.66% $17,810 -0.07% $12,630
12/31/95 $16,205 0.96% $17,981 -0.07% $12,621
1/31/96 $16,281 0.76% $18,118 0.59% $12,696
2/29/96 $16,232 -0.68% $17,995 0.32% $12,736
3/31/96 $16,072 -1.28% $17,764 0.52% $12,803
4/30/96 $16,009 -0.28% $17,714 0.39% $12,852
5/31/96 $16,043 -0.04% $17,707 0.19% $12,877
6/30/96 $16,178 1.09% $17,900 0.06% $12,885
7/31/96 $16,299 0.91% $18,063 0.19% $12,909
8/31/96 $16,320 -0.02% $18,060 0.19% $12,934
9/30/96 $16,509 1.40% $18,313 0.32% $12,975
10/31/96 $16,657 1.13% $18,519 0.32% $13,017
11/30/96 $16,891 1.83% $18,858 0.19% $13,041
12/31/96 $16,836 -0.42% $18,779 0.00% $13,041
1/31/97 $16,869 0.19% $18,815 0.32% $13,083
2/28/97 $17,003 0.92% $18,988 0.31% $13,124
3/31/97 $16,784 -1.33% $18,735 0.25% $13,156
4/30/97 $16,921 0.84% $18,893 0.12% $13,172
5/31/97 $17,162 1.51% $19,178 -0.06% $13,164
6/30/97 $17,348 1.07% $19,383 0.12% $13,180
7/31/97 $17,818 2.77% $19,920 0.12% $13,196
8/31/97 $17,654 -0.94% $19,733 0.19% $13,221
9/30/97 $17,852 1.19% $19,968 0.25% $13,254
10/31/97 $17,944 0.64% $20,096 0.25% $13,287
11/30/97 $18,067 0.59% $20,214 -0.06% $13,279
12/31/97 $18,327 1.46% $20,509 -0.12% $13,263
1/31/98 $18,451 1.03% $20,720 0.19% $13,288
2/28/98 $18,451 0.03% $20,727 0.19% $13,314
3/31/98 $18,465 0.09% $20,745 0.19% $13,339
4/30/98 $18,431 -0.45% $20,652 0.18% $13,363
5/31/98 $18,684 1.58% $20,978 0.18% $13,387
6/30/98 $18,793 0.39% $21,060 0.12% $13,403
7/31/98 $18,823 0.25% $21,113 0.12% $13,419
8/31/98 $19,063 1.55% $21,440 0.12% $13,435
9/30/98 $19,272 1.25% $21,708 0.12% $13,451
10/31/98 $19,205 0.00% $21,708 0.24% $13,484
11/30/98 $19,286 0.35% $21,784 0.00% $13,484
12/31/98 $19,314 0.25% $21,838 -0.06% $13,476
1/31/99 0.85% $19,478 1.19% $22,098 0.24% $13,508
2/28/99 -0.19% $19,466 -0.44% $22,001 0.12% $13,524
Total Return 94.66% 120.01% 35.24%
- -----------------------------------------------------------------------------------------
</TABLE>
CLASS A (3/1/89 - 2/29/99)
insert Plot Points
AVERAGE ANNUAL TOTAL RETURN
2/28/99
<TABLE>
<CAPTION>
CLASS C
- -------
<S> <C>
1-Year +2.70%
3-Year +5.24%
Since Inception (5/1/95) +6.04%
</TABLE>
The following line graph compares the performance of the Franklin Massachusetts
Insured 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>
- --------------------------------------------------------------------------------------------
Fund No. 218 Inception 5/1/95
- --------------------------------------------------------------------------------------------
Date Franklin Massachusetts Lehman Brothers CPI
Insured Tax-Free Municipal Bond
Income Fund-Class C Index
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
5/1/95 $ 9,904 $10,000 $10,000
5/31/95 $10,100 3.19% $10,319 0.20% $10,020
6/30/95 $10,064 -0.87% $10,229 0.20% $10,040
7/31/95 $10,125 0.95% $10,326 0.00% $10,040
8/31/95 $10,213 1.27% $10,458 0.26% $10,066
9/29/95 $10,265 0.63% $10,523 0.20% $10,086
10/31/95 $10,380 1.45% $10,676 0.33% $10,120
11/30/95 $10,513 1.66% $10,853 -0.07% $10,112
12/29/95 $10,611 0.96% $10,957 -0.07% $10,105
1/31/96 $10,655 0.76% $11,041 0.59% $10,165
2/29/96 $10,618 -0.68% $10,966 0.32% $10,198
3/29/96 $10,501 -1.28% $10,825 0.52% $10,251
4/30/96 $10,464 -0.28% $10,795 0.39% $10,291
5/31/96 $10,481 -0.04% $10,791 0.19% $10,310
6/28/96 $10,564 1.09% $10,908 0.06% $10,316
7/31/96 $10,647 0.91% $11,008 0.19% $10,336
8/30/96 $10,646 -0.02% $11,005 0.19% $10,356
9/30/96 $10,774 1.40% $11,159 0.32% $10,389
10/31/96 $10,855 1.13% $11,286 0.32% $10,422
11/29/96 $11,002 1.83% $11,492 0.19% $10,442
12/31/96 $10,961 -0.42% $11,444 0.00% $10,442
1/31/97 $10,977 0.19% $11,466 0.32% $10,475
2/28/97 $11,068 0.92% $11,571 0.31% $10,508
3/31/97 $10,921 -1.33% $11,417 0.25% $10,534
4/30/97 $10,996 0.84% $11,513 0.12% $10,547
5/31/97 $11,147 1.51% $11,687 -0.06% $10,540
6/30/97 $11,272 1.07% $11,812 0.12% $10,553
7/31/97 $11,561 2.77% $12,139 0.12% $10,565
8/31/97 $11,450 -0.94% $12,025 0.19% $10,586
9/30/97 $11,582 1.19% $12,168 0.25% $10,612
10/31/97 $11,635 0.64% $12,246 0.25% $10,639
11/30/97 $11,709 0.59% $12,318 -0.06% $10,632
12/31/97 $11,861 1.46% $12,498 -0.12% $10,619
1/31/98 $11,945 1.03% $12,627 0.19% $10,640
2/28/98 $11,939 0.03% $12,631 0.19% $10,660
3/31/98 $11,943 0.09% $12,642 0.19% $10,680
4/30/98 $11,916 -0.45% $12,585 0.18% $10,699
5/31/98 $12,072 1.58% $12,784 0.18% $10,719
6/30/98 $12,137 0.39% $12,834 0.12% $10,731
7/31/98 $12,161 0.25% $12,866 0.12% $10,744
8/31/98 $12,299 1.55% $13,065 0.12% $10,757
9/30/98 $12,427 1.25% $13,229 0.12% $10,770
10/31/98 $12,389 0.00% $13,229 0.24% $10,796
11/30/98 $12,424 0.35% $13,275 0.00% $10,796
12/31/98 $12,447 0.25% $13,308 -0.06% $10,789
1/31/99 0.79% $12,545 1.19% $13,466 0.24% $10,815
2/28/99 -0.32% $12,520 -0.44% $13,407 0.12% $10,828
Total Return 25.20% 34.07% 8.28%
- -----------------------------------------------------------------------------------------
</TABLE>
CLASS C (5/1/95 - 2/28/99)
insert Plot Points
*Source: Standard and Poor's Micropal.
Past performance is not predictive of future results.
24
FRANKLIN MICHIGAN INSURED TAX-FREE INCOME FUND
Your Fund's Goal: Franklin Michigan Insured 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 insured
Michigan municipal bonds.(1)
STATE UPDATE
[MICHIGAN STATE GRAPHIC] 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)
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)
(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. 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.
(2.) Source: Fitch IBCA, November 1998.
(3.) Source: Moody's, November 1998.
(4.) 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 70 of
this report.
25
PORTFOLIO BREAKDOWN
Franklin Michigan Insured
Tax-Free Income Fund
2/28/99
<TABLE>
<CAPTION>
% OF TOTAL
LONG-TERM
SECTOR INVESTMENTS
- ------ -----------
<S> <C>
Prerefunded 32.2%
Education 22.2%
Hospitals 18.8%
Utilities 12.3%
General Obligation 4.8%
Transportation 3.7%
Other Revenue 3.0%
Health Care 1.6%
Housing 0.9%
Tax Allocation 0.4%
Sales Tax Revenue 0.1%
</TABLE>
PORTFOLIO NOTES
During the year under review, municipal bonds traded at historically attractive
levels, compared with the 30-year Treasury bond. At the end of the reporting
period, long-term, insured municipal bonds yielded approximately 95% of the long
Treasury bond. At the same time, 1998 was the second-highest year in history for
municipal bond issuance nationally, with more than $280 billion in new supply.
This prevented municipal bond yields from decreasing at the same rate as those
of government bonds. Although municipal bonds lagged behind Treasuries during
foreign investors' flight to quality from international stock market volatility
in 1998, as fundamentals reverse, we expect the municipal bond market should
close the gap.
The fund's total net assets increased slightly during the year under review,
rising by $36 million, to $1.21 billion on February 28, 1999. In addition,
Franklin Michigan Insured Tax-Free Income Fund's Class A share price, as
measured by net asset value, increased eight cents, from $12.20 on February 28,
1998, to $12.28 on February 28, 1999. The fund's asset allocation changed
slightly during the period. Prerefunded securities was the largest sector in the
fund, comprising 32.2% of total long-term investments at the end of the
reporting period, compared with 17.2% a year earlier. When an outstanding bond
becomes prerefunded, it will be called at its first call date. In most cases,
prerefunded bonds are backed by an escrow of U.S. Treasuries and thus have a
substantial increase in price -- depending on their call date. Education, making
up 22.2% of total long-term investments at the end of the reporting period,
remained an important sector in the portfolio, as we continued to find value
there.
The fund purchased current coupon bonds with at least 10-year call protection in
an attempt to protect its long-term income stream. Also, by actively managing
the fund's exposure to prerefunded bonds and reinvesting the proceeds in current
coupons with longer call protection, we helped to protect its share value and
maintain a competitive yield. Significant purchases during the period included
Fenton Area Public School General Obligation, Northview Public School District
General Obligation and Michigan State Hospital Finance Authority Revenue
- -Oakwood Obligation Group.
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 totaling 5.13 cents per share in long-term
capital gains and 0.36 cents per share in short-term capital gains in June and
December. Additionally, the fund may make another capital gain distribution in
June 1999.
26
Going forward, the fund should perform well when compared with other
fixed-income investments. However, please keep in mind that in this low
interest-rate environment, the fund may have to further decrease the dividend
payment, if interest rates stay at their recent, low level.
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 Michigan Insured Tax-Free Income Fund
3/1/98 - 2/28/99
<TABLE>
<CAPTION>
DIVIDENDS PER SHARE
-------------------
MONTH CLASS A CLASS C
- ----- ------- -------
<S> <C> <C>
March 5.1 cents 4.49 cents
April 5.1 cents 4.50 cents
May 5.1 cents 4.50 cents
June 5.1 cents 4.50 cents
July 5.1 cents 4.52 cents
August 5.1 cents 4.52 cents
September 5.1 cents 4.52 cents
October 5.1 cents 4.60 cents
November 5.1 cents 4.60 cents
December 5.0 cents 4.50 cents
January 5.0 cents 4.50 cents
February 5.0 cents 4.50 cents
---------- -----------
TOTAL 60.9 CENTS 54.25 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.
27
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.
FRANKLIN MICHIGAN INSURED TAX-FREE INCOME FUND
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 +$0.08 $12.28 $12.20
DISTRIBUTIONS
-------------
Dividend Income $0.6090
Long-Term Capital Gain $0.0513
Short-Term Capital Gain $0.0036
TOTAL $0.6639
</TABLE>
<TABLE>
<CAPTION>
CLASS C CHANGE 2/28/99 2/28/98
- ------- ------ ------- -------
<S> <C> <C> <C>
Net Asset Value +$0.09 $12.36 $12.27
DISTRIBUTIONS
-------------
Dividend Income $0.5425
Long-Term Capital Gain $0.0513
Short-Term Capital Gain $0.0036
TOTAL $0.5974
</TABLE>
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.
PERFORMANCE
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR 5-YEAR 10-YEAR (4/3/85)
- ------- ------ ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return(1) +6.23% +33.98% +106.98% +192.30%
Average Annual Total Return(2) +1.73% +5.11% +7.08% +7.68%
Distribution Rate(3) 4.63%
Taxable Equivalent Distribution Rate(4) 8.02%
30-Day Standardized Yield(5) 3.71%
Taxable Equivalent Yield(4) 6.43%
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS C 1-YEAR 3-YEAR (5/1/95)
- ------- ------ ------ ---------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) +5.71% +18.91% +27.92%
Average Annual Total Return(2) +3.70% +5.60% +6.36%
Distribution Rate(3) 4.15%
Taxable Equivalent Distribution Rate(4) 7.19%
30-Day Standardized Yield(5) 3.28%
Taxable Equivalent Yield(4) 5.68%
</TABLE>
Franklin Michigan Insured Tax-Free Income Fund paid distributions derived from
long-term capital gains totaling 5.13 cents ($0.0513) 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).
(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 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.
Past performance is not predictive of future results.
28
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 +1.73%
5-Year +5.11%
10-Year +7.08%
Since Inception (4/3/85) +7.68%
</TABLE>
The following line graph compares the performance of the Franklin Michigan
Insured 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. Inception 4/3/85
0119
- -------------------------------------------------------------------------------------
Date Franklin Michigan Lehman Brothers CPI
Insured Tax-Free Municipal Bond
Income Fund-Class A Index
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
3/1/89 $ 9,578 $10,000 $10,000
3/31/89 $ 9,553 -0.24% $ 9,976 0.58% $10,058
4/30/89 $ 9,740 2.37% $10,212 0.65% $10,123
5/31/89 $ 9,972 2.08% $10,425 0.57% $10,181
6/30/89 $10,107 1.36% $10,567 0.24% $10,206
7/31/89 $10,180 1.36% $10,710 0.24% $10,230
8/31/89 $10,118 -0.98% $10,605 0.16% $10,246
9/30/89 $10,064 -0.30% $10,574 0.32% $10,279
10/31/89 $10,147 1.22% $10,703 0.48% $10,329
11/30/89 $10,295 1.75% $10,890 0.24% $10,353
12/31/89 $10,370 0.82% $10,979 0.16% $10,370
1/31/90 $10,287 -0.47% $10,928 1.03% $10,477
2/28/90 $10,391 0.89% $11,025 0.47% $10,526
3/31/90 $10,393 0.03% $11,028 0.55% $10,584
4/30/90 $10,300 -0.72% $10,949 0.16% $10,601
5/31/90 $10,539 2.18% $11,187 0.23% $10,625
6/30/90 $10,666 0.88% $11,286 0.54% $10,682
7/31/90 $10,822 1.48% $11,453 0.38% $10,723
8/31/90 $10,601 -1.45% $11,287 0.92% $10,822
9/30/90 $10,613 0.06% $11,294 0.84% $10,913
10/31/90 $10,752 1.81% $11,498 0.60% $10,978
11/30/90 $10,981 2.01% $11,729 0.22% $11,002
12/31/90 $11,002 0.44% $11,781 0.00% $11,002
1/31/91 $11,174 1.34% $11,939 0.60% $11,068
2/28/91 $11,246 0.87% $12,042 0.15% $11,085
3/31/91 $11,288 0.04% $12,047 0.15% $11,102
4/30/91 $11,442 1.34% $12,209 0.15% $11,118
5/31/91 $11,515 0.89% $12,317 0.30% $11,152
6/30/91 $11,507 -0.10% $12,305 0.29% $11,184
7/31/91 $11,654 1.22% $12,455 0.15% $11,201
8/31/91 $11,738 1.32% $12,620 0.29% $11,233
9/30/91 $11,886 1.30% $12,784 0.44% $11,283
10/31/91 $11,972 0.90% $12,899 0.15% $11,299
11/30/91 $11,963 0.28% $12,935 0.29% $11,332
12/31/91 $12,209 2.15% $13,213 0.07% $11,340
1/31/92 $12,253 0.23% $13,243 0.15% $11,357
2/29/92 $12,245 0.03% $13,247 0.36% $11,398
3/31/92 $12,279 0.04% $13,253 0.51% $11,456
4/30/92 $12,400 0.89% $13,370 0.14% $11,472
5/31/92 $12,597 1.18% $13,528 0.14% $11,488
6/30/92 $12,782 1.68% $13,756 0.36% $11,530
7/31/92 $13,242 3.00% $14,168 0.21% $11,554
8/31/92 $13,064 -0.98% $14,029 0.28% $11,586
9/30/92 $13,096 0.65% $14,121 0.28% $11,619
10/31/92 $12,872 -0.98% $13,982 0.35% $11,659
11/30/92 $13,173 1.79% $14,232 0.14% $11,676
12/31/92 $13,341 1.02% $14,378 -0.07% $11,667
1/31/93 $13,509 1.16% $14,544 0.49% $11,725
2/28/93 $13,895 3.62% $15,071 0.35% $11,766
3/31/93 $13,859 -1.06% $14,911 0.35% $11,807
4/30/93 $13,949 1.01% $15,062 0.28% $11,840
5/31/93 $14,029 0.56% $15,146 0.14% $11,856
6/30/93 $14,260 1.67% $15,399 0.14% $11,873
7/31/93 $14,258 0.13% $15,419 0.00% $11,873
8/31/93 $14,538 2.08% $15,740 0.28% $11,906
9/30/93 $14,712 1.14% $15,919 0.21% $11,931
10/31/93 $14,780 0.19% $15,949 0.41% $11,980
11/30/93 $14,706 -0.88% $15,809 0.07% $11,989
12/31/93 $14,954 2.11% $16,143 0.00% $11,989
1/31/94 $15,084 1.14% $16,327 0.27% $12,021
2/28/94 $14,780 -2.59% $15,904 0.34% $12,062
3/31/94 $14,306 -4.07% $15,257 0.34% $12,103
4/30/94 $14,399 0.85% $15,386 0.14% $12,120
5/31/94 $14,469 0.87% $15,520 0.07% $12,128
6/30/94 $14,415 -0.61% $15,425 0.34% $12,170
7/31/94 $14,634 1.83% $15,708 0.27% $12,202
8/31/94 $14,667 0.35% $15,763 0.40% $12,251
9/30/94 $14,502 -1.47% $15,531 0.27% $12,284
10/31/94 $14,310 -1.78% $15,255 0.07% $12,293
11/30/94 $14,081 -1.81% $14,978 0.13% $12,309
12/31/94 $14,367 2.20% $15,308 0.00% $12,309
1/31/95 $14,694 2.86% $15,746 0.40% $12,358
2/28/95 $15,060 2.91% $16,204 0.40% $12,408
3/31/95 $15,184 1.15% $16,390 0.33% $12,448
4/30/95 $15,218 0.12% $16,410 0.33% $12,490
5/31/95 $15,577 3.19% $16,933 0.20% $12,515
6/30/95 $15,482 -0.87% $16,786 0.20% $12,540
7/31/95 $15,569 0.95% $16,946 0.00% $12,540
8/31/95 $15,710 1.27% $17,161 0.26% $12,572
9/30/95 $15,798 0.63% $17,269 0.20% $12,597
10/31/95 $15,993 1.45% $17,519 0.33% $12,639
11/30/95 $16,229 1.66% $17,810 -0.07% $12,630
12/31/95 $16,359 0.96% $17,981 -0.07% $12,621
1/31/96 $16,463 0.76% $18,118 0.59% $12,696
2/29/96 $16,391 -0.68% $17,995 0.32% $12,736
3/31/96 $16,208 -1.28% $17,764 0.52% $12,803
4/30/96 $16,187 -0.28% $17,714 0.39% $12,852
5/31/96 $16,180 -0.04% $17,707 0.19% $12,877
6/30/96 $16,353 1.09% $17,900 0.06% $12,885
7/31/96 $16,484 0.91% $18,063 0.19% $12,909
8/31/96 $16,476 -0.02% $18,060 0.19% $12,934
9/30/96 $16,693 1.40% $18,313 0.32% $12,975
10/31/96 $16,840 1.13% $18,519 0.32% $13,017
11/30/96 $17,115 1.83% $18,858 0.19% $13,041
12/31/96 $17,051 -0.42% $18,779 0.00% $13,041
1/31/97 $17,058 0.19% $18,815 0.32% $13,083
2/28/97 $17,193 0.92% $18,988 0.31% $13,124
3/31/97 $16,985 -1.33% $18,735 0.25% $13,156
4/30/97 $17,108 0.84% $18,893 0.12% $13,172
5/31/97 $17,332 1.51% $19,178 -0.06% $13,164
6/30/97 $17,482 1.07% $19,383 0.12% $13,180
7/31/97 $17,913 2.77% $19,920 0.12% $13,196
8/31/97 $17,742 -0.94% $19,733 0.19% $13,221
9/30/97 $17,925 1.19% $19,968 0.25% $13,254
10/31/97 $18,036 0.64% $20,096 0.25% $13,287
11/30/97 $18,146 0.59% $20,214 -0.06% $13,279
12/31/97 $18,448 1.46% $20,509 -0.12% $13,263
1/31/98 $18,602 1.03% $20,720 0.19% $13,288
2/28/98 $18,636 0.03% $20,727 0.19% $13,314
3/31/98 $18,637 0.09% $20,745 0.19% $13,339
4/30/98 $18,608 -0.45% $20,652 0.18% $13,363
5/31/98 $18,872 1.58% $20,978 0.18% $13,387
6/30/98 $19,001 0.39% $21,060 0.12% $13,403
7/31/98 $19,049 0.25% $21,113 0.12% $13,419
8/31/98 $19,286 1.55% $21,440 0.12% $13,435
9/30/98 $19,523 1.25% $21,708 0.12% $13,451
10/31/98 $19,524 0.00% $21,708 0.24% $13,484
11/30/98 $19,605 0.35% $21,784 0.00% $13,484
12/31/98 $19,641 0.25% $21,838 -0.06% $13,476
1/31/99 0.90% $19,818 1.19% $22,098 0.24% $13,508
2/28/99 -0.09% $19,824 -0.44% $22,001 0.12% $13,524
Total Return 98.24% 120.01% 35.24%
- -------------------------------------------------------------------------------------
</TABLE>
AVERAGE ANNUAL TOTAL RETURN
2/28/99
<TABLE>
<CAPTION>
CLASS C
- -------
<S> <C>
1-Year +3.70%
3-Year +5.60%
Since Inception (5/1/95) +6.36%
</TABLE>
The following line graph compares the performance of the Franklin Michigan
Insured 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>
- -----------------------------------------------------------------------------------------
Fund No. 219 Inception 5/1/95
- -----------------------------------------------------------------------------------------
Date Franklin Michigan Lehman Brothers CPI
Insured Tax-Free Municipal Bond
Income Fund-Class C Index
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
5/1/95 $ 9,899 $10,000 $10,000
5/31/95 $10,141 3.19% $10,319 0.20% $10,020
6/30/95 $10,082 -0.87% $10,229 0.20% $10,040
7/31/95 $10,134 0.95% $10,326 0.00% $10,040
8/31/95 $10,220 1.27% $10,458 0.26% $10,066
9/29/95 $10,281 0.63% $10,523 0.20% $10,086
10/31/95 $10,402 1.45% $10,676 0.33% $10,120
11/30/95 $10,549 1.66% $10,853 -0.07% $10,112
12/29/95 $10,629 0.96% $10,957 -0.07% $10,105
1/31/96 $10,690 0.76% $11,041 0.59% $10,165
2/29/96 $10,639 -0.68% $10,966 0.32% $10,198
3/29/96 $10,513 -1.28% $10,825 0.52% $10,251
4/30/96 $10,495 -0.28% $10,795 0.39% $10,291
5/31/96 $10,494 -0.04% $10,791 0.19% $10,310
6/28/96 $10,591 1.09% $10,908 0.06% $10,316
7/31/96 $10,671 0.91% $11,008 0.19% $10,336
8/30/96 $10,670 -0.02% $11,005 0.19% $10,356
9/30/96 $10,805 1.40% $11,159 0.32% $10,389
10/31/96 $10,895 1.13% $11,286 0.32% $10,422
11/29/96 $11,066 1.83% $11,492 0.19% $10,442
12/31/96 $11,020 -0.42% $11,444 0.00% $10,442
1/31/97 $11,019 0.19% $11,466 0.32% $10,475
2/28/97 $11,109 0.92% $11,571 0.31% $10,508
3/31/97 $10,960 -1.33% $11,417 0.25% $10,534
4/30/97 $11,034 0.84% $11,513 0.12% $10,547
5/31/97 $11,173 1.51% $11,687 -0.06% $10,540
6/30/97 $11,273 1.07% $11,812 0.12% $10,553
7/31/97 $11,544 2.77% $12,139 0.12% $10,565
8/31/97 $11,420 -0.94% $12,025 0.19% $10,586
9/30/97 $11,541 1.19% $12,168 0.25% $10,612
10/31/97 $11,596 0.64% $12,246 0.25% $10,639
11/30/97 $11,671 0.59% $12,318 -0.06% $10,632
12/31/97 $11,858 1.46% $12,498 -0.12% $10,619
1/31/98 $11,951 1.03% $12,627 0.19% $10,640
2/28/98 $11,966 0.03% $12,631 0.19% $10,660
3/31/98 $11,961 0.09% $12,642 0.19% $10,680
4/30/98 $11,936 -0.45% $12,585 0.18% $10,699
5/31/98 $12,099 1.58% $12,784 0.18% $10,719
6/30/98 $12,185 0.39% $12,834 0.12% $10,731
7/31/98 $12,210 0.25% $12,866 0.12% $10,744
8/31/98 $12,355 1.55% $13,065 0.12% $10,757
9/30/98 $12,500 1.25% $13,229 0.12% $10,770
10/31/98 $12,496 0.00% $13,229 0.24% $10,796
11/30/98 $12,542 0.35% $13,275 0.00% $10,796
12/31/98 $12,560 0.25% $13,308 -0.06% $10,789
1/31/99 0.85% $12,667 1.19% $13,466 0.24% $10,815
2/28/99 -0.13% $12,663 -0.44% $13,407 0.12% $10,828
Total Return 26.63% 34.07% 8.28%
- -----------------------------------------------------------------------------------------
</TABLE>
*Source: Standard and Poor's Micropal.
Past performance is not predictive of future results.
29
FRANKLIN MINNESOTA INSURED TAX-FREE INCOME FUND
Your Fund's Goal: Franklin Minnesota Insured Tax-Free Income Fund seeks to
provide high, current income exempt from regular federal and Minnesota state
personal income taxes through a portfolio consisting primarily of insured
Minnesota municipal bonds.(1)
STATE UPDATE
[MINNESOTA STATE GRAPHIC] With perhaps the most balanced economy in the U.S.,
conservative stewardship of fiscal policy and a vigorous growth trend, Minnesota
walked away from 1998 with a clean bill of health. Beyond solid and soaring
fundamentals, including an unemployment rate less than half the national
average, during the year under review, the state maintained the highest possible
credit ratings with an increased revenue stream and continued control over
current and future spending initiatives. Unaudited revenues for fiscal 1998
increased $400 million over 1997, with individual income taxes spawning 87% of
the increase.(2) Synergies between the services, trade and manufacturing sectors
offered resilience in the event of a major economic downturn. Independent of
positive forecasts for a surplus in fiscal 1999, the state just received the
first of many multi-million dollar annual installments as a result of the
historic $6.1 billion tobacco settlement, which is payable over 25 years.
Tobacco companies promised to provide $1.7 billion in funds during the next five
years.(3)
As a result of the November elections, "tripartisan" may become the operative
word as the governorship, Senate and House each fall under the control of a
different political party. With $1.4 billion in reserves and another projected
surplus, the first item on the agenda requiring cooperation may be a coordinated
tax relief plan.(4) However, the new political forces will not have to worry
about a new debt structure. Touted as one of the more simplistic, yet effective,
debt management policies in the
(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.
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.
(2) Source: Moody's Investors Service, Municipal Credit Research, October 23,
1998.
(3) Source: Moody's Investors Service, Municipal Credit Research, May 26, 1998.
(4) Standard & Poor's CreditWeek Municipal, January 18, 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 78 of
this report.
30
nation, almost all debt issued by Minnesota falls under general obligation (GO),
70% of which is scheduled to retire in the next 10 years. The Debt Management
Policy, which restricts GO debt to 2.5% of personal income and limits total debt
to 5.0%, underscores the state's commitment to responsible borrowing practices.
The "stable" outlook and Aaa rating assigned Minnesota by Moody's, a national
credit rating agency, is as much the result of excellent management from the
government's highest levels as it is a product of a booming, diverse economy
that has hit its stride.(5)
PORTFOLIO NOTES
Issuers continued to redeem higher interest-rate bonds during the one-year
review period, albeit at a slower pace than last year. Seeking to extend the
portfolio's long-term, income-earning potential, we sold a percentage of these
prerefunded bonds and reinvested the proceeds in bonds offering longer call
protection. At the end of the reporting period, prerefunded bonds made up 6.5%
of the fund's total long-term investments, down from 15.5% on February 28, 1998.
Selling prerefunded securities is consistent with our fiscally responsible
strategy of managing the fund to maximize tax-free income and maintain a stable
share value. To further increase stability, we do not use derivatives or attempt
to forecast where interest rates are heading.
Franklin Minnesota Insured Tax-Free Income Fund's total net assets grew 6%
during the 12 months under review, reaching approximately $536.1 million on
February 28, 1999, compared with $505.4 million a year earlier. We invested new
money as well as proceeds from sold securities in a wide range of industries to
maintain the fund's broad sector diversification. At the end of the period, the
hospital sector had the fund's heaviest weighting, comprising 17.8% of the
fund's total long-term investments, compared with 16.4% on February 28, 1998. We
also found value in the education sector, which increased from 13.1% to17.5% of
the fund's total long-term investments during the same period. Purchases
included Minneapolis/St. Paul Metropolitan Airport Commission Airport Revenue;
Buffalo GO - Independent School District and Minneapolis Multifamily Revenue -
Riverside Plaza.
PORTFOLIO BREAKDOWN
Franklin Minnesota Insured
Tax-Free Income Fund
2/28/99
<TABLE>
<CAPTION>
% OF TOTAL
LONG-TERM
SECTOR INVESTMENTS
- ------ -----------
<S> <C>
Hospitals 17.8%
Education 17.5%
Housing 16.3%
Utilities 12.5%
Transportation 10.0%
Health Care 7.0%
Prerefunded 6.5%
General Obligation 5.3%
Other Revenue 3.3%
Certificates
of Participation 2.2%
Tax Allocation 1.4%
Sales Tax 0.2%
</TABLE>
(5) This does not indicate Moody's rating of the fund.
31
The fund should perform well into the next reporting period, aided by stable
interest rates and ample supply of new bonds. 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 dividend payment cuts in the next
reporting period. In addition, 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 Minnesota Insured Tax-Free Income Fund
3/1/98 - 2/28/99
<TABLE>
<CAPTION>
DIVIDENDS PER SHARE
------------------------
MONTH CLASS A CLASS C
---------- -----------
<S> <C> <C>
March 5.2 cents 4.61 cents
April 5.2 cents 4.69 cents
May 5.2 cents 4.69 cents
June 5.2 cents 4.69 cents
July 5.2 cents 4.62 cents
August 5.2 cents 4.62 cents
September 5.2 cents 4.62 cents
October 5.2 cents 4.61 cents
November 5.2 cents 4.61 cents
December 5.0 cents 4.41 cents
January 5.0 cents 4.41 cents
February 5.0 cents 4.41 cents
TOTAL 61.8 CENTS 54.99 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.
32
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.
FRANKLIN MINNESOTA INSURED TAX-FREE INCOME FUND
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 $12.14 $12.16
DISTRIBUTIONS
-------------
Dividend Income $0.6180
Long-Term Capital Gain $0.0206
TOTAL $0.6386
</TABLE>
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.
<TABLE>
<CAPTION>
CLASS C CHANGE 2/28/99 2/28/98
- ------- ------ ------- -------
<S> <C> <C> <C>
Net Asset Value -$0.02 $12.19 $12.21
DISTRIBUTIONS
-------------
Dividend Income $0.5499
Long-Term Capital Gain $0.0206
TOTAL $0.5705
</TABLE>
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.
PERFORMANCE
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR 5-YEAR 10-YEAR (4/3/85)
- ------- ------ ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return(1) +5.18% +30.60% +98.04% +187.60%
Average Annual Total Return(2) +0.71% +4.57% +6.61% +7.56%
Distribution Rate(3) 4.73%
Taxable Equivalent Distribution Rate(4) 8.56%
30-Day Standardized Yield(5) 3.83%
Taxable Equivalent Yield(4) 6.93%
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS C 1-YEAR 3-YEAR (5/1/95)
- ------- ------ ------ ---------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) +4.58% +16.39% +24.16%
Average Annual Total Return(2) +2.57% +4.85% +5.53%
Distribution Rate(3) 4.31%
Taxable Equivalent Distribution Rate(4) 7.80%
30-Day Standardized Yield(5) 3.41%
Taxable Equivalent Yield(4) 6.17%
</TABLE>
Franklin Minnesota Insured Tax-Free Income Fund paid distributions derived from
long-term capital gains totaling 2.06 cents ($0.0206) 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).
(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 Minnesota state personal income tax bracket of 44.7%, 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.
33
FRANKLIN MINNESOTA INSURED 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 +0.71%
5-Year +4.57%
10-Year +6.61%
Since Inception (4/3/85) +7.56%
</TABLE>
The following line graph compares the performance of the Franklin Minnesota
Insured 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. Inception 4/3/85
0120
- ---------------------------------------------------------------------------------------
Date Franklin Minnesota Lehman Brothers CPI
Insured Tax-Free Municipal Bond
Income Fund-Class A Index
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
3/1/89 $ 9,574 $10,000 $10,000
3/31/89 $ 9,562 -0.24% $9,976 0.58% $10,058
4/30/89 $ 9,765 2.37% $10,212 0.65% $10,123
5/31/89 $ 9,969 2.08% $10,425 0.57% $10,181
6/30/89 $10,104 1.36% $10,567 0.24% $10,206
7/31/89 $10,179 1.36% $10,710 0.24% $10,230
8/31/89 $10,123 -0.98% $10,605 0.16% $10,246
9/30/89 $10,075 -0.30% $10,574 0.32% $10,279
10/31/89 $10,160 1.22% $10,703 0.48% $10,329
11/30/89 $10,300 1.75% $10,890 0.24% $10,353
12/31/89 $10,377 0.82% $10,979 0.16% $10,370
1/31/90 $10,301 -0.47% $10,928 1.03% $10,477
2/28/90 $10,406 0.89% $11,025 0.47% $10,526
3/31/90 $10,412 0.03% $11,028 0.55% $10,584
4/30/90 $10,362 -0.72% $10,949 0.16% $10,601
5/31/90 $10,580 2.18% $11,187 0.23% $10,625
6/30/90 $10,688 0.88% $11,286 0.54% $10,682
7/31/90 $10,834 1.48% $11,453 0.38% $10,723
8/31/90 $10,642 -1.45% $11,287 0.92% $10,822
9/30/90 $10,619 0.06% $11,294 0.84% $10,913
10/31/90 $10,768 1.81% $11,498 0.60% $10,978
11/30/90 $10,975 2.01% $11,729 0.22% $11,002
12/31/90 $10,981 0.44% $11,781 0.00% $11,002
1/31/91 $11,142 1.34% $11,939 0.60% $11,068
2/28/91 $11,196 0.87% $12,042 0.15% $11,085
3/31/91 $11,241 0.04% $12,047 0.15% $11,102
4/30/91 $11,405 1.34% $12,209 0.15% $11,118
5/31/91 $11,490 0.89% $12,317 0.30% $11,152
6/30/91 $11,483 -0.10% $12,305 0.29% $11,184
7/31/91 $11,637 1.22% $12,455 0.15% $11,201
8/31/91 $11,710 1.32% $12,620 0.29% $11,233
9/30/91 $11,866 1.30% $12,784 0.44% $11,283
10/31/91 $11,950 0.90% $12,899 0.15% $11,299
11/30/91 $11,943 0.28% $12,935 0.29% $11,332
12/31/91 $12,173 2.15% $13,213 0.07% $11,340
1/31/92 $12,217 0.23% $13,243 0.15% $11,357
2/29/92 $12,210 0.03% $13,247 0.36% $11,398
3/31/92 $12,265 0.04% $13,253 0.51% $11,456
4/30/92 $12,363 0.89% $13,370 0.14% $11,472
5/31/92 $12,545 1.18% $13,528 0.14% $11,488
6/30/92 $12,706 1.68% $13,756 0.36% $11,530
7/31/92 $13,135 3.00% $14,168 0.21% $11,554
8/31/92 $12,942 -0.98% $14,029 0.28% $11,586
9/30/92 $12,943 0.65% $14,121 0.28% $11,619
10/31/92 $12,716 -0.98% $13,982 0.35% $11,659
11/30/92 $13,023 1.79% $14,232 0.14% $11,676
12/31/92 $13,199 1.02% $14,378 -0.07% $11,667
1/31/93 $13,366 1.16% $14,544 0.49% $11,725
2/28/93 $13,732 3.62% $15,071 0.35% $11,766
3/31/93 $13,700 -1.06% $14,911 0.35% $11,807
4/30/93 $13,801 1.01% $15,062 0.28% $11,840
5/31/93 $13,866 0.56% $15,146 0.14% $11,856
6/30/93 $14,079 1.67% $15,399 0.14% $11,873
7/31/93 $14,088 0.13% $15,419 0.00% $11,873
8/31/93 $14,325 2.08% $15,740 0.28% $11,906
9/30/93 $14,471 1.14% $15,919 0.21% $11,931
10/31/93 $14,514 0.19% $15,949 0.41% $11,980
11/30/93 $14,443 -0.88% $15,809 0.07% $11,989
12/31/93 $14,649 2.11% $16,143 0.00% $11,989
1/31/94 $14,776 1.14% $16,327 0.27% $12,021
2/28/94 $14,503 -2.59% $15,904 0.34% $12,062
3/31/94 $14,088 -4.07% $15,257 0.34% $12,103
4/30/94 $14,133 0.85% $15,386 0.14% $12,120
5/31/94 $14,238 0.87% $15,520 0.07% $12,128
6/30/94 $14,192 -0.61% $15,425 0.34% $12,170
7/31/94 $14,393 1.83% $15,708 0.27% $12,202
8/31/94 $14,439 0.35% $15,763 0.40% $12,251
9/30/94 $14,289 -1.47% $15,531 0.27% $12,284
10/31/94 $14,088 -1.78% $15,255 0.07% $12,293
11/30/94 $13,852 -1.81% $14,978 0.13% $12,309
12/31/94 $14,130 2.20% $15,308 0.00% $12,309
1/31/95 $14,471 2.86% $15,746 0.40% $12,358
2/28/95 $14,814 2.91% $16,204 0.40% $12,408
3/31/95 $14,934 1.15% $16,390 0.33% $12,448
4/30/95 $14,966 0.12% $16,410 0.33% $12,490
5/31/95 $15,276 3.19% $16,933 0.20% $12,515
6/30/95 $15,195 -0.87% $16,786 0.20% $12,540
7/31/95 $15,278 0.95% $16,946 0.00% $12,540
8/31/95 $15,415 1.27% $17,161 0.26% $12,572
9/30/95 $15,512 0.63% $17,269 0.20% $12,597
10/31/95 $15,687 1.45% $17,519 0.33% $12,639
11/30/95 $15,876 1.66% $17,810 -0.07% $12,630
12/31/95 $16,014 0.96% $17,981 -0.07% $12,621
1/31/96 $16,088 0.76% $18,118 0.59% $12,696
2/29/96 $16,003 -0.68% $17,995 0.32% $12,736
3/31/96 $15,827 -1.28% $17,764 0.52% $12,803
4/30/96 $15,795 -0.28% $17,714 0.39% $12,852
5/31/96 $15,802 -0.04% $17,707 0.19% $12,877
6/30/96 $15,958 1.09% $17,900 0.06% $12,885
7/31/96 $16,087 0.91% $18,063 0.19% $12,909
8/31/96 $16,067 -0.02% $18,060 0.19% $12,934
9/30/96 $16,263 1.40% $18,313 0.32% $12,975
10/31/96 $16,405 1.13% $18,519 0.32% $13,017
11/30/96 $16,616 1.83% $18,858 0.19% $13,041
12/31/96 $16,567 -0.42% $18,779 0.00% $13,041
1/31/97 $16,600 0.19% $18,815 0.32% $13,083
2/28/97 $16,730 0.92% $18,988 0.31% $13,124
3/31/97 $16,568 -1.33% $18,735 0.25% $13,156
4/30/97 $16,686 0.84% $18,893 0.12% $13,172
5/31/97 $16,874 1.51% $19,178 -0.06% $13,164
6/30/97 $17,021 1.07% $19,383 0.12% $13,180
7/31/97 $17,410 2.77% $19,920 0.12% $13,196
8/31/97 $17,301 -0.94% $19,733 0.19% $13,221
9/30/97 $17,463 1.19% $19,968 0.25% $13,254
10/31/97 $17,554 0.64% $20,096 0.25% $13,287
11/30/97 $17,659 0.59% $20,214 -0.06% $13,279
12/31/97 $17,847 1.46% $20,509 -0.12% $13,263
1/31/98 $17,983 1.03% $20,720 0.19% $13,288
2/28/98 $18,002 0.03% $20,727 0.19% $13,314
3/31/98 $18,035 0.09% $20,745 0.19% $13,339
4/30/98 $18,008 -0.45% $20,652 0.18% $13,363
5/31/98 $18,235 1.58% $20,978 0.18% $13,387
6/30/98 $18,317 0.39% $21,060 0.12% $13,403
7/31/98 $18,350 0.25% $21,113 0.12% $13,419
8/31/98 $18,550 1.55% $21,440 0.12% $13,435
9/30/98 $18,721 1.25% $21,708 0.12% $13,451
10/31/98 $18,769 0.00% $21,708 0.24% $13,484
11/30/98 $18,834 0.35% $21,784 0.00% $13,484
12/31/98 $18,861 0.25% $21,838 -0.06% $13,476
1/31/99 0.74% $19,001 1.19% $22,098 0.24% $13,508
2/28/99 -0.34% $18,961 -0.44% $22,001 0.12% $13,524
Total Return 89.61% 120.01% 35.24%
- ---------------------------------------------------------------------------------------
</TABLE>
AVERAGE ANNUAL TOTAL RETURN
2/28/99
<TABLE>
<CAPTION>
CLASS C
- -------
<S> <C>
1-Year +2.57%
3-Year +4.85%
Since Inception (5/1/95) +5.53%
</TABLE>
The following line graph compares the performance of the Franklin Minnesota
Insured 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>
- -------------------------------------------------------------------------------------
Fund No. 220 Inception 5/1/95
- -------------------------------------------------------------------------------------
Date Franklin Minnesota Lehman Brothers CPI
Insured Tax-Free Municipal Bond
Income Fund-Class C Index
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
5/1/95 $ 9,900 $10,000 $10,000
5/31/95 $10,105 3.19% $10,319 0.20% $10,020
6/30/95 $10,046 -0.87% $10,229 0.20% $10,040
7/31/95 $10,097 0.95% $10,326 0.00% $10,040
8/31/95 $10,190 1.27% $10,458 0.26% $10,066
9/29/95 $10,240 0.63% $10,523 0.20% $10,086
10/31/95 $10,351 1.45% $10,676 0.33% $10,120
11/30/95 $10,479 1.66% $10,853 -0.07% $10,112
12/29/95 $10,565 0.96% $10,957 -0.07% $10,105
1/31/96 $10,608 0.76% $11,041 0.59% $10,165
2/29/96 $10,547 -0.68% $10,966 0.32% $10,198
3/29/96 $10,426 -1.28% $10,825 0.52% $10,251
4/30/96 $10,399 -0.28% $10,795 0.39% $10,291
5/31/96 $10,408 -0.04% $10,791 0.19% $10,310
6/28/96 $10,496 1.09% $10,908 0.06% $10,316
7/31/96 $10,576 0.91% $11,008 0.19% $10,336
8/30/96 $10,567 -0.02% $11,005 0.19% $10,356
9/30/96 $10,682 1.40% $11,159 0.32% $10,389
10/31/96 $10,770 1.13% $11,286 0.32% $10,422
11/29/96 $10,904 1.83% $11,492 0.19% $10,442
12/31/96 $10,867 -0.42% $11,444 0.00% $10,442
1/31/97 $10,882 0.19% $11,466 0.32% $10,475
2/28/97 $10,969 0.92% $11,571 0.31% $10,508
3/31/97 $10,855 -1.33% $11,417 0.25% $10,534
4/30/97 $10,927 0.84% $11,513 0.12% $10,547
5/31/97 $11,045 1.51% $11,687 -0.06% $10,540
6/30/97 $11,145 1.07% $11,812 0.12% $10,553
7/31/97 $11,383 2.77% $12,139 0.12% $10,565
8/31/97 $11,306 -0.94% $12,025 0.19% $10,586
9/30/97 $11,406 1.19% $12,168 0.25% $10,612
10/31/97 $11,460 0.64% $12,246 0.25% $10,639
11/30/97 $11,523 0.59% $12,318 -0.06% $10,632
12/31/97 $11,650 1.46% $12,498 -0.12% $10,619
1/31/98 $11,733 1.03% $12,627 0.19% $10,640
2/28/98 $11,739 0.03% $12,631 0.19% $10,660
3/31/98 $11,755 0.09% $12,642 0.19% $10,680
4/30/98 $11,732 -0.45% $12,585 0.18% $10,699
5/31/98 $11,875 1.58% $12,784 0.18% $10,719
6/30/98 $11,923 0.39% $12,834 0.12% $10,731
7/31/98 $11,939 0.25% $12,866 0.12% $10,744
8/31/98 $12,063 1.55% $13,065 0.12% $10,757
9/30/98 $12,167 1.25% $13,229 0.12% $10,770
10/31/98 $12,193 0.00% $13,229 0.24% $10,796
11/30/98 $12,229 0.35% $13,275 0.00% $10,796
12/31/98 $12,251 0.25% $13,308 -0.06% $10,789
1/31/99 0.69% $12,336 1.19% $13,466 0.24% $10,815
2/28/99 -0.46% $12,292 -0.44% $13,407 0.12% $10,828
Total Return 22.92% 34.07% 8.28%
- -------------------------------------------------------------------------------------
</TABLE>
*Source: Standard and Poor's Micropal.
Past performance is not predictive of future results.
34
FRANKLIN OHIO INSURED TAX-FREE INCOME FUND
Your Fund's Goal: Franklin Ohio Insured Tax-Free Income Fund seeks to provide
high, current income exempt from regular federal and Ohio state personal income
taxes through a portfolio consisting primarily of insured Ohio municipal
bonds.(1)
STATE UPDATE
[OHIO STATE GRAPHIC] During the year under review, Ohio maintained remarkable
strength, bolstered by fiscal prudence and an ever more-diversified economy.
Unemployment drifted lower and remained slightly below the national average,
while the bustling economy, once dominated by the manufacturing sector,
blossomed in the services and trade sectors. With more than 20% of exports
destined for Asia, the export sector suffered, but only slightly. Although
manufacturing still accounted for a disproportionately high percentage of total
state output, the state broadened its exposure beyond the cyclical auto and
steel sectors, reducing the manufacturing sector's vulnerabilities. Growth as a
whole slowed somewhat, but this could have been predicted given the already
fully tapped employment levels. In short, Ohio continued to maintain a solid
growth trend despite low but increasing wage pressures exacerbated by tight
labor market conditions.
In addition to the buoyant economy, the state's balance sheet exceeded
expectations. As with the previous seven years, Ohio witnessed yet one more of
higher-than-anticipated revenues combined with expenses below estimates. Ohio
added $44 million to its already hefty "rainy day" reserve fund, bringing the
total to an impressive $907 million.(2) State reserves have now surpassed those
of pre-recession levels in the early '90s, leaving Ohio well-positioned to
defend itself should the economy take a downturn. An additional $701 million,
earmarked to fund an income tax reduction
(1.) For investors subject to the federal 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.
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.
(2.) Source: Moody's Investors Service, Municipal Credit Research, January 29,
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 83 of
this report.
35
initiative, and another $200 million designated for the public school system,
should help further stimulate the economic base. The state also maintained
manageable debt levels for fiscal 1998, with 75% of total state debt on a rapid,
10-year retirement schedule.(3)
With low debt levels, reserves approaching the $1 billion mark and judicious yet
generous fiscal policies, Ohio enjoys a well-deserved Aa1 rating of "stable
outlook" on general obligation bonds by Moody's, a national credit rating
agency.(4)
PORTFOLIO NOTES
Franklin Ohio Insured Tax-Free Income Fund's total net assets increased by
approximately $50 million for the 12 months under review, to $818.9 million on
February 28, 1999. This was due to new money coming into the fund as well as
appreciation of the fund's existing bonds' values. The fund's Class A share
price, as measured by net asset value, increased four cents, from $12.45 on
February 28, 1998, to $12.49 on February 28, 1999.
The fund's asset allocation changed little during the reporting period, as we
sought to maintain broad sector diversification. Utilities remained the fund's
largest sector, comprising 27.3% of total long-term investments at the end of
the reporting period, followed by education, 19.9%, and prerefunded bonds, at
15.6%. Purchases during the period included Cleveland Waterworks Revenue;
Pickerington Local School District General Obligation and Hamilton Hospital
Facilities Revenue - Children's Hospital Medical Center.
Our treatment of prerefunded bonds remained the same. We generally sell
prerefunded bonds as they approach five years to their call date and use the
sale proceeds to purchase current coupon bonds, at a slight discount, that offer
call protection of approximately 10 years. Such bonds should perform well
through various market cycles. However, because of 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
long-term capital gain distributions totaling 2.99 cents during the one-year
period and may make another capital gain distribution in June 1999. The fund
will continue its strategy of selling prerefunded bonds to decrease call
exposure.
PORTFOLIO BREAKDOWN
Franklin Ohio Insured Tax-Free Income Fund
2/28/99
<TABLE>
<CAPTION>
% OF TOTAL
LONG-TERM
SECTOR INVESTMENTS
- ------ -----------
<S> <C>
Utilities 27.3%
Education 19.9%
Prerefunded 15.6%
Hospitals 11.6%
General Obligation 10.8%
Housing 4.4%
Transportation 3.5%
Industrial 3.4%
Certificates
of Participation 2.8%
Other Revenue 0.7%
</TABLE>
(3.) Source: Standard & Poor's CreditWeek Municipal, January 25, 1999.
(4.) This does not indicate Moody's rating of the fund.
36
Going forward, the fund should continue to do well. However, the low
interest-rate environment will put some pressure on the fund's overall income
earnings. Please keep in mind that the fund can distribute only what it earns,
so the fund's dividend distributions may decrease in the future if interest
rates stay at recent levels or move lower. It is important to note that we still
adhere to our philosophy of investing for income and share value stability. We
believe the fund should rank favorably when compared with other fixed-income
investment alternatives.
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 Ohio Insured Tax-Free Income Fund
3/1/98 - 2/28/99
<TABLE>
<CAPTION>
DIVIDENDS PER SHARE
------------------------
MONTH CLASS A CLASS C
---------- -----------
<S> <C> <C>
March 5.3 cents 4.70 cents
April 5.3 cents 4.73 cents
May 5.3 cents 4.73 cents
June 5.1 cents 4.53 cents
July 5.1 cents 4.51 cents
August 5.1 cents 4.51 cents
September 5.1 cents 4.51 cents
October 5.1 cents 4.50 cents
November 5.1 cents 4.50 cents
December 5.1 cents 4.50 cents
January 5.1 cents 4.50 cents
February 5.1 cents 4.50 cents
---------- -----------
TOTAL 61.8 CENTS 54.72 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.
37
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.
FRANKLIN OHIO INSURED TAX-FREE INCOME FUND
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 $12.49 $12.45
DISTRIBUTIONS
-------------
Dividend Income $0.6180
Long-Term Capital Gain $0.0299
TOTAL $0.6479
</TABLE>
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.
<TABLE>
<CAPTION>
CLASS C CHANGE 2/28/99 2/28/98
- ------- ------ ------- -------
<S> <C> <C> <C>
Net Asset Value +$0.05 $12.56 $12.51
DISTRIBUTIONS
-------------
Dividend Income $0.5472
Long-Term Capital Gain $0.0299
TOTAL $0.5771
</TABLE>
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.
PERFORMANCE
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR 5-YEAR 10-YEAR (4/3/85)
- ------- ------ ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return(1) +5.63% +33.19% +106.05% +191.88%
Average Annual Total Return(2) +1.17% +4.98% +7.03% +7.67%
Distribution Rate(3) 4.69%
Taxable Equivalent Distribution Rate(4) 8.33%
30-Day Standardized Yield(5) 3.84%
Taxable Equivalent Yield(4) 6.82%
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS C 1-YEAR 3-YEAR (5/1/95)
- ------- ------ ------ ---------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) +5.10% +18.58% +27.39%
Average Annual Total Return(2) +3.03% +5.50% +6.25%
Distribution Rate(3) 4.26%
Taxable Equivalent Distribution Rate(4) 7.57%
30-Day Standardized Yield(5) 3.42%
Taxable Equivalent Yield(4) 6.08%
</TABLE>
Franklin Ohio Insured Tax-Free Income Fund paid distributions derived from
long-term capital gains totaling 2.99 cents ($0.0299) 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).
(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 Ohio state personal income tax bracket of 43.7%, 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.
38
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 +1.17%
5-Year +4.98%
10-Year +7.03%
Since Inception (4/3/85) +7.67%
</TABLE>
The following line graph compares the performance of the Franklin Minnesota
Insured 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. Inception 4/3/85
0122
- -------------------------------------------------------------------------------------
Date Franklin Ohio Insured Lehman Brothers CPI
Tax-Free Income Municipal Bond
Fund-Class A Index
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
3/1/89 $ 9,574 $10,000 $10,000
3/31/89 $ 9,549 -0.24% $ 9,976 0.58% $10,058
4/30/89 $ 9,734 2.37% $10,212 0.65% $10,123
5/31/89 $ 9,955 2.08% $10,425 0.57% $10,181
6/30/89 $10,089 1.36% $10,567 0.24% $10,206
7/31/89 $10,162 1.36% $10,710 0.24% $10,230
8/31/89 $10,101 -0.98% $10,605 0.16% $10,246
9/30/89 $10,058 -0.30% $10,574 0.32% $10,279
10/31/89 $10,132 1.22% $10,703 0.48% $10,329
11/30/89 $10,271 1.75% $10,890 0.24% $10,353
12/31/89 $10,345 0.82% $10,979 0.16% $10,370
1/31/90 $10,255 -0.47% $10,928 1.03% $10,477
2/28/90 $10,368 0.89% $11,025 0.47% $10,526
3/31/90 $10,370 0.03% $11,028 0.55% $10,584
4/30/90 $10,297 -0.72% $10,949 0.16% $10,601
5/31/90 $10,533 2.18% $11,187 0.23% $10,625
6/30/90 $10,651 0.88% $11,286 0.54% $10,682
7/31/90 $10,826 1.48% $11,453 0.38% $10,723
8/31/90 $10,638 -1.45% $11,287 0.92% $10,822
9/30/90 $10,661 0.06% $11,294 0.84% $10,913
10/31/90 $10,801 1.81% $11,498 0.60% $10,978
11/30/90 $10,990 2.01% $11,729 0.22% $11,002
12/31/90 $11,033 0.44% $11,781 0.00% $11,002
1/31/91 $11,214 1.34% $11,939 0.60% $11,068
2/28/91 $11,257 0.87% $12,042 0.15% $11,085
3/31/91 $11,291 0.04% $12,047 0.15% $11,102
4/30/91 $11,455 1.34% $12,209 0.15% $11,118
5/31/91 $11,529 0.89% $12,317 0.30% $11,152
6/30/91 $11,524 -0.10% $12,305 0.29% $11,184
7/31/91 $11,681 1.22% $12,455 0.15% $11,201
8/31/91 $11,767 1.32% $12,620 0.29% $11,233
9/30/91 $11,925 1.30% $12,784 0.44% $11,283
10/31/91 $12,012 0.90% $12,899 0.15% $11,299
11/30/91 $12,006 0.28% $12,935 0.29% $11,332
12/31/91 $12,240 2.15% $13,213 0.07% $11,340
1/31/92 $12,286 0.23% $13,243 0.15% $11,357
2/29/92 $12,266 0.03% $13,247 0.36% $11,398
3/31/92 $12,299 0.04% $13,253 0.51% $11,456
4/30/92 $12,418 0.89% $13,370 0.14% $11,472
5/31/92 $12,590 1.18% $13,528 0.14% $11,488
6/30/92 $12,754 1.68% $13,756 0.36% $11,530
7/31/92 $13,198 3.00% $14,168 0.21% $11,554
8/31/92 $13,022 -0.98% $14,029 0.28% $11,586
9/30/92 $13,032 0.65% $14,121 0.28% $11,619
10/31/92 $12,810 -0.98% $13,982 0.35% $11,659
11/30/92 $13,130 1.79% $14,232 0.14% $11,676
12/31/92 $13,318 1.02% $14,378 -0.07% $11,667
1/31/93 $13,507 1.16% $14,544 0.49% $11,725
2/28/93 $13,922 3.62% $15,071 0.35% $11,766
3/31/93 $13,921 -1.06% $14,911 0.35% $11,807
4/30/93 $13,999 1.01% $15,062 0.28% $11,840
5/31/93 $14,066 0.56% $15,146 0.14% $11,856
6/30/93 $14,317 1.67% $15,399 0.14% $11,873
7/31/93 $14,327 0.13% $15,419 0.00% $11,873
8/31/93 $14,592 2.08% $15,740 0.28% $11,906
9/30/93 $14,752 1.14% $15,919 0.21% $11,931
10/31/93 $14,784 0.19% $15,949 0.41% $11,980
11/30/93 $14,723 -0.88% $15,809 0.07% $11,989
12/31/93 $14,980 2.11% $16,143 0.00% $11,989
1/31/94 $15,132 1.14% $16,327 0.27% $12,021
2/28/94 $14,796 -2.59% $15,904 0.34% $12,062
3/31/94 $14,267 -4.07% $15,257 0.34% $12,103
4/30/94 $14,337 0.85% $15,386 0.14% $12,120
5/31/94 $14,443 0.87% $15,520 0.07% $12,128
6/30/94 $14,391 -0.61% $15,425 0.34% $12,170
7/31/94 $14,620 1.83% $15,708 0.27% $12,202
8/31/94 $14,655 0.35% $15,763 0.40% $12,251
9/30/94 $14,467 -1.47% $15,531 0.27% $12,284
10/31/94 $14,240 -1.78% $15,255 0.07% $12,293
11/30/94 $14,014 -1.81% $14,978 0.13% $12,309
12/31/94 $14,309 2.20% $15,308 0.00% $12,309
1/31/95 $14,682 2.86% $15,746 0.40% $12,358
2/28/95 $15,056 2.91% $16,204 0.40% $12,408
3/31/95 $15,179 1.15% $16,390 0.33% $12,448
4/30/95 $15,200 0.12% $16,410 0.33% $12,490
5/31/95 $15,580 3.19% $16,933 0.20% $12,515
6/30/95 $15,473 -0.87% $16,786 0.20% $12,540
7/31/95 $15,547 0.95% $16,946 0.00% $12,540
8/31/95 $15,712 1.27% $17,161 0.26% $12,572
9/30/95 $15,786 0.63% $17,269 0.20% $12,597
10/31/95 $15,978 1.45% $17,519 0.33% $12,639
11/30/95 $16,211 1.66% $17,810 -0.07% $12,630
12/31/95 $16,366 0.96% $17,981 -0.07% $12,621
1/31/96 $16,455 0.76% $18,118 0.59% $12,696
2/29/96 $16,357 -0.68% $17,995 0.32% $12,736
3/31/96 $16,164 -1.28% $17,764 0.52% $12,803
4/30/96 $16,143 -0.28% $17,714 0.39% $12,852
5/31/96 $16,177 -0.04% $17,707 0.19% $12,877
6/30/96 $16,361 1.09% $17,900 0.06% $12,885
7/31/96 $16,490 0.91% $18,063 0.19% $12,909
8/31/96 $16,482 -0.02% $18,060 0.19% $12,934
9/30/96 $16,724 1.40% $18,313 0.32% $12,975
10/31/96 $16,883 1.13% $18,519 0.32% $13,017
11/30/96 $17,154 1.83% $18,858 0.19% $13,041
12/31/96 $17,092 -0.42% $18,779 0.00% $13,041
1/31/97 $17,099 0.19% $18,815 0.32% $13,083
2/28/97 $17,232 0.92% $18,988 0.31% $13,124
3/31/97 $17,026 -1.33% $18,735 0.25% $13,156
4/30/97 $17,162 0.84% $18,893 0.12% $13,172
5/31/97 $17,383 1.51% $19,178 -0.06% $13,164
6/30/97 $17,547 1.07% $19,383 0.12% $13,180
7/31/97 $17,987 2.77% $19,920 0.12% $13,196
8/31/97 $17,820 -0.94% $19,733 0.19% $13,221
9/30/97 $18,013 1.19% $19,968 0.25% $13,254
10/31/97 $18,091 0.64% $20,096 0.25% $13,287
11/30/97 $18,213 0.59% $20,214 -0.06% $13,279
12/31/97 $18,493 1.46% $20,509 -0.12% $13,263
1/31/98 $18,661 1.03% $20,720 0.19% $13,288
2/28/98 $18,650 0.03% $20,727 0.19% $13,314
3/31/98 $18,654 0.09% $20,745 0.19% $13,339
4/30/98 $18,613 -0.45% $20,652 0.18% $13,363
5/31/98 $18,875 1.58% $20,978 0.18% $13,387
6/30/98 $18,951 0.39% $21,060 0.12% $13,403
7/31/98 $18,998 0.25% $21,113 0.12% $13,419
8/31/98 $19,215 1.55% $21,440 0.12% $13,435
9/30/98 $19,463 1.25% $21,708 0.12% $13,451
10/31/98 $19,495 0.00% $21,708 0.24% $13,484
11/30/98 $19,558 0.35% $21,784 0.00% $13,484
12/31/98 $19,592 0.25% $21,838 -0.06% $13,476
1/31/99 0.81% $19,751 1.19% $22,098 0.24% $13,508
2/28/99 -0.24% $19,728 -0.44% $22,001 0.12% $13,524
Total Return 97.28% 120.01% 35.24%
- -------------------------------------------------------------------------------------
</TABLE>
AVERAGE ANNUAL TOTAL RETURN
2/28/99
<TABLE>
<CAPTION>
CLASS C
- -------
<S> <C>
1-Year +3.03%
3-Year +5.50%
Since Inception (5/1/95) +6.25%
</TABLE>
The following line graph compares the performance of the Franklin Minnesota
Insured 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>
- -------------------------------------------------------------------------------------
Fund No. 222 Inception 5/1/95
- -------------------------------------------------------------------------------------
Date Franklin Ohio Insured Lehman Brothers CPI
Tax-Free Income Municipal Bond
Fund-Class C Index
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
5/1/95 $ 9,900 $10,000 $10,000
5/31/95 $10,139 3.19% $10,319 0.20% $10,020
6/30/95 $10,065 -0.87% $10,229 0.20% $10,040
7/31/95 $10,116 0.95% $10,326 0.00% $10,040
8/31/95 $10,218 1.27% $10,458 0.26% $10,066
9/29/95 $10,261 0.63% $10,523 0.20% $10,086
10/31/95 $10,389 1.45% $10,676 0.33% $10,120
11/30/95 $10,535 1.66% $10,853 -0.07% $10,112
12/29/95 $10,631 0.96% $10,957 -0.07% $10,105
1/31/96 $10,692 0.76% $11,041 0.59% $10,165
2/29/96 $10,623 -0.68% $10,966 0.32% $10,198
3/29/96 $10,492 -1.28% $10,825 0.52% $10,251
4/30/96 $10,474 -0.28% $10,795 0.39% $10,291
5/31/96 $10,490 -0.04% $10,791 0.19% $10,310
6/28/96 $10,595 1.09% $10,908 0.06% $10,316
7/31/96 $10,692 0.91% $11,008 0.19% $10,336
8/30/96 $10,682 -0.02% $11,005 0.19% $10,356
9/30/96 $10,823 1.40% $11,159 0.32% $10,389
10/31/96 $10,929 1.13% $11,286 0.32% $10,422
11/29/96 $11,098 1.83% $11,492 0.19% $10,442
12/31/96 $11,052 -0.42% $11,444 0.00% $10,442
1/31/97 $11,051 0.19% $11,466 0.32% $10,475
2/28/97 $11,131 0.92% $11,571 0.31% $10,508
3/31/97 $10,994 -1.33% $11,417 0.25% $10,534
4/30/97 $11,076 0.84% $11,513 0.12% $10,547
5/31/97 $11,213 1.51% $11,687 -0.06% $10,540
6/30/97 $11,313 1.07% $11,812 0.12% $10,553
7/31/97 $11,599 2.77% $12,139 0.12% $10,565
8/31/97 $11,487 -0.94% $12,025 0.19% $10,586
9/30/97 $11,597 1.19% $12,168 0.25% $10,612
10/31/97 $11,650 0.64% $12,246 0.25% $10,639
11/30/97 $11,723 0.59% $12,318 -0.06% $10,632
12/31/97 $11,897 1.46% $12,498 -0.12% $10,619
1/31/98 $11,999 1.03% $12,627 0.19% $10,640
2/28/98 $11,986 0.03% $12,631 0.19% $10,660
3/31/98 $11,993 0.09% $12,642 0.19% $10,680
4/30/98 $11,952 -0.45% $12,585 0.18% $10,699
5/31/98 $12,113 1.58% $12,784 0.18% $10,719
6/30/98 $12,166 0.39% $12,834 0.12% $10,731
7/31/98 $12,181 0.25% $12,866 0.12% $10,744
8/31/98 $12,323 1.55% $13,065 0.12% $10,757
9/30/98 $12,475 1.25% $13,229 0.12% $10,770
10/31/98 $12,490 0.00% $13,229 0.24% $10,796
11/30/98 $12,524 0.35% $13,275 0.00% $10,796
12/31/98 $12,530 0.25% $13,308 -0.06% $10,789
1/31/99 0.84% $12,635 1.19% $13,466 0.24% $10,815
2/28/99 -0.29% $12,612 -0.44% $13,407 0.12% $10,828
Total Return 26.12% 34.07% 8.28%
- -------------------------------------------------------------------------------------
</TABLE>
*Source: Standard and Poor's Micropal.
Past performance is not predictive of future results.
39
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.
40
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.
41
FRANKLIN TAX-FREE TRUST
Financial Highlights
FRANKLIN ARIZONA INSURED 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 $ 10.77 $ 10.36 $ 10.36 $ 9.80 $ 10.28
------- ------- ------- ------- -------
Income from investment operations:
Net investment income .53 .54 .55 .55 .55
Net realized and unrealized gains (losses) .07 .42 -- .57 (.48)
------- ------- ------- ------- -------
Total from investment operations .60 .96 .55 1.12 .07
------- ------- ------- ------- -------
Less distributions from net investment income (.53) (.55) (.55) (.56) (.55)
------- ------- ------- ------- -------
Net asset value, end of year $ 10.84 $ 10.77 $ 10.36 $ 10.36 $ 9.80
======= ======= ======= ======= =======
Total return* 5.75% 9.53% 5.55% 11.64% .94%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $80,684 $58,059 $39,693 $38,199 $20,794
Ratios to average net assets:
Expenses .37% .30% .25% .16% .10%
Expenses excluding waiver and payments by affiliate .84% .82% .86% .86% .96%
Net investment income 4.87% 5.11% 5.45% 5.51% 5.80%
Portfolio turnover rate 10.68% 17.44% 18.27% 4.12% 44.61%
</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.
42
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN ARIZONA INSURED TAX-FREE INCOME FUND AMOUNT VALUE
---------- ----------
<S> <C> <C>
LONG TERM INVESTMENTS 97.5%
Arizona Health Facilities Authority Hospital System Revenue, Northern Arizona
Healthcare System, AMBAC Insured, 5.00%, 10/01/23 .......................................... $3,500,000 $3,451,140
Refunding, AMBAC Insured, 4.75%, 10/01/30 .................................................. 1,000,000 943,830
Arizona State University Revenue, Refunding, Series A, MBIA Insured, 5.50%, 7/01/19 ........... 1,000,000 1,026,200
Arizona State Wastewater Management Authority Wastewater Financial Assistance Revenue,
AMBAC Insured, 5.75%, 7/01/15 ............................................................... 750,000 812,393
Casa Grande Excise Tax Revenue, FGIC Insured, 6.00%, 4/01/10 .................................. 400,000 429,952
Douglas Municipal Property Corp. Municipal Facilities Excise Tax Revenue, MBIA Insured,
5.75%, 7/01/15 .............................................................................. 525,000 565,919
Gilbert GO, Projects of 1988, Series C, MBIA Insured, 5.50%, 7/01/23 .......................... 1,000,000 1,033,590
Glendale IDA, Midwestern University, Series A, MBIA Insured, 5.375%, 5/15/28 .................. 2,000,000 2,051,480
La Paz County School District No. 4, Quartzsite Elementary School Improvement, MBIA
Insured, 5.70%, 7/01/16 ..................................................................... 480,000 501,206
Marana Municipal Property Corp. Municipal Facilities Revenue, Refunding, MBIA Insured,
5.25%, 7/01/22 .............................................................................. 1,100,000 1,119,668
Maricopa County GO,
Hospital District No. 1, AMBAC Insured, 5.00%, 6/01/21 ..................................... 1,250,000 1,231,750
School District No. 3, Tempe Elementary, Refunding, AMBAC Insured, 6.00%, 7/01/13 .......... 700,000 764,778
School District No. 8, Osborn, Refunding, Series A, FGIC Insured, 5.875%, 7/01/14 .......... 500,000 547,395
School District No. 11, Peoria Unified, Refunding, AMBAC Insured, 6.10%, 7/01/10 ........... 700,000 768,817
School District No. 28, Kyrene Elementary, Series B, FGIC Insured, 6.00%, 7/01/14 .......... 500,000 538,085
School District No. 31, Series A, AMBAC Insured, Pre-Refunded, 6.20%, 7/01/13 .............. 570,000 640,047
School District No. 66, Roosevelt Elementary, Projects of 1996, Series B, FGIC Insured,
5.30%, 7/01/13 ........................................................................... 1,540,000 1,612,580
School District No. 68, Alhambra Elementary, Refunding and Improvement, AMBAC Insured,
5.125%, 7/01/13 .......................................................................... 500,000 513,010
School District No. 98, Fountain Hills Unified, AMBAC Insured, 5.75%, 7/01/12 .............. 500,000 543,870
School District No. 98, Fountain Hills Unified, Series A, MBIA Insured, Pre-Refunded,
6.20%, 7/01/10 ........................................................................... 235,000 263,879
USD No. 9, Wickenburg Projects of 1997, AMBAC Insured, 5.55%, 7/01/14 ...................... 1,000,000 1,062,910
USD No. 9, Wickenburg Projects of 1997, AMBAC Insured, 5.65%, 7/01/16 ...................... 1,055,000 1,115,884
USD No. 80, Chandler, FGIC Insured, 5.85%, 7/01/13 ......................................... 435,000 468,730
USD No. 80, Chandler, FGIC Insured, Pre-Refunded, 5.85%, 7/01/13 ........................... 265,000 295,857
USD No. 80, Chandler, Projects of 1995, Series E, FGIC Insured, 5.00%, 7/01/13 ............. 1,750,000 1,784,790
USD No. 95, Queens Creek, Series A, AMBAC Insured, 5.70%, 7/01/14 .......................... 400,000 428,940
Maricopa County IDA,
MFHR, Metro Gardens, Mesa Ridge Project, Series A, MBIA Insured, 5.15%,
7/01/29 .................................................................................. 1,350,000 1,345,788
MFHR, National Health Facilities II Project, Series A, FSA Insured, 5.10%, 1/01/33 ......... 2,500,000 2,483,850
MFHR, Stanford Court Apartments Project, Series A, MBIA Insured, 5.30%, 7/01/28 ............ 1,000,000 1,013,530
MFHR, Villas De Merced Apartment Project, Series A, GNMA Secured, 5.50%, 12/20/37 .......... 570,000 574,486
Water System Revenue Improvement, Chaparral Water Co., Series A, AMBAC Insured,
5.40%, 12/01/22 .......................................................................... 1,000,000 1,021,180
Water System Revenue, Series B, AMBAC Insured, 5.30%, 12/01/22 ............................. 515,000 521,695
Mesa Arizona IDAR, Lutheran Health Systems, Refunding, Series A-1, MBIA Insured, 5.00%,
1/01/19 .................................................................................. 1,490,000 1,476,948
Mesa GO, FGIC Insured, 5.00%, 7/01/18 ......................................................... 1,000,000 991,370
Mesa Street and Highway Revenue, FGIC Insured, 5.00%, 7/01/17 ................................. 1,000,000 999,930
Mesa Utility System Revenue, FGIC Insured,
5.25%, 7/01/16 ............................................................................. 500,000 514,015
5.375%, 7/01/17 ............................................................................ 500,000 516,985
Mohave County GO, Hospital District No. 1, Kingman Regional Medical Center Project,
FGIC Insured, 6.50%, 6/01/15 ............................................................... 610,000 659,349
Navajo County PCR, Arizona Public Service Co., Series A,
AMBAC Insured, 5.50%, 8/15/28 .............................................................. 2,400,000 2,470,728
MBIA Insured, 5.875%, 8/15/28 .............................................................. 2,450,000 2,604,154
Oro Valley Municipal Property Corp. Revenue, Municipal Water System, MBIA Insured,
5.55%, 7/01/17 .............................................................................. 700,000 749,007
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,
AMBAC Insured, 5.50%, 7/01/21 .............................................................. 500,000 517,315
FGIC Insured, 5.50%, 7/01/24 ............................................................... 1,000,000 1,035,250
MBIA Insured, 5.375%, 7/01/22 .............................................................. 1,000,000 1,022,480
Phoenix IDA, SFMR, Statewide, Series C, GNMA Secured, 5.30%, 4/01/20 .......................... 1,500,000 1,509,240
Pima County IDA, SFMR, GNMA Secured, 6.625%, 11/01/14 ......................................... 540,000 574,333
Pima County USD No. 6, Marana Projects of 1995, Series B, FGIC Insured, 5.00%, 7/01/17 ........ 1,600,000 1,590,400
Pinal County USD No. 43, Apache Junction, Series C, FGIC Insured, 5.00%, 7/01/15 .............. 1,000,000 1,012,820
Prescott Municipal Property Corp. Municipal Facility Revenue, FGIC Insured, 5.125%, 1/01/18 ... 1,000,000 1,008,620
Puerto Rico Commonwealth GO, MBIA Insured, Pre-Refunded, 6.45%, 7/01/17 ....................... 845,000 966,807
Puerto Rico Commonwealth Highway and Transportation Authority Revenue, Series A, MBIA
Insured, 5.00%, 7/01/38 ..................................................................... 3,100,000 3,068,163
</TABLE>
43
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN ARIZONA INSURED TAX-FREE INCOME FUND AMOUNT VALUE
---------- -----------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
Puerto Rico Electric Power Authority Revenue, Series R, FSA Insured, Pre-Refunded, 6.25%,
7/01/17 .................................................................................. $ 800,000 $ 879,184
Puerto Rico Industrial Tourist Educational Medical and Environmental Control Facilities
Financing Authority Hospital Revenue, Hospital Auxilio Mutuo Obligation, Series A, 6.25%,
7/01/24 .................................................................................. 840,000 931,636
Puerto Rico PBA Revenue, Government Facilities, Series B, AMBAC Insured, 5.00%, 7/01/27 .... 300,000 298,179
Salt River Project Agricultural Improvement and Power District Electric System Revenue,
Refunding, Series D, 5.50%, 1/01/25 ..................................................... 1,000,000 1,023,010
Series D, 6.25%, 1/01/27 ................................................................ 1,205,000 1,293,905
Series D, Pre-Refunded, 6.25%, 1/01/27 .................................................. 295,000 321,574
Santa Cruz County USD No. 1, Nogales, Series B, AMBAC Insured, Pre-Refunded, 6.10%, 7/01/14 250,000 277,483
Sierra Vista Municipal Property Corp. Facilities Revenue, AMBAC Insured,
6.15%, 1/01/15 .......................................................................... 360,000 395,622
5.00%, 1/01/18 .......................................................................... 1,250,000 1,255,700
Tucson GO,
Series A, MBIA Insured, 5.375%, 7/01/19 ................................................. 500,000 512,605
Series 1984-G, FGIC Insured, Pre-Refunded, 6.25%, 7/01/18 ............................... 650,000 731,432
Tucson Water Revenue, Refunding, FGIC Insured,
5.00%, 7/01/19 .......................................................................... 1,100,000 1,091,607
5.125%, 7/01/20 ......................................................................... 2,000,000 2,007,260
University of Arizona COP,
Administrative and Packaging Facility Project, Series B, MBIA Insured, 6.00%, 7/15/16 ... 500,000 547,520
Administrative and Packaging Facility Project, Series B, MBIA Insured, 6.00%, 7/15/23 ... 1,625,000 1,758,266
Residence Life Project, Series A, FSA Insured, 5.80%, 9/01/13 ........................... 1,000,000 1,086,490
Yavapai County GO,
Elementary School District No. 6, Cottonwood-Oak Creek, Project of 1993, Series B, AMBAC
Insured, 6.70%, 7/01/09 ............................................................... 250,000 281,800
USD No. 28 Camp Verde, Refunding, FGIC Insured, 6.00%, 7/01/09 .......................... 775,000 850,222
USD No. 22 Humboldt, Project of 1995, Series C, FGIC Insured, 5.40%, 7/01/14 ............ 575,000 605,119
USD No. 22 Humboldt, Series A, FGIC Insured, Pre-Refunded, 5.95%, 7/01/14 ............... 300,000 336,522
Yavapai County IDA, Residential Care Facility Revenue, Margaret T. Morris Center, Series A,
GNMA Secured, 5.40%, 2/20/38 ............................................................. 1,585,000 1,592,687
Yuma County GO, Elementary School District No. 1
MBIA Insured, 5.50%, 7/01/14 ............................................................ 1,000,000 1,066,320
Series A, MBIA Insured, 5.75%, 7/01/14 .................................................. 500,000 542,875
Yuma County Jail District Revenue, AMBAC Insured, 5.25%, 7/01/12 ........................... 1,000,000 1,034,320
Yuma IDA, Hospital Revenue,
Regency Apartments, Refunding, Series A, GNMA Secured, 5.50%, 12/20/32 .................. 920,000 932,668
Yuma Regional Medical Center, Refunding, MBIA Insured, 5.50%, 8/01/17 ................... 1,000,000 1,050,928
-----------
TOTAL LONG TERM INVESTMENTS (COST $75,157,736) 78,631,977
-----------
(a)SHORT TERM INVESTMENTS 1.7%
Apache County IDA, IDR, Tucson Electric Power Co. Project, Series A, Weekly VRDN and Put,
3.00%, 12/15/18 .......................................................................... 200,000 200,000
Maricopa County PCC, PCR, Arizona Public Service Co., Refunding,
Series A, Daily VRDN and Put, 3.20%, 5/01/29 ............................................ 400,000 400,000
Series D, Daily VRDN and Put, 3.10%, 5/01/29 ............................................ 300,000 300,000
Phoenix GO, Series 95-2, Daily VRDN and Put, 3.20%, 6/01/20................................. 100,000 100,000
Pinal County IDA, PCR, Magma Copper Co., Newport Mining Corp., Daily VRDN and
Put, 3.20%, 12/01/09........................................................................ 200,000 200,000
Puerto Rico Commonwealth Highway and Transportation Authority Revenue, Series A, AMBAC
Insured, Weekly VRDN and Put, 2.60%, 7/01/28 ............................................. 200,000 200,000
-----------
TOTAL SHORT TERM INVESTMENTS (COST $1,400,000) ............................................. 1,400,000
-----------
TOTAL INVESTMENTS (COST $76,557,736) 99.2% ................................................. 80,031,977
OTHER ASSETS, LESS LIABILITIES .8% ......................................................... 652,448
-----------
NET ASSETS 100.0% .......................................................................... $80,684,425
===========
</TABLE>
See glossary of terms on page 89.
(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.
44
FRANKLIN TAX-FREE TRUST
Financial Highlights
FRANKLIN FLORIDA INSURED 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 $ 10.43 $ 9.99 $ 10.02 $ 9.53 $ 10.07
-------- -------- ------- ------- -------
Income from investment operations:
Net investment income .51 .53 .53 .53 .52
Net realized and unrealized gains (losses) .10 .44 (.03) .49 (.53)
-------- -------- ------- ------- -------
Total from investment operations .61 .97 .50 1.02 (.01)
-------- -------- ------- ------- -------
Less distributions from net investment income (.51) (.53) (.53) (.53) (.53)
-------- -------- ------- ------- -------
Net asset value, end of year $ 10.53 $ 10.43 $ 9.99 $ 10.02 $ 9.53
-------- -------- ------- ------- -------
Total return* 6.01% 9.94% 5.17% 10.95% .21%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $124,488 $101,506 $77,177 $69,583 $46,847
Ratios to average net assets:
Expenses .42% .35% .35% .35% .35%
Expenses excluding waiver and payments by affiliate .79% .80% .80% .82% .88%
Net investment income 4.88% 5.16% 5.36% 5.37% 5.61%
Portfolio turnover rate 1.81% 8.08% 32.23% 24.36% 43.71%
</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.
See notes to financial statements.
45
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN FLORIDA INSURED TAX-FREE INCOME FUND AMOUNT VALUE
---------- ----------
<S> <C> <C>
LONG TERM INVESTMENTS 97.0%
Alachua County School Board COP, AMBAC Insured, 5.00%, 7/01/18 .............................. $1,000,000 $ 995,030
Bay Medical Center Hospital Revenue, Bay Medical Center Project, AMBAC Insured, 5.00%,
10/01/27 .................................................................................. 2,025,000 1,985,675
Broward County HFA, FSA Insured,
5.60%, 11/01/17 .......................................................................... 630,000 644,099
5.65%, 11/01/22 .......................................................................... 885,000 902,744
5.70%, 11/01/29 .......................................................................... 1,345,000 1,371,913
Canaveral Port Authority Revenue, Refunding, Series B, FGIC Insured, 5.625%, 6/01/21 ........ 1,000,000 1,049,500
Celebration CDD, Special Assessment, Series A, MBIA Insured, 5.50%, 5/01/18 ................. 535,000 562,157
Citrus County PCR, Florida Power Corp., Refunding, MBIA Insured, 6.625%, 1/01/27 ............ 2,435,000 2,628,583
Clearwater Gas System Revenue, Refunding, MBIA Insured, 5.00%, 9/01/23 ...................... 1,935,000 1,918,804
Cocoa Beach Improvement Revenue, Refunding, AMBAC Insured, 5.45%, 12/01/20 .................. 1,000,000 1,019,550
Cocoa Water and Sewer Improvement Revenue, FGIC Insured, Pre-Refunded, 5.875%, 10/01/22 ..... 1,000,000 1,134,300
Dade County HFA, MFMR, Siesta Pointe Apartments, Series A, FSA Insured, 5.75%, 9/01/29 ...... 1,890,000 1,951,387
Escambia County Utilities Authority Utility System Revenue, FGIC Insured, 5.625%, 1/01/27 ... 1,500,000 1,566,915
First Florida Governmental Financing Commission Revenue, Refunding, AMBAC Insured, 5.375%,
7/01/18.................................................................................... 1,475,000 1,526,315
Florida HFA, Spinnaker Cove Apartments, Series G, AMBAC Insured, 6.50%, 7/01/36 ............. 1,600,000 1,739,040
Gainesville Public Improvements, Refunding, AMBAC Insured, 5.50%, 8/01/17 ................... 1,000,000 1,043,180
Gulf Breeze Revenue, Local Government Loan Program, FGIC Insured, 6.05%, 12/01/13 ........... 1,915,000 2,131,318
Hernando County Water and Sewer Revenue, FGIC Insured,
6.00%, 6/01/19 ........................................................................... 1,035,000 1,108,640
Pre-Refunded, 6.00%, 6/01/19 ............................................................. 965,000 1,055,565
Hillsborough County IDA, PCR, Tampa Electric Co. Project, Refunding, MBIA Insured, 6.25%,
12/01/34 .................................................................................. 1,500,000 1,660,320
Hillsborough County IDAR, University Community Hospital, MBIA Insured, 5.80%, 8/15/24 ....... 2,000,000 2,142,700
Hillsborough County School Board COP, Master Lease Program, Series A, MBIA Insured, 5.25%,
7/01/22 ................................................................................... 1,015,000 1,032,275
Indian River County Water and Sewer Revenue, FGIC Insured, 5.50%, 9/01/26 ................... 1,250,000 1,303,500
Indian Trace CDD, Water Management Special Benefit Assessment, MBIA Insured, 5.00%, 5/01/27 . 1,000,000 988,020
Indian Trail Water Control District Improvement Bonds, MBIA Insured,
5.75%, 8/01/16 ........................................................................... 1,090,000 1,187,075
5.60%, 8/01/17 ........................................................................... 1,000,000 1,059,960
5.50%, 8/01/22 ........................................................................... 500,000 520,465
Jacksonville Sales Tax Revenue, River City Renaissance Project, FGIC Insured, 5.375%,
10/01/18 .................................................................................. 1,000,000 1,034,200
Jacksonville Water and Sewer Revenue, United Water Project, AMBAC Insured, 6.35%, 8/01/25 ... 1,000,000 1,112,290
Lake Clarke Shores Utility Systems Revenue, Refunding and Improvement, FGIC Insured, 5.80%,
10/01/18 .................................................................................. 1,415,000 1,516,710
Lake Mary Public Improvement Revenue, FGIC Insured, 5.25%, 9/01/15 .......................... 1,000,000 1,031,090
Lakeland Hospital System Revenue, Lakeland Regional Medical Center Project, Refunding, MBIA
Insured, 5.25%, 11/15/16 .................................................................. 2,000,000 2,053,380
Lakeland Utilities Tax Revenue, Refunding and Improvement, Series A, FGIC Insured, 6.00%,
10/01/17 .................................................................................. 500,000 548,315
Lee County Capital and Transportation Facilities Revenue, Refunding, Series A, MBIA Insured,
5.55%, 10/01/18 ........................................................................... 3,000,000 3,118,650
Lee County IDA Utilities Revenue, Bonita Springs Utilities Project, Refunding, MBIA Insured,
6.05%,
11/01/15 ................................................................................. 2,000,000 2,199,440
11/01/20 ................................................................................. 1,500,000 1,642,455
Lee County Solid Waste System Revenue, MBIA Insured, 5.375%, 10/01/15 ....................... 2,000,000 2,058,740
Lynn Haven Capital Improvement Revenue, Series A, MBIA Insured, 5.75%, 12/01/16 ............. 1,000,000 1,083,710
Martin County Consolidated Utilities System Revenue,
FGIC Insured, Pre-Refunded, 6.00%, 10/01/24 .............................................. 785,000 885,888
Refunding, FGIC Insured, 6.00%, 10/01/24 ................................................. 215,000 233,765
Martin County Health Facilities Authority Hospital Revenue, Martin Memorial Medical Center
Project, AMBAC Insured, 5.00%, 11/15/28 ................................................... 3,500,000 3,430,735
Martin County Improvement Revenue, Refunding, AMBAC Insured, 6.00%, 10/01/14 ................ 1,000,000 1,098,200
Martin County Utilities System Revenue, Refunding, FGIC Insured, 5.00%, 10/01/24 ............ 1,775,000 1,754,730
Miami-Dade County School Board COP, Refunding, Series C, FSA Insured, 5.00%, 8/01/25 ........ 3,500,000 3,434,410
Miramar Wastewater Improvement Assessment Revenue, FGIC Insured, Pre-Refunded, 6.75%,
10/01/25 .................................................................................. 2,000,000 2,310,180
Ocoee Water and Sewer System Revenue, AMBAC Insured, 5.625%, 10/01/26........................ 5,220,000 5,494,102
Okaloosa County Gas District Revenue, Gas System, MBIA Insured,
5.50%, 10/01/21............................................................................ 2,795,000 2,901,266
Okeechobee Utility Authority Utility System Revenue,
Acquisition and Improvement, MBIA Insured, 5.60%, 10/01/25 ............................... 1,500,000 1,569,540
Orange County Capital Improvement Revenue,
AMBAC Insured, Pre-Refunded, 6.00%, 10/01/22 ............................................. 810,000 890,384
Refunding, AMBAC Insured, 6.00%, 10/01/22 ................................................ 490,000 525,750
Orange County Health Facilities Authority Revenue,
Adventist/Sunbelt, Series B, FSA Insured, 6.75%, 11/15/21 ................................ 1,000,000 1,084,930
Orlando Regional Healthcare, Refunding, Series A, MBIA Insured, 6.00%, 11/01/24 .......... 2,400,000 2,571,000
</TABLE>
46
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN FLORIDA INSURED TAX-FREE INCOME FUND AMOUNT VALUE
---------- ------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
Orange County Public Services Tax Revenue, FGIC Insured, 6.00%, 10/01/24 ....................... $1,000,000 $ 1,097,670
Orange County Sales Tax Revenue, FGIC Insured,
5.375%, 1/01/24 ............................................................................. 1,000,000 1,019,690
Pre-Refunded, 6.125%, 1/01/19 ............................................................... 500,000 522,625
Orange County School Board COP, Series A, MBIA Insured, 5.375%, 8/01/22 ........................ 875,000 899,351
Osceola County HFA, MFHR, Tierra Vista Apartment Project, Series A, FSA Insured, 5.70%,
12/01/17 ..................................................................................... 630,000 648,717
Osceola County School Board COP, Series A, AMBAC Insured, 6.00%, 6/01/19 ....................... 1,900,000 2,065,490
Osceola County Transportation Revenue, Osceola Parkway Project, MBIA Insured, 6.10%, 4/01/17 ... 1,225,000 1,314,891
Palm Beach County Criminal Justice Facilities Revenue, FGIC Insured, 6.00%, 6/01/15 ............ 1,000,000 1,094,980
Pinellas County Sewer Revenue, FGIC Insured, Pre-Refunded, 6.00%, 10/01/24 ..................... 1,250,000 1,374,050
Port Orange Water and Sewer Revenue, junior lien, Refunding, AMBAC Insured, 5.25%, 10/01/21 .... 1,500,000 1,520,745
Port St. Lucie Utilities Revenue, Refunding and Improvement, Series A, MBIA Insured, 5.125%,
9/01/27 ...................................................................................... 4,000,000 4,014,480
Puerto Rico Commonwealth GO, FSA Insured, Pre-Refunded, 6.00%, 7/01/22 ......................... 1,000,000 1,091,200
Puerto Rico PBA Revenue, Government Facilities, Series A, AMBAC Insured, 5.50%, 7/01/25 ........ 1,000,000 1,044,030
Sarasota County Utilities System Revenue, FGIC Insured, 5.75%, 10/01/27 ........................ 520,000 560,503
Seminole County School Board COP, Series A, MBIA Insured, Pre-Refunded, 6.125%,
7/01/14 ...................................................................................... 1,000,000 1,130,080
7/01/19 ...................................................................................... 1,000,000 1,130,080
South Miami Health Facilities Authority Hospital Revenue, Baptist Health System Obligation
Group, MBIA Insured, 5.00%, 11/15/28 ......................................................... 3,000,000 2,940,630
St. John's County IDA, IDR, Series A, MBIA Insured,
5.25%, 3/01/11 ............................................................................... 1,250,000 1,327,900
5.50%, 3/01/17 ............................................................................... 1,000,000 1,046,970
St. Lucie County Water and Sewer Revenue, Refunding, AMBAC Insured, 5.50%, 10/01/17 ............ 500,000 522,565
Stuart Utilities Revenue, FGIC Insured, Pre-Refunded,
6.70%, 10/01/14 .............................................................................. 500,000 561,495
6.80%, 10/01/24 .............................................................................. 500,000 563,580
Sunrise Utilities System Revenue,
Refunding, AMBAC Insured, 5.20%, 10/01/22 .................................................... 2,000,000 2,049,500
Series A, AMBAC Insured, Pre-Refunded, 5.75%, 10/01/26 ....................................... 1,000,000 1,120,800
Tampa Occupational License Tax, Refunding, Series B, FGIC Insured, 5.50%, 10/01/27 ............. 1,000,000 1,043,060
Tampa Sports Authority Revenue, Tourist Development, FSA Insured, 5.25%, 1/01/27 ............... 2,000,000 2,033,640
Titusville Water and Sewer Revenue, Refunding, MBIA Insured, 6.20%, 10/01/14 ................... 490,000 557,865
Vero Beach Electric Revenue, Refunding, Series A, MBIA Insured, 5.375%, 12/01/21 ............... 1,500,000 1,536,060
Village Center CDD, Recreational Revenue, Refunding, Series A, MBIA Insured, 5.00%, 11/01/21 ... 1,000,000 993,230
West Melbourne Water and Sewer Revenue, Refunding and Improvement, FGIC Insured, 6.75%,
10/01/14 ..................................................................................... 500,000 564,895
West Palm Beach Utilities System Revenue, Series B, FGIC Insured, 5.40%, 10/01/23 .............. 1,500,000 1,526,673
------------
TOTAL LONG TERM INVESTMENTS (COST $113,940,869) ................................................. 120,730,335
------------
(a)SHORT TERM INVESTMENTS 1.6%
Dade County Health Facilities Authority Hospital Revenue, Miami Children's Hospital Project,
Daily VRDN and Put, 3.20%, 9/01/20 ........................................................... 400,000 400,000
Hillsborough County IDA, PCR, Daily VRDN and Put, 3.15%, 5/15/18 ............................... 500,000 500,000
Pinellas County Health Facilities Authority Revenue, Pooled Hospital Loan Program, Refunding,
AMBAC Insured, Daily VRDN and Put, 3.20%, 12/01/15 ........................................... 100,000 100,000
Puerto Rico Commonwealth Highway and Transportation Authority Revenue, Series A, AMBAC Insured,
Weekly VRDN and Put, 2.60%, 7/01/28 .......................................................... 100,000 100,000
St. Lucie County PCR, Florida Power and Light Co. Project, Refunding, Daily VRDN and Put,
3.15%, 3/01/27 ............................................................................... 900,000 900,000
------------
TOTAL SHORT TERM INVESTMENTS (COST $2,000,000) ................................................. 2,000,000
------------
TOTAL INVESTMENTS (COST $115,940,869) 98.6% .................................................... 122,730,335
OTHER ASSETS, LESS LIABILITIES 1.4% ............................................................ 1,757,487
------------
NET ASSETS 100.0% .............................................................................. $124,487,822
============
</TABLE>
See glossary of terms on page 89.
(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.
47
FRANKLIN TAX-FREE TRUST
Financial Highlights
FRANKLIN INSURED 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 ............ $ 12.31 $ 12.15 $ 12.27 $ 11.97 $ 12.45
---------- ---------- ---------- ---------- ----------
Income from investment operations:
Net investment income ........................ .63 .66 .69 .71 .71
Net realized and unrealized gains (losses) ... .06 .29 (.11) .30 (.48)
---------- ---------- ---------- ---------- ----------
Total from investment operations .............. .69 .95 .58 1.01 .23
---------- ---------- ---------- ---------- ----------
Less distributions from:
Net investment income ........................ (.63) (.66) (.70) (.71) (.71)
In excess of net investment income ........... (.01) (.01) -- -- --
Net realized gains ........................... (.10) (.12) -- -- --
---------- ---------- ---------- ---------- ----------
Total distributions ........................... (.74) (.79) (.70) (.71) (.71)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year .................. $ 12.26 $ 12.31 $ 12.15 $ 12.27 $ 11.97
========== ========== ========== ========== ==========
Total return* ................................. 5.72% 8.09% 4.88% 8.66% 2.03%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............... $1,727,014 $1,685,260 $1,662,087 $1,705,038 $1,683,234
Ratios to average net assets:
Expenses ..................................... .62% .61% .60% .60% .59%
Net investment income ........................ 5.11% 5.44% 5.68% 5.81% 6.00%
Portfolio turnover rate ....................... 13.16% 27.77% 18.66% 13.52% 14.42%
CLASS C
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............ $ 12.38 $ 12.21 $ 12.31 $ 11.98
---------- ---------- ---------- ----------
Income from investment operations:
Net investment income ........................ .57 .60 .62 .54
Net realized and unrealized gains (losses) ... .05 .29 (.09) .32
---------- ---------- ---------- ----------
Total from investment operations .............. .62 .89 .53 .86
---------- ---------- ---------- ----------
Less distributions from:
Net investment income ........................ (.57)(2) (.60) (.63) (.53)
Net realized gains ........................... (.10) (.12) -- --
---------- ---------- ---------- ----------
Total distributions ........................... (.67) (.72) (.63) (.53)
---------- ---------- ---------- ----------
Net asset value, end of year .................. $ 12.33 $ 12.38 $ 12.21 $ 12.31
========== ========== ========== ==========
Total return* ................................. 5.12% 7.52% 4.42% 7.32%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............... $ 65,166 $ 38,057 $ 21,521 $ 8,152
Ratios to average net assets:
Expenses ..................................... 1.18% 1.18% 1.17% 1.18%**
Net investment income ........................ 4.54% 4.86% 5.10% 5.21%**
Portfolio turnover rate ....................... 13.16% 27.77% 18.66% 13.52%
</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.
(2)Includes distributions in excess of net investment income in the amount of
$.004.
See notes to financial statements.
48
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN INSURED TAX-FREE INCOME FUND AMOUNT VALUE
----------- -----------
<S> <C> <C>
LONG TERM INVESTMENTS 99.0%
ALABAMA 3.7%
Alabama Agricultural and Mechanical University Revenue, MBIA Insured, Pre-Refunded,
5.50%, 11/01/20 .......................................................................... $ 1,000,000 $ 1,108,470
Alabama HFA, SFMR, Series A-1, GNMA Secured, 7.80%, 10/01/20 ............................... 1,850,000 1,888,998
Alabama State Board Educational Revenue, Southern Union State Junior College, MBIA
Insured, 6.50%, 7/01/12 .................................................................. 1,000,000 1,093,650
Alabama Water Pollution Control Authority Revolving Fund Loan,
AMBAC Insured, 6.25%, 8/15/14 ........................................................... 100,000 104,842
Series A, AMBAC Insured, 5.60%, 8/15/16 ................................................. 2,000,000 2,075,880
Anniston Regional Medical Center Board, Series A, AMBAC Insured,
5.25%, 6/01/18 .......................................................................... 6,000,000 6,117,000
5.125%, 6/01/28 ......................................................................... 3,000,000 2,983,980
Auburn Governmental Utility Services Corp. Wastewater Treatment Revenue, Merscot-Auburn
LP Project, FGIC Insured, 7.30%, 1/01/12 ................................................. 1,420,000 1,482,125
Bessemer Governmental Utility Services Corp., Water Supply Revenue, MBIA Insured, 5.25%,
6/01/32 .................................................................................. 5,000,000 5,076,000
Birmingham Airport Authority Revenue, MBIA Insured, 5.625%, 7/01/26 ........................ 2,000,000 2,116,580
Birmingham Baptist Medical Center Special Care Facilities Financing Authority Revenue,
Baptist Health System Inc., Refunding, MBIA Insured, 5.875%, 11/15/19 .................... 3,500,000 3,534,440
Daphne Utilities Board Water Gas and Sewer Revenue,
Capital Improvement Bonds, Series B, FGIC Insured, 7.35%, 6/01/20 ....................... 2,000,000 2,108,640
Refunding, Series B, FGIC Insured, 7.30%, 6/01/10 ....................................... 4,030,000 4,269,301
East Alabama Health Care Authority Health Care Facilities Revenue, Tax Anticipation Bond,
Series A, MBIA Insured, 5.25%, 9/01/28 ................................................... 8,500,000 8,591,970
Fort Payne Waterworks Board of Water Revenue, MBIA Insured, 5.45%, 7/01/21 ................. 3,550,000 3,683,196
Huntsville Health Care Authority Facilities Revenue, Series A, MBIA Insured, 6.375%,
6/01/22 .................................................................................. 300,000 324,834
Huntsville Health Care Authority, Series A, MBIA Insured, 5.00%, 6/01/23 ................... 2,000,000 1,955,860
Jefferson County Sewer Revenue, wts., Series D, FGIC Insured, 5.75%, 2/01/22 ............... 5,000,000 5,398,550
Montgomery Medical Clinic Board Health Care Facilities Revenue, Jackson Hospital and
Clinic, Refunding, AMBAC Insured, 6.00%, 3/01/26 ......................................... 4,000,000 4,362,240
Pelham GO, AMBAC Insured, 5.50%,
12/01/21 ................................................................................ 1,565,000 1,632,013
12/01/26 ................................................................................ 2,000,000 2,080,920
University of Alabama Hospital Revenues, Huntsville, Refunding, Series A, MBIA Insured,
5.50%, 5/01/18 ........................................................................... 4,000,000 4,119,600
----------
66,109,089
----------
ALASKA 4.1%
Alaska Energy Authority Power Revenue, Bradley Lake Hydro Project, Series 1, BIG Insured,
7.25%, 7/01/09 .......................................................................... 5,000,000 5,152,500
7.25%, 7/01/16 .......................................................................... 4,765,000 4,913,382
7.25%, 7/01/21 .......................................................................... 5,795,000 6,158,173
Pre-Refunded, 6.25%, 7/01/21 ............................................................ 3,205,000 3,223,140
Alaska Energy Authority Utilities Revenue, Refunding, FSA Insured,
5.20%, 7/01/17 .......................................................................... 3,000,000 3,035,160
5.375%, 7/01/20 ......................................................................... 5,000,000 5,115,600
Alaska Industrial Development and Export Authority, Refunding, Series A, MBIA Insured,
6.125%, 4/01/27 .......................................................................... 5,000,000 5,436,950
Alaska State HFC, Refunding, Series A,
6.10%, 12/01/37 ......................................................................... 5,000,000 5,252,050
MBIA Insured, 6.00%, 6/01/27 ............................................................ 5,000,000 5,241,200
MBIA Insured, 5.875%, 12/01/30 .......................................................... 485,000 503,925
Anchorage Electric Utility Revenue, senior lien,
Municipal Light and Power, Series C, AMBAC Insured, 5.125%, 12/01/26 .................... 5,000,000 4,995,900
Refunding, Series A, MBIA Insured, 7.125%, 6/01/06 ...................................... 5,000,000 5,139,400
Series B, MBIA Insured, 5.50%, 2/01/26 .................................................. 4,000,000 4,116,120
Anchorage GO,
General Purpose, AMBAC Insured, Pre-Refunded, 7.30%, 8/01/10 ............................ 2,765,000 2,918,126
Refunding, AMBAC Insured, 7.20%, 6/01/17 ................................................ 5,000,000 5,093,750
Refunding, AMBAC Insured, 6.25%, 6/01/23 ................................................ 3,505,000 3,525,294
University of Alaska COP, Series 1990, FSA Insured, 7.375%, 10/01/07 ....................... 500,000 534,685
University of Alaska Revenues,
Series B, AMBAC Insured, 6.50%, 10/01/17 ................................................ 250,000 266,938
Series G, FSA Insured, 5.45%, 10/01/22 .................................................. 3,155,000 3,264,037
----------
73,886,330
----------
</TABLE>
49
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN INSURED TAX-FREE INCOME FUND AMOUNT VALUE
----------- -----------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
ARIZONA 1.7%
Arizona State Municipal Financing Program COP, ETM, Series 1986-20, BIG Insured,
7.70%, 8/01/10 ......................................................................... $ 6,000,000 $ 7,508,760
Chandler Water and Sewer Revenue, Refunding, FGIC Insured, 7.00%, 7/01/12 ................ 2,200,000 2,365,198
Cochise County USD, No. 68, Sierra Vista,
Refunding, FGIC Insured, 7.50%, 7/01/10 ................................................ 500,000 641,205
Series B, FGIC Insured, Pre-Refunded, 7.625%, 7/01/10 .................................. 3,000,000 3,197,760
Maricopa County GO,
UHSD, No. 216, FGIC Insured, 6.70%, 7/01/11 ............................................ 325,000 340,204
UHSD, No. 216, FGIC Insured, Pre-Refunded, 6.70%, 7/01/11 .............................. 675,000 711,450
USD No. 80, Chandler, FGIC Insured, Pre-Refunded, 7.20%, 7/01/07 ....................... 775,000 821,841
USD No. 80, Chandler, FGIC Insured, Pre-Refunded, 7.20%, 7/01/08 ....................... 825,000 874,863
USD No. 80, Chandler, FGIC Insured, Pre-Refunded, 7.25%, 7/01/09 ....................... 500,000 530,545
USD No. 98, Fountain Hills, Series A, FGIC Insured, Pre-Refunded, 7.10%, 7/01/10 ....... 1,000,000 1,023,260
Maricopa County IDA, Hospital Facility Revenue, Samaritan Health Service Hospital,
Refunding, Series A, MBIA Insured, 7.00%, 12/01/16 ..................................... 300,000 376,137
Mohave County USD No. 1, Lake Havasu Project, Series B, AMBAC Insured, 5.375%, 7/01/11 ... 500,000 522,325
Navajo County PCR, Arizona Public Service Co., Series A, MBIA Insured, 5.875%, 8/15/28 ... 3,925,000 4,171,961
Phoenix GO, Refunding, Series B, MBIA Insured, 5.50%, 7/01/16 ............................ 890,000 923,589
Pima County Sewer Revenue, Refunding, FGIC Insured, 6.75%, 7/01/15 ....................... 270,000 290,102
Salt River Project Agricultural Improvement and Power District Electric System Revenue,
Refunding, Series A, FGIC Insured, 5.50%, 1/01/19 ...................................... 1,150,000 1,176,151
Tucson Water Revenue, Series 1994-A, MBIA Insured, Pre-Refunded, 6.00%, 7/01/21 .......... 5,000,000 5,666,800
-----------
31,142,151
-----------
ARKANSAS .1%
Arkansas State Development Finance Authority Water Revenue, Refunding, Series A, MBIA
Insured, 6.50%, 7/01/10 ................................................................ 2,000,000 2,344,020
Pulaski County Health Facilities Board Hospital Revenue, St. Vincent's Infirmary, MBIA
Insured, Pre-Refunded, 10.00%, 9/01/12 ................................................. 25,000 25,853
-----------
2,369,873
-----------
CALIFORNIA 3.5%
California Health Facilities Financing Authority Revenue, Kaiser Permanente, Series A,
FSA Insured, 5.00%, 6/01/24 ............................................................ 5,000,000 4,936,050
California Statewide CDA Revenue, COP, John Muir/Mt. Diablo Health System, MBIA Insured,
5.25%, 8/15/27 ......................................................................... 3,085,000 3,132,015
Corona COP, Corona Community Hospital Project, Pre-Refunded, 9.425%, 9/01/20 ............. 15,000,000 20,930,850
El Centro Financing Authority Water and Wastewater Revenue, Series A, AMBAC Insured,
5.125%, 10/01/27 ....................................................................... 1,800,000 1,809,414
Lancaster RDA, Tax Allocation, Lancaster Residential Redevelopment, Refunding, MBIA
Insured, 6.10%, 8/01/19 ................................................................ 1,515,000 1,618,535
Los Angeles County MTA, Sales Tax Revenue, Proposition C, Series B-2, AMBAC Insured,
5.25%, 7/01/23 ......................................................................... 2,000,000 2,037,540
Oakland RDA, Central District Redevelopment, Refunding, AMBAC Insured, 5.50%, 2/01/14 .... 250,000 273,508
Sacramento Area Flood Control Agency Special Assessment, Capital AD No. 2, FGIC Insured,
5.375%, 10/01/25 ....................................................................... 5,000,000 5,125,750
Sacramento MUD, Electric Revenue, Refunding, Series D, MBIA Insured, 5.25%, 11/15/20 ..... 4,000,000 4,085,720
San Francisco BART District Sales Tax Revenue, FGIC Insured,
5.50%, 7/01/20 ......................................................................... 1,035,000 1,083,148
Pre-Refunded, 5.50%, 7/01/20 ........................................................... 965,000 1,066,923
San Joaquin Hills Transportation Corridor Agency Toll Road Revenue, Refunding, Series A,
MBIA Insured,
5.375%, 1/15/29 ........................................................................ 5,000,000 5,160,050
5.25%, 1/15/30 ......................................................................... 5,000,000 5,092,200
San Jose-Santa Clara Water Financing Authority Sewer Revenue, Series A, FGIC Insured,
5.375%, 11/15/20 ....................................................................... 2,670,000 2,745,428
Stockton East Water District COP, 1990 Project, Series A, AMBAC Insured, 6.40%, 4/01/22 .. 1,460,000 1,584,538
Yuba City USD, COP, Refunding, Series A, MBIA Insured, 5.25%, 2/01/22 .................... 1,750,000 1,779,365
-----------
62,461,034
-----------
COLORADO 5.6%
Adams County PCR, Public Service Co. of Colorado Project, Refunding, AMBAC Insured,
5.10%, 1/01/19 ......................................................................... 6,750,000 6,716,183
Arapahoe County COP,
Arapahoe County Building Finance Corp., FSA Insured, Pre-Refunded, 7.50%, 12/01/10 ..... 1,000,000 1,070,560
Refunding, FSA Insured, 6.625%, 12/01/16 ............................................... 8,695,000 9,539,806
Castle Pines Metropolitan District GO, Refunding and Improvement, FSA Insured,
Pre-Refunded, 7.625%, 12/01/15 ......................................................... 1,500,000 1,637,325
Centennial Water and Sanitation District, Water and Sewer Revenue, Refunding, Series A,
FSA Insured, 5.125%, 12/01/17 .......................................................... 5,000,000 5,085,950
Colorado Association of School Boards COP, Pueblo School District No. 60 Project,
Series A, MBIA Insured, Pre-Refunded, 7.25%, 12/01/09 .................................. 2,400,000 2,497,848
</TABLE>
50
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN INSURED TAX-FREE INCOME FUND AMOUNT VALUE
----------- ------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
COLORADO (CONT.)
Colorado Health Facilities Authority Revenue, Community Provider Pooled Loan Program,
Series A, FSA Insured, 7.25%, 7/15/17 ................................................. $ 1,174,000 $ 1,268,695
Colorado Public Highway Authority Revenue, Highway E-470, Refunding, Senior Series A,
MBIA Insured, 5.00%, 9/01/21 .......................................................... 5,000,000 4,900,750
Colorado Springs Hospital Revenue, Refunding, MBIA Insured, 6.00%, 12/15/24 ............. 2,455,000 2,704,330
Colorado Springs Utilities Revenue, Refunding and Improvement, Series A, MBIA Insured,
5.125%, 11/15/18 ...................................................................... 1,000,000 1,008,520
Colorado State Board of Agriculture Revenue, MBIA Insured, 6.40%,
3/01/11 .............................................................................. 350,000 375,669
3/01/17 .............................................................................. 440,000 470,215
Colorado Water Resource and Power Development Authority Small Water Resource Revenue,
Series A, FGIC Insured, 6.70%, 11/01/12 ............................................... 2,000,000 2,207,160
Denver City and County Airport Revenue,
ETM, Series C, MBIA Insured, 6.125%, 11/15/25 ........................................ 3,590,000 4,038,032
Series A, MBIA Insured, 5.50%, 11/15/25 .............................................. 7,250,000 7,474,750
Series C, MBIA Insured, 6.125%, 11/15/25 ............................................. 4,410,000 4,690,388
Series D, MBIA Insured, 5.50%, 11/15/25 .............................................. 3,900,000 4,020,900
Series E, MBIA Insured, 5.50%, 11/15/25 .............................................. 5,000,000 5,167,100
Denver City and County Board of Water Commissioners COP, FGIC Insured,
6.625%, 11/15/11 ..................................................................... 545,000 588,894
Pre-Refunded, 6.625%, 11/15/11 ....................................................... 955,000 1,041,179
Denver City and County Revenue, Children's Hospital Association Project, FGIC Insured,
6.00%, 10/01/15 ....................................................................... 3,000,000 3,227,940
El Paso County SFMR, Series A, GNMA Secured, 8.00%, 9/01/22 ............................. 310,000 323,014
Garfield, Pitkin and Eagle Counties Reorganized School District No. 1, MBIA Insured,
Pre-Refunded, 6.60%, 12/15/14 ......................................................... 3,600,000 4,098,384
Goldsmith Metropolitan District, Refunding, MBIA Insured, 6.125%, 12/01/12 .............. 2,000,000 2,147,000
Jefferson County COP, Refunding, MBIA Insured, 6.65%, 12/01/08 .......................... 5,000,000 5,520,250
Jefferson County SFMR, Refunding, Series A, MBIA Insured, 8.875%, 10/01/13 .............. 215,000 227,425
La Plata County School District No. R-9, Durango City, FGIC Insured, 6.55%, 11/01/12 .... 490,000 538,299
Morgan County PCR, First Mortgage, Public Service Co., Refunding, Series A, MBIA Insured,
5.50%, 6/01/12 ........................................................................ 1,000,000 1,048,820
Mountain College Residence Hall Revenue Authority, MBIA Insured,
5.625%, 6/01/12 ...................................................................... 1,900,000 2,062,925
5.75%, 6/01/23 ....................................................................... 3,000,000 3,187,710
Parker Water and Sanitation District Water and Sewer Revenue, Refunding, FGIC Insured,
6.20%, 10/01/15 ....................................................................... 275,000 290,835
Postsecondary Educational Facilities Authority Revenue, University of Denver Project,
Refunding, Connie Lee Insured, 6.00%, 3/01/10 ......................................... 1,000,000 1,059,270
Regional Transportation District Sales Tax Revenue, FGIC Insured, 6.25%, 11/01/12 ....... 235,000 254,693
University of Colorado Hospital Authority Revenue, Refunding, Series A, AMBAC Insured,
5.20%, 11/15/17 ...................................................................... 5,675,000 5,748,945
5.25%, 11/15/22 ...................................................................... 3,800,000 3,868,248
------------
100,108,012
------------
CONNECTICUT .5%
Connecticut State Health and Educational Facilities Authority Revenue,
Danbury Hospital, Series E, MBIA Insured, 6.50%, 7/01/14 ............................. 2,000,000 2,141,780
Mansfield Nursing Home, AMBAC Insured, 6.00%, 11/01/22 ............................... 2,450,000 2,630,810
Trinity College, Series D, FGIC Insured, Pre-Refunded, 6.125%, 7/01/24 ............... 2,000,000 2,260,160
New Haven Air Rights Parking Facility Revenue, Refunding, MBIA Insured, 6.50%, 12/01/15 . 2,000,000 2,162,280
------------
9,195,030
------------
DELAWARE .2%
Delaware State EDA Revenue, PCR, Refunding, Series B, AMBAC Insured, 6.75%, 5/01/19 1,000,000 1,092,220
Delaware State Health Facilities Authority Revenue, Medical Center, MBIA Insured,
Pre-Refunded, 7.00%, 10/01/15 ......................................................... 2,900,000 3,317,571
------------
4,409,791
------------
FLORIDA 3.8%
Bay Medical Center Hospital Revenue, Bay Medical Center Project, Refunding, AMBAC Insured,
5.65%, 10/01/26 ....................................................................... 2,500,000 2,626,250
Cape Coral Franchise Fees Revenue, AMBAC Insured, 5.40%, 12/01/13 ....................... 1,800,000 1,883,862
Celebration CDD, Special Assessment, Series B, MBIA Insured, 5.50%, 5/01/19 ............. 2,375,000 2,484,108
Dade County Seaport Revenue, Refunding, Series E, MBIA Insured, 8.00%, 10/01/08 ......... 200,000 259,598
Florida State Turnpike Authority Revenue, Department of Transportation, Series A, FGIC
Insured, 5.625%, 7/01/25 .............................................................. 7,400,000 7,712,502
Fort Myers Utility Revenue, Refunding, Series A, 6.00%, 10/01/19 ........................ 25,000 25,302
Hillsborough County IDA, PCR, Tampa Electric Co. Project, Refunding, MBIA Insured, 6.25%,
12/01/34 .............................................................................. 1,000,000 1,106,880
Hillsborough County IDAR, University Community Hospital, MBIA Insured, 5.80%, 8/15/24 ... 3,000,000 3,214,050
</TABLE>
51
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN INSURED TAX-FREE INCOME FUND AMOUNT VALUE
----------- -------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
FLORIDA (CONT.)
Lakeland Hospital System Revenue, Lakeland Regional Medical Center Project, Refunding,
MBIA Insured, 5.25%, 11/15/25 $ 1,250,000 $ 1,266,013
Lee County IDA Utilities Revenue, Bonita Springs Utilities Project, Refunding, MBIA
Insured, 6.05%,
11/01/15 1,000,000 1,099,720
11/01/20 1,000,000 1,094,970
Lee County Solid Waste System Revenue, MBIA Insured, 5.375%, 10/01/15 2,000,000 2,058,740
Manatee County School Board COP, MBIA Insured, Pre-Refunded, 6.125%, 7/01/21 5,000,000 5,760,850
Opa-Locka Capital Improvement Revenue, FGIC Insured, 6.125%, 1/01/24 1,000,000 1,089,060
Orange County Health Facilities Authority Revenue, Orlando Regional Healthcare, Refunding,
Series A, MBIA Insured, 6.00%, 11/01/24 1,000,000 1,071,250
Orange County School Board COP, Series A, MBIA Insured, 5.375%, 8/01/22 5,000,000 5,139,150
Orlando and Orange County Expressway Authority Expressway Revenue, junior lien,
FGIC Insured, 6.50%,
7/01/10 100,000 119,657
7/01/12 225,000 269,973
Orlando Utilities Commission Water and Electric Revenue, Series A, AMBAC Insured, 5.50%,
10/01/26 2,535,000 2,572,518
Osceola County School Board COP, Refunding, Series A, AMBAC Insured, 5.50%, 6/01/19 1,000,000 1,035,520
Osceola County Transportation Revenue, Osceola Parkway Project, MBIA Insured, 6.10%,
4/01/17 1,000,000 1,073,380
Panama City Water and Sewer Revenue, Refunding and Improvement, AMBAC Insured, 5.625%,
6/01/19 1,000,000 1,042,000
Polk County IDAR, Winter Haven Hospital, Series 2, MBIA Insured, 6.25%, 9/01/15 985,000 1,075,551
(b)Polk County School Board COP, Series A, FSA Insured, 5.00%, 1/01/24 5,000,000 4,957,500
Reedy Creek ID, Utilities Revenue, Refunding, Series 1, MBIA Insured, 5.00%, 10/01/19 3,500,000 3,495,380
St. Petersburg Public Utilities Revenue, MBIA Insured, 5.60%, 10/01/18 3,910,000 4,086,732
Sumter County School District Revenue, Multi-District Loan Program, FSA Insured, 7.15%,
11/01/15 250,000 318,513
Sunrise Utilities System Revenue, Refunding, AMBAC Insured, 5.20%, 10/01/22 2,000,000 2,049,500
Vero Beach Electric Revenue, Refunding, Series A, MBIA Insured, 5.375%, 12/01/21 3,200,000 3,276,928
West Palm Beach Utilities System Revenue, MBIA Insured, 5.75%, 10/01/27 5,000,000 5,539,600
-------------
68,805,057
-------------
GEORGIA 2.4%
Atlanta GO, Refunding, FGIC Insured, 5.00%,
12/01/20 4,775,000 4,743,342
12/01/23 6,000,000 5,924,040
Atlanta Water and Sewer Revenue, FGIC Insured,
5.375%, 1/01/20 5,000,000 5,143,800
5.25%, 1/01/27 10,000,000 10,091,000
Brunswick Water and Sewer Revenue, Refunding and Improvement, MBIA Insured, 6.10%, 10/01/14 1,535,000 1,764,897
Burke County Development Authority PCR, Georgia Power Co. Plant Vogtle, 7th Series, MBIA
Insured, 6.625%, 10/01/24 2,000,000 2,068,940
Cherokee County Water and Sewage Authority Revenue,
FGIC Insured, 5.00%, 8/01/27 1,500,000 1,468,740
Refunding, MBIA Insured, 6.90%, 8/01/18 1,000,000 1,080,780
Columbia County Water and Sewage Revenue, Refunding, AMBAC Insured, 6.25%, 6/01/12 1,500,000 1,606,380
Fitzgerald Housing Authority Mortgage Revenue, Bridge Creek, Refunding, Series A, MBIA
Insured, 6.50%, 7/01/24 1,030,000 1,080,800
Macon-Bibb County Urban Development Authority Revenue, MF Housing, Refunding, Series A,
MBIA Insured, 5.55%, 1/01/24 1,590,000 1,650,182
Municipal Electric Authority, Project One, Refunding, Sub Series A, MBIA Insured, 5.375%,
1/01/19 5,000,000 5,112,650
Upper Oconee Basin Water Authority Revenue, FGIC Insured, 5.25%, 7/01/27 1,340,000 1,359,336
-------------
43,094,887
-------------
HAWAII 1.4%
Hawaii County GO, Refunding and Improvement, Series A, FGIC Insured, 5.60%,
5/01/12 1,000,000 1,095,770
5/01/13 1,000,000 1,091,150
Hawaii State Airports System Revenue, Second Series 1990, FGIC Insured, 7.50%, 7/01/20 5,000,000 5,319,250
Hawaii State Department of Budget and Finance Special Purpose Mortgage Revenue,
Hawaiian Electric Co. and Subsidiaries, MBIA Insured, 6.55%, 12/01/22 3,000,000 3,294,120
St. Francis Medical Centers, Refunding, FSA Insured, 6.50%, 7/01/22 4,000,000 4,360,160
Hawaii State Department of Budget and Finance Special Purpose Revenue, Hawaiian Electric
Co. Project,
Series A, MBIA Insured, 5.65%, 10/01/27 5,000,000 5,338,700
Series B, MBIA Insured, 5.875%, 12/01/26 2,000,000 2,166,580
</TABLE>
52
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
<S> <C> <C>
HAWAII (CONT.)
Hawaii State Harbor Capital Improvement Revenue, FGIC Insured, 6.40%,
7/01/05 .......................................................................................... $ 535,000 $ 583,803
7/01/06 .......................................................................................... 605,000 659,196
7/01/07 .......................................................................................... 610,000 664,644
-----------
24,573,373
-----------
IDAHO .1%
Boise State University Revenues, Student Fee, MBIA Insured, 6.50%, 4/01/19 .......................... 1,000,000 1,117,600
-----------
ILLINOIS 4.0%
Aurora SFMR, GNMA Secured, AMBAC Insured, 7.80%, 12/01/15 ........................................... 315,000 325,934
Blue Island Waterworks and Sewer Revenue, MBIA Insured, 5.55%, 12/01/24 ............................. 2,270,000 2,352,492
Chicago Board of Education GO, Chicago School Reform, Series A, AMBAC Insured,
5.25%, 12/01/30 .................................................................................. 2,000,000 2,014,540
Chicago Board of Education Lease COP, Refunding, Series A, MBIA Insured, 6.25%, 1/01/09 ............. 320,000 365,427
Chicago GO, Project and Refunding, FGIC Insured, 5.25%, 1/01/28 ..................................... 9,775,000 9,848,997
Chicago Heights GO, MBIA Insured, Pre-Refunded, 7.40%, 12/01/03 ..................................... 100,000 110,113
Cicero GO, FSA Insured, 6.90%, 12/01/12 ............................................................. 1,500,000 1,676,175
Cook County Community College District No. 508 COP, FGIC Insured,
8.50%, 1/01/02 ................................................................................... 7,470,000 8,400,164
8.75%, 1/01/05 ................................................................................... 5,000,000 6,185,150
Illinois Health Facilities Authority Revenue,
Community Provider Pooled Loan Program, Series A, FSA Insured, 7.35%, 8/15/10 .................... 4,452,000 4,851,166
ETM, Refunding, Series B, MBIA Insured, 7.90%, 8/15/03 ........................................... 403,000 456,127
ETM, Series 1990, FSA Insured, 7.75%, 8/15/10 .................................................... 105,000 136,703
Michael Reese Hospital, ETM, Series A, FSA Insured, 7.60%, 2/15/05 ............................... 4,280,000 4,805,798
Northwestern Medical Facility Foundation, Refunding, MBIA Insured, 5.125%, 11/15/28 .............. 5,000,000 4,891,400
Series 1990, FSA Insured, 7.75%, 8/15/10 ......................................................... 2,525,000 2,699,503
Series B, MBIA Insured, 7.90%, 8/15/03 ........................................................... 1,783,000 1,806,357
Silver Cross Hospital, MBIA Insured, 7.00%, 8/15/21 .............................................. 1,000,000 1,088,460
Illinois State COP, FSA Insured, 6.95%, 7/01/13 ..................................................... 5,750,000 6,387,330
Macon County and Decatur COP, Decatur Public Building Commission, FGIC Insured,
6.50%, 1/01/06 ................................................................................... 300,000 341,142
Metropolitan Pier and Exposition Authority Dedicated State Tax Revenue, McCormick
Place Expansion Project, Refunding, Series A, AMBAC Insured, 5.25%, 6/15/27 ...................... 4,225,000 4,249,336
Onterie Center HFC, Mortgage Revenue, Refunding, MBIA Insured, 7.05%, 7/01/27 ....................... 2,000,000 2,140,180
Regional Transportation Authority Revenue, Series A, AMBAC Insured, 7.20%, 11/01/20 ................. 300,000 389,052
Southwestern Illinois Development Authority Retirement Community Revenue, Meridian
Village Project, GNMA Secured,
5.25%, 8/20/23 ................................................................................... 1,000,000 990,460
5.30%, 8/20/38 ................................................................................... 5,690,000 5,579,159
-----------
72,091,165
-----------
INDIANA .5%
Fort Wayne Hospital Authority Hospital Revenue, Ancillary System Inc., Parkview Memorial
Hospital, Series A, FGIC Insured, Pre-Refunded, 7.50%, 11/15/11 .................................. 250,000 262,705
Indiana Health Facility Financing Authority Hospital Revenue, Community Hospital Project,
Refunding and Improvement, MBIA Insured, 6.40%, 5/01/12 ........................................... 250,000 271,423
Indianapolis Gas Utility Revenue, Refunding, Series B, FGIC Insured, 4.00%, 6/01/15 ................. 500,000 452,575
Jasper County PCR, Northern Indiana Public Service Co., Refunding, MBIA Insured, 7.10%, 7/01/17 ..... 500,000 540,640
Monroe County Hospital Authority Revenue, Bloomington Hospital Project, Refunding,
BIG Insured, Pre-Refunded, 7.125%, 5/01/11 ....................................................... 6,000,000 6,099,180
Patoka Lake Regional Water and Sewer District Waterworks Revenue, Series A, AMBAC
Insured, Pre-Refunded, 6.45%, 1/01/15 ............................................................ 1,500,000 1,686,240
Rockport PCR, Michigan Power Co., Refunding, Series B, FGIC Insured, 7.60%, 3/01/16 ................. 185,000 201,587
-----------
9,514,350
-----------
IOWA .1%
Davenport Hospital Revenue, St. Lukes Hospital, Series A, AMBAC Insured, Pre-Refunded, 7.40%,
7/01/20........................................................................................... 200,000 214,520
Greater Kentucky Housing Assistance Corp. Mortgage Revenue, Logan Park Project, Refunding,
Series B, MBIA Insured, 6.50%, 1/01/24 ........................................................... 2,115,000 2,223,478
-----------
2,437,998
-----------
</TABLE>
53
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
<S> <C> <C>
KANSAS .6%
Burlington PCR, Kansas Gas and Electric Co. Project, Refunding, MBIA Insured,
7.00%, 6/01/31 ............................................................... $ 3,350,000 $ 3,636,827
Cowley and Shawnee Counties SFMR, GNMA Secured, AMBAC Insured, 7.35%, 12/01/11 .. 875,000 916,475
Kansas State Development Finance Authority Health Facility Revenue, MBIA Insured,
5.80%, 11/15/21 .............................................................. 1,330,000 1,434,192
Topeka Public Building Commission Revenue, Tenth and Jackson Projects,
MBIA Insured, 5.00%, 6/01/24 ................................................. 2,250,000 2,214,945
Wichita Hospital Revenue, St. Francis, Refunding and Improvement,
MBIA Insured, 6.25%, 10/01/10 ................................................ 2,000,000 2,166,500
Wichita Water and Sewer Utility Revenue, Refunding and Improvement,
Series B, FGIC Insured, 6.00%, 10/01/12 ...................................... 1,000,000 1,050,640
--------------
11,419,579
--------------
KENTUCKY 1.9%
Jefferson County Capital Projects Corp. Lease Revenue, MBIA Insured,
5.375%, 6/01/22 .............................................................. 2,000,000 2,057,780
5.50%, 6/01/28 ............................................................... 3,000,000 3,123,750
Jefferson County Health Facilities Revenue,
Alliant Health System Inc., Refunding, MBIA Insured, 5.125%, 10/01/27 ........ 10,000,000 9,815,600
Jewish Hospital Healthcare Services Inc., AMBAC Insured, 6.55%, 5/01/22 ...... 1,000,000 1,082,630
Jefferson County Health System Revenue, Alliant Health System Inc., MBIA Insured,
5.20%, 10/01/28 .............................................................. 7,000,000 7,035,980
Kenton County Water District No. 001 Waterworks Revenue, Series B, FGIC Insured,
5.70%, 2/01/20 ............................................................... 1,250,000 1,328,413
Kentucky Economic Development Finance Authority Hospital Facilities Revenue,
Baptist Healthcare System, Refunding, MBIA Insured, 5.00%, 8/15/24 ........... 2,000,000 1,957,660
St. Elizabeth Medical Center Project, Series A, FGIC Insured, 6.00%,
12/01/22.......................................................................... 2,375,000 2,549,159
Kentucky Economic Development Finance Authority Medical Center Revenue,
Ashland Hospital Corp., Refunding and Improvement,
Series A, FSA Insured, 6.125%, 2/01/12 ......................................... 1,000,000 1,082,320
Louisville and Jefferson County Metropolitan Sewer District Sewer and
Drain System Revenue, Series A, AMBAC Insured, Pre-Refunded, 6.75%, 5/15/25 ... 2,000,000 2,326,340
Northern Kentucky University COP, Student Housing Facilities, FSA Insured,
Pre-Refunded, 7.25%, 1/01/12 ................................................... 2,000,000 2,172,820
--------------
34,532,452
--------------
LOUISIANA .4%
Jefferson Parish Hospital Service District No. 2 Hospital Revenue, FSA Insured,
5.00%, 7/01/28 ............................................................... 5,000,000 4,835,400
Jefferson Sales Tax District Special Sales Tax Revenue, Refunding, Series A,
BIG Insured, Pre-Refunded, 8.00%, 7/01/05 ...................................... 1,700,000 1,727,370
New Orleans GO, Public Improvement, FGIC Insured, Pre-Refunded, 7.50%, 9/01/21 .. 500,000 561,745
--------------
7,124,515
--------------
MAINE .7%
Maine State Health and Higher Educational Facilities Authority Revenue,
Eastern Maine Health Care, FGIC Insured, Pre-Refunded, 6.625%, 10/01/11 ...... 2,000,000 2,191,900
Series B, FSA Insured, Pre-Refunded, 7.00%, 7/01/24 .......................... 2,000,000 2,333,360
Series C, FSA Insured, 6.20%, 7/01/25 ........................................ 2,015,000 2,213,316
Maine State Turnpike Authority Revenue, MBIA Insured, Pre-Refunded, 6.00%,
7/01/14 ...................................................................... 525,000 588,793
7/01/18 ...................................................................... 2,500,000 2,803,775
Old Orchard Beach GO, MBIA Insured, Pre-Refunded, 6.65%,
9/01/11 ...................................................................... 1,180,000 1,308,160
9/01/12 ...................................................................... 535,000 601,356
--------------
12,040,660
--------------
MARYLAND .4%
Maryland State CDA, Department of Housing and Community Development,
Infrastructure Financing, Series A, AMBAC Insured,
6.625%, 6/01/12 .............................................................. 245,000 265,004
Pre-Refunded, 6.625%, 6/01/12 ................................................ 1,755,000 1,950,191
Pre-Refunded, 6.70%, 6/01/22 ................................................. 820,000 913,070
Maryland State Health and Higher Educational Facilities Authority Revenue,
University of Maryland Medical System,
Refunding, FGIC Insured, 5.00%, 7/01/20 ...................................... 3,000,000 2,976,480
Series B, FGIC Insured, 7.00%, 7/01/22 ....................................... 200,000 254,376
--------------
6,359,121
--------------
</TABLE>
54
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
<S> <C> <C>
MASSACHUSETTS 7.2%
Boston Water and Sewer Commission Revenue, Series A, FGIC Insured, Pre-Refunded,
6.00%, 11/01/21 ................................................................................$ 3,700,000 $ 3,947,456
Central Berkshire Religious School District GO, Series B, FSA Insured, 5.125%, 3/01/18 .... 1,125,000 1,139,625
Massachusetts Municipal Wholesale Electric Co. Power Supply System Revenue,
Refunding, Series A,
AMBAC Insured, 6.00%, 7/01/18 ............................................................ 4,455,000 4,684,388
Massachusetts State Health and Educational Facilities Authority Revenue,
Bay State Medical Center, Series E, FSA Insured, 6.00%, 7/01/26 ........................ 10,000,000 10,797,000
Beverly Hospital, Series E, MBIA Insured, Pre-Refunded, 7.70%, 7/01/20 ................. 1,500,000 1,615,725
Caregroup Issue, Refunding, Series A, MBIA Insured, 5.00%, 7/01/18 ..................... 2,000,000 1,958,620
Caregroup Issue, Refunding, Series A, MBIA Insured, 5.00%, 7/01/25 ..................... 5,000,000 4,843,150
Central New England Health, Series B, AMBAC Insured, 5.20%, 8/01/28 .................... 5,000,000 4,933,000
Harvard Pilgrim Health, Series A, FSA Insured, 5.00%, 7/01/18 .......................... 3,000,000 2,937,930
Lahey Clinic Medical Center, Series B, MBIA Insured, 5.375%, 7/01/23 ................... 1,000,000 1,009,260
Massachusetts General Hospital, Series F, AMBAC Insured, 6.25%, 7/01/20 ................ 9,220,000 10,110,375
Massachusetts Medical Center, Series A, AMBAC Insured, Pre-Refunded, 7.10%, 7/01/21 .... 1,000,000 1,100,560
McLean Hospital, Refunding, Series C, FGIC Insured, 6.625%, 7/01/15 .................... 1,085,000 1,187,229
Northeastern University, Series E, MBIA Insured, 6.55%, 10/01/22 ....................... 8,500,000 9,345,070
Partners Healthcare System, Series A, MBIA Insured, 5.375%, 7/01/24 .................... 12,200,000 12,397,274
Simmons College, Series C, MBIA Insured, 5.125%, 10/01/28 .............................. 8,000,000 7,921,440
Stonehill College, Refunding, Series E, MBIA Insured, 6.60%, 7/01/20 ................... 2,000,000 2,191,500
Youville Hospital, Refunding, Series B, MBIA Insured, 6.00%, 2/15/25 ................... 2,000,000 2,139,860
Massachusetts State Industrial Finance Agency Revenue,
Babson College, Series A, MBIA Insured, Pre-Refunded, 6.50%, 10/01/22 .................. 3,000,000 3,342,300
Brandeis University, Series C, MBIA Insured, 6.80%, 10/01/19 ........................... 5,000,000 5,184,050
Combined Jewish Philanthropies, Refunding, Series A, AMBAC Insured, 6.375%, 2/01/15 .... 5,000,000 5,528,800
Suffolk University, AMBAC Insured, 5.25%, 7/01/17 ...................................... 3,000,000 3,052,440
Massachusetts State Port Authority Revenue,
Refunding, Series A, FGIC Insured, 6.00%, 7/01/23 ...................................... 4,000,000 4,330,560
Special Facilities, Bosfuel Project, MBIA Insured, 5.625%, 7/01/20 ..................... 1,590,000 1,640,785
Special Facilities, Bosfuel Project, MBIA Insured, 5.625%, 7/01/21 ..................... 1,560,000 1,609,826
Special Facilities, Bosfuel Project, MBIA Insured, 5.625%, 7/01/23 ..................... 2,155,000 2,223,831
Special Facilities, Bosfuel Project, MBIA Insured, 5.625%, 7/01/24 ..................... 2,910,000 3,002,945
Massachusetts State Turnpike Authority Metropolitan Highway System Revenue, Sub. Lien,
Refunding, Series B,
MBIA Insured, 5.125%, 1/01/37 ............................................................ 2,100,000 2,067,072
Massachusetts State Water Resources Authority Revenue,
Refunding, Series D, 5.00%, 8/01/24 .................................................... 5,000,000 4,880,300
Series A, FGIC Insured, Pre-Refunded, 5.50%, 11/01/21 .................................. 3,000,000 3,326,880
Monson GO, School District, Series 1990, MBIA Insured, Pre-Refunded, 7.70%, 10/15/10 ...... 2,000,000 2,176,920
Palmer GO, Series B, AMBAC Insured, Pre-Refunded, 7.70%, 10/01/10 ......................... 2,300,000 2,499,801
-------------
129,125,972
-------------
MICHIGAN 4.2%
Chippewa Valley Schools GO, Refunding, AMBAC Insured, 5.00%, 5/01/27 ...................... 1,000,000 976,310
Detroit Sewage Disposal Revenue, MBIA Insured, 5.00%, 7/01/25 ............................. 6,000,000 5,836,920
Ecorse Public School District, FGIC Insured, 5.50%, 5/01/27 ............................... 7,250,000 7,500,488
Jackson County Hospital Finance Authority Hospital Revenue, W.A. Foote Memorial Hospital,
Series A, AMBAC Insured, 5.25%, 6/01/17 ................................................ 750,000 765,435
Kalamazoo Hospital Finance Authority Hospital Facility Revenue, Bronson Methodist Hospital,
Refunding and Improvement, MBIA Insured, 5.875%, 5/15/26 ............................... 5,500,000 5,909,750
Series A, MBIA Insured, Pre-Refunded, 6.375%, 5/15/17 .................................. 2,000,000 2,244,680
Kent Hospital Finance Authority Health Care Revenue, Butterworth Health System, Series A,
MBIA Insured, Pre-Refunded, 5.625%, 1/15/26 ............................................ 10,000,000 11,151,200
Marquette City Hospital Finance Authority Revenue, Marquette General Hospital, Refunding,
Series D, FSA Insured, 6.10%, 4/01/19 .................................................. 5,000,000 5,501,800
Michigan State Hospital Finance Authority Revenue,
Hospital Botsford Obligation, Refunding, Series A, MBIA Insured, 5.25%, 2/15/22 ........ 2,000,000 2,024,880
Oakwood Obligation Group, Refunding, Series A, FSA Insured, 5.125%, 8/15/25 ............ 6,725,000 6,605,362
Oakwood Obligation Group, Refunding, Series A, FSA Insured, 5.00%, 8/15/31 ............. 10,000,000 9,582,100
St. John's Hospital and Medical Center, AMBAC Insured, 5.25%, 5/15/26 .................. 3,000,000 3,023,700
St. John's Hospital, Refunding, Series A, AMBAC Insured, 6.00%, 5/15/13 ................ 2,500,000 2,702,350
</TABLE>
55
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
<S> <C> <C>
MICHIGAN (CONT.)
Michigan State Strategic Fund Limited Obligation Revenue, Detroit Edison Co.,
Pollution Project, Refunding, FGIC Insured, 6.875%, 12/01/21 ............................... $ 200,000 $ 217,120
Series BB, AMBAC Insured, 7.00%, 5/01/21 ................................................... 250,000 316,110
Saginaw Valley State University Revenue, AMBAC Insured, 5.30%, 7/01/28 ........................ 3,400,000 3,454,774
Yale Public Schools District GO, FSA Insured, 5.375%, 5/01/27 ................................. 3,845,000 3,906,905
Zeeland Public Schools GO, Refunding, MBIA Insured, 5.25%, 5/01/24 ............................ 3,180,000 3,200,717
-----------
74,920,601
-----------
MINNESOTA 2.0%
Eden Prairie MFHR, Olympic Ridge, Refunding, Series A, GNMA Secured, 6.25%, 1/20/31 ........... 2,000,000 2,143,300
Minnesota Agriculture and Economic Development Board Revenue, Health Care System,
Fairview Hospital, Refunding, Series A, MBIA Insured, 5.75%, 11/15/26 ...................... 5,000,000 5,345,950
Minnesota State HFA, Rental Housing, Refunding, Series D, MBIA Insured, 6.00%, 2/01/22 ........ 2,135,000 2,253,001
Northern Municipal Power Agency Electric System Revenue, Refunding, Series B,
AMBAC Insured, 5.50%, 1/01/18 .............................................................. 2,100,000 2,174,886
Southern Minnesota Municipal Power Agency Power Supply System Revenue, Series A,
AMBAC Insured, 5.75%, 1/01/18 .............................................................. 2,870,000 3,038,900
St. Louis Park Health Care Facilities Revenue, Health System of Minnesota Obligated Group,
Refunding, Series A, AMBAC Insured, 5.20%, 7/01/16 ......................................... 8,200,000 8,318,490
Washington County GO,
Governmental Housing, Scandia II Project, Series B, FGIC Insured, 6.30%, 7/01/24 ........... 1,200,000 1,284,648
Raymie Johnson Apartments, Refunding, Series C, FGIC Insured, 6.30%, 1/01/20 ............... 2,415,000 2,595,062
Western Minnesota Municipal Power Agency Power Supply Revenue, Series A, MBIA Insured,
6.125%, 1/01/16 ............................................................................ 8,350,000 8,405,444
-----------
35,559,681
-----------
MISSISSIPPI
Harrison County Wastewater Management District Revenue, Wastewater Treatment Facilities,
Refunding, Series A, FGIC Insured, 8.50%, 2/01/13 .......................................... 200,000 283,330
-----------
MISSOURI .9%
Kansas City IDA, Mortgage Revenue, Presidential Gardens, Refunding,
Series A, FNMA Insured, 5.55%, 8/01/25 ..................................................... 1,000,000 1,033,020
Missouri State HDC, SFMR, Series B, GNMA Secured, 7.75%, 6/01/22 .............................. 910,000 947,838
Missouri State Health and Educational Facilities Authority Health Facilities Revenue,
Heartland Health System Project, AMBAC Insured, 6.35%, 11/15/17 ............................ 1,000,000 1,084,650
Richmond Heights COP, Capital Improvement Projects, Series A, MBIA Insured, 5.30%, 8/15/17 .... 2,000,000 2,045,480
St. Charles County Public Facilities Authority Leasehold Revenue, FGIC Insured,
6.375%, 3/15/07 ............................................................................ 2,850,000 3,079,254
St. Louis County Mortgage Revenue, GNMA Secured, 8.125%, 9/01/19 .............................. 295,000 301,186
St. Louis Municipal Finance Corp. Leasehold Revenue,
City Justice Center, Refunding, Series A, AMBAC Insured, 5.95%, 2/15/16 .................... 2,000,000 2,188,160
Refunding and Improvement, FGIC Insured, Pre-Refunded, 6.25%, 2/15/12 ...................... 2,025,000 2,281,203
St. Louis School District GO, Refunding, FGIC Insured, 6.00%, 4/01/12 ......................... 2,950,000 3,166,412
-----------
16,127,203
-----------
MONTANA 1.2%
Forsyth County PCR, Puget Sound Power and Light Co. Project, AMBAC Insured, 6.80%, 3/01/22 .... 4,475,000 4,868,934
Forsyth PCR, Washington Water Co., Refunding, Series A, MBIA Insured, 7.125%, 12/01/13 ........ 5,000,000 5,221,900
Helena Water Revenue, Series C, FGIC Insured, 6.65%, 11/01/12 ................................. 750,000 823,500
Montana State Board Workers Compensation Investment Program, ETM, MBIA Insured, 6.875%,
6/01/20..................................................................................... 8,500,000 9,134,440
Montana State University Revenue, Higher Education Facilities, Acquisition and Improvement,
Series C, MBIA Insured, 6.00%, 11/15/14 .................................................... 1,000,000 1,001,480
-----------
21,050,254
-----------
NEBRASKA 1.4%
Cass County School District No. 001, Plattsmouth Community Schools, FGIC Insured, Pre-Refunded,
6.35%, 12/01/19 ............................................................................ 2,500,000 2,563,150
Lancaster County Hospital Authority Revenue, Bryan Memorial Hospital Project No. 1,
ETM, MBIA Insured, 6.70%, 6/01/22 .......................................................... 2,500,000 2,937,500
Series A, MBIA Insured, 5.375%, 6/01/19 .................................................... 2,715,000 2,784,667
Series B, MBIA Insured, 5.375%, 6/01/17 .................................................... 5,000,000 5,159,400
Lincoln Hospital Revenue, Lincoln General Hospital, Series A, FSA Insured, Pre-Refunded,
6.20%, 12/01/14 ............................................................................ 2,000,000 2,167,700
</TABLE>
56
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
<S> <C> <C>
NEBRASKA (CONT.)
Municipal Energy Agency of Nebraska Power Supply System Revenue, Refunding,
Series A, AMBAC Insured, 6.00%,
4/01/15 .................................................................................. $ 2,000,000 $ 2,162,620
4/01/17 .................................................................................. 1,350,000 1,442,772
Nebraska Educational Finance Authority Revenue, Creighton University Project,
AMBAC Insured, 5.95%, 1/01/11 ............................................................ 1,000,000 1,092,350
Nebraska Investment Finance Authority Health Facilities Revenue, Children's
Healthcare Services, AMBAC Insured, 5.50%, 8/15/27 ....................................... 2,000,000 2,088,620
Nebraska Investment Finance Authority SFMR, Refunding,
Series B, FGIC Insured, 8.00%, 7/15/17 ................................................... 2,200,000 2,245,320
Series R1-A, FGIC Insured, 8.00%, 7/15/17 ................................................ 135,000 135,296
-----------
24,779,395
-----------
NEVADA .4%
Carson City Hospital Revenue, Series B, AMBAC Insured, 5.40%, 3/01/17 ........................ 1,000,000 1,025,050
Clark County GO, Series A, AMBAC Insured, 6.50%, 6/01/17 .................................... 250,000 297,858
Clark County School District, Series A, MBIA Insured, 7.00%, 6/01/10 ........................ 4,000,000 4,926,360
Sparks GO, AMBAC Insured, Pre-Refunded, 7.50%, 10/01/09 ..................................... 1,695,000 1,772,139
-----------
8,021,407
-----------
NEW HAMPSHIRE 1.2%
New Hampshire Higher Education and Health Facilities Authority Revenue,
Concord Hospital, Refunding, AMBAC Insured, 6.00%, 10/01/26 .............................. 4,300,000 4,687,301
Mary Hitchcock Memorial Hospital, FGIC Insured, 5.75%, 8/15/23 ........................... 11,000,000 11,683,100
University System, Refunding, MBIA Insured, 6.25%, 7/01/20 ............................... 4,000,000 4,333,280
-----------
20,703,681
-----------
NEW JERSEY 1.6%
Essex County Improvement Authority Lease, Jail and Youth House Projects,
AMBAC Insured, Pre-Refunded, 7.00%, 12/01/24 ............................................. 3,000,000 3,539,340
Refunding, AMBAC Insured, 5.35%, 12/01/24 ................................................ 4,000,000 4,088,040
Essex County Improvement Authority Revenue, Garden State Cancer Center Project,
AMBAC Insured, 6.00%, 12/01/20 ........................................................... 2,525,000 2,755,709
Mantua Township School District COP, MBIA Insured, Pre-Refunded, 7.25%, 6/30/10 ............. 1,700,000 1,821,108
Middlesex County COP, MBIA Insured, 5.30%, 6/15/29 .......................................... 3,575,000 3,663,231
Mount Laurel Township Municipal Utilities Authority System Revenue, Refunding,
Series A, MBIA Insured, 6.00%, 7/01/15 ................................................... 2,000,000 2,142,840
New Jersey Health Care Facilities Financing Authority Revenue,
Community Medical Center, Series D, MBIA Insured, Pre-Refunded, 6.00%, 7/01/19 ........... 2,000,000 2,019,940
Muhlenberg Regional Medical Center, Series B, AMBAC Insured, 8.00%, 7/01/18 .............. 3,000,000 3,062,490
St. Barnabas Health, Refunding, Series B, MBIA Insured, 5.00%, 7/01/24 ...................... 5,000,000 4,936,000
New Jersey State Housing and Mortgage Finance Agency Revenue, Home Buyer, Series C,
MBIA Insured, 7.375%, 10/01/17 ........................................................... 485,000 501,218
New Jersey State Turnpike Authority Revenue, Refunding, Series C, AMBAC Insured,
6.50%, 1/01/16 ........................................................................... 300,000 358,782
-----------
28,888,698
-----------
NEW MEXICO .5%
Farmington PCR, Public Service Co. of New Mexico, Refunding, Series A, AMBAC Insured,
6.375%, 12/15/22 ......................................................................... 5,000,000 5,439,750
Gallup PCR, Plains Electric Generation, Refunding, MBIA Insured, 6.65%, 8/15/17 ............. 2,000,000 2,106,420
New Mexico Mortgage Finance Authority SFM Program, Series C, FGIC Insured, 8.625%,
7/01/17 .................................................................................. 720,000 729,490
-----------
8,275,660
-----------
NEW YORK 7.4%
Central Square GO, Central School District, FGIC Insured, 6.50%, 6/15/10 .................... 900,000 1,071,909
Dutchess County IDA, Civic Facilities Revenue, Bard College Project, AMBAC Insured,
5.375%, 6/01/27 .......................................................................... 3,945,000 4,030,409
New York City GO, Series C, Sub Series C-1, MBIA Insured, Pre-Refunded, 6.625%, 8/01/12 ..... 105,000 116,321
New York City Municipal Water Finance Authority Water and Sewer System Revenue,
Series A, MBIA Insured, Pre-Refunded, 7.25%, 6/15/15 ..................................... 2,000,000 2,128,400
New York City Trust Cultural Resources Revenue, New York Botanical Garden,
MBIA Insured, 5.80%, 7/01/26 ............................................................. 2,000,000 2,138,640
New York State Dormitory Authority Revenue,
Brooklyn Law School, FSA Insured, 6.40%, 7/01/11 ......................................... 4,000,000 4,268,320
City University, Series C, 7.00%, 7/01/14 ................................................ 6,110,000 6,479,105
City University, Series C, Pre-Refunded, 7.00%, 7/01/14 .................................. 2,545,000 2,716,660
Mount Sinai School of Medicine, Refunding, MBIA Insured, 6.75%, 7/01/15 .................. 1,500,000 1,617,375
Pace University, MBIA Insured, 5.70%, 7/01/22 ............................................ 7,500,000 8,000,025
</TABLE>
57
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
<S> <C> <C>
NEW YORK (CONT.)
New York State Dormitory Authority Revenue, (cont.)
Pace University, Refunding, MBIA Insured, 5.75%, 7/01/26 ................................... $ 2,500,000 $ 2,706,275
Pooled Capital Program, FGIC Insured, 7.80%, 12/01/05 ...................................... 1,230,000 1,256,666
St. John's University, MBIA Insured, 5.70%, 7/01/26 ........................................ 15,000,000 15,900,150
Vassar Brothers Hospital, FSA Insured, 5.375%, 7/01/25 ..................................... 4,000,000 4,093,480
New York State Energy Research and Development Authority Electric Facilities Revenue,
Consolidated Edison Project, Series A, MBIA Insured, 6.75%, 1/15/27 ........................ 5,000,000 5,276,250
New York State Energy Research and Development Authority PCR,
Central Hudson Gas, Series A, FGIC Insured, 7.375%, 10/01/14 ............................... 2,000,000 2,102,440
Niagara Mohawk Power Corp., Refunding, Series A, FGIC Insured, 6.625%, 10/01/13 ............ 3,500,000 3,794,070
Rochester Gas and Electric Project, Refunding, Series B, MBIA Insured, 6.50%, 5/15/32 ...... 5,000,000 5,399,950
New York State Medical Care Facilities Finance Agency Revenue,
North Shore University Hospital, Mortgage Project, Series A, MBIA Insured, Pre-Refunded,
7.20%, 11/01/20 ............................................................................ 3,000,000 3,244,260
Presbyterian Hospital, FHA Mortgage, Series A, MBIA Insured, 5.375%, 2/15/25 ............... 3,055,000 3,143,137
New York State Tollway Authority General Revenue,
Series B, MBIA Insured, 5.00%, 1/01/20 ..................................................... 6,635,000 6,592,072
Series C, FGIC Insured, Pre-Refunded, 6.00%, 1/01/25 ....................................... 7,815,000 8,787,499
Niagara Frontier Transportation Authority Airport Revenue, Greater Buffalo
International Airport, Series A, AMBAC Insured, 6.25%, 4/01/24 ............................. 9,000,000 9,765,450
Port Authority of New York and New Jersey Revenue, Consolidated,
102nd Series, MBIA Insured, 5.625%, 10/15/17 ............................................... 5,000,000 5,197,550
102nd Series, MBIA Insured, 5.875%, 10/15/27 ............................................... 10,000,000 10,624,800
109th Series, FGIC Insured, 5.375%, 7/15/22 ................................................ 10,000,000 10,312,200
Upper Mohawk Valley Regional Water Finance Authority Water System Revenue, Refunding,
Series A, FSA Insured, 5.125%, 10/01/26 .................................................... 1,495,000 1,499,171
------------
132,262,584
------------
NORTH CAROLINA 1.7%
Asheville Water System Revenue, FGIC Insured, 5.70%, 8/01/25 ................................... 1,000,000 1,070,590
New Hanover County Hospital Revenue, New Hanover Regional Medical Center Project,
AMBAC Insured, 5.75%, 10/01/26 ............................................................. 1,150,000 1,225,774
MBIA Insured, 5.00%, 10/01/28 .................................................................. 7,000,000 6,820,380
North Carolina Medical Care Commission Health Care Facilities Revenue,
Novant Health Project, Series B, 5.00%, 10/01/28 ........................................... 11,300,000 10,943,485
North Carolina Medical Care Commission Hospital Revenue,
Rex Healthcare Project, AMBAC Insured, 5.00%, 6/01/17 ...................................... 5,000,000 4,923,200
Wyne Memorial Hospital Project, Refunding, AMBAC Insured, 5.00%, 10/01/21 .................. 5,000,000 4,880,800
North Carolina Municipal Power Agency No. 1 Catawba Electric Revenue,
ETM, MBIA Insured, 6.50%, 1/01/10 .......................................................... 20,000 23,131
MBIA Insured, 6.50%, 1/01/10 ............................................................... 80,000 83,095
------------
29,970,455
------------
NORTH DAKOTA .4%
Grand Forks Health Care System Revenue, Altru Health System Obligation Group, MBIA Insured,
5.625%, 8/15/27 ............................................................................ 5,500,000 5,809,100
North Dakota State Building Authority Lease Revenue, Department of Corrections and
Rehabilitation, Series B, AMBAC Insured, Pre-Refunded, 7.40%, 6/01/10 ...................... 150,000 157,521
North Dakota State Building Authority Revenue, Refunding, Series A, AMBAC Insured,
6.75%, 6/01/11 ............................................................................. 300,000 321,519
------------
6,288,140
------------
OHIO 3.8%
Clermont County Building and Road Improvement, Refunding, AMBAC Insured, 5.60%, 9/01/14 ........ 2,000,000 2,107,740
Cleveland Airport Systems Revenue, Series A, FSA Insured, 5.125%, 1/01/27 ...................... 6,000,000 5,916,360
Cleveland Waterworks Revenue,
Refunding and Improvement, Series I, FSA Insured, 5.00%, 1/01/23 ........................... 2,750,000 2,727,120
Series F, AMBAC Insured, Pre-Refunded, 6.50%, 1/01/11 ...................................... 1,625,000 1,779,911
Elyria GO, FGIC Insured, 5.40%, 12/01/17 ....................................................... 2,400,000 2,465,424
Hamilton County Sales Tax, Hamilton County Football, Project B, MBIA Insured,
5.00%, 12/01/27 ............................................................................ 3,250,000 3,186,593
Hamilton Wastewater System Revenue, Series A, FSA Insured, 5.15%, 10/15/17 ..................... 3,015,000 3,064,175
Hamilton Waterworks Mortgage Revenue, Series A, MBIA Insured, 6.30%, 10/15/21 .................. 1,750,000 1,866,515
</TABLE>
58
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STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
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LONG TERM INVESTMENTS (CONT.)
OHIO (CONT.)
Montgomery County Hospital Facilities Revenue, Kettering Medical Center Facilities,
MBIA Insured, Pre-Refunded, 7.50%, 4/01/14 ......................................................... $12,720,000 $13,017,775
Ohio HFA, SFMR, Series D, GNMA Secured, 7.05%, 9/01/16 ................................................. 3,105,000 3,257,362
Ohio Municipal Electric Generation Agency Joint Venture 5, Certificates of Beneficial
Interest, AMBAC Insured, 5.375%, 2/15/24 ........................................................... 5,500,000 5,624,740
Ohio State Turnpike Commission Turnpike Revenue, Series A, MBIA Insured, Pre-Refunded, 5.50%, 2/15/26 .. 15,900,000 17,575,860
University of Cincinnati COP, University Center Project, MBIA Insured, 5.125%, 6/01/24 ................. 2,950,000 2,962,567
West Holmes Local School District GO, MBIA Insured, 5.375%, 12/01/17 ................................... 3,100,000 3,189,559
-----------
68,741,701
-----------
OKLAHOMA .7%
Grady County HFA, SFMR, Refunding, Series A, FGIC Insured, 6.70%, 1/01/12 .............................. 595,000 630,611
McGee Creek Authority Water Revenue, MBIA Insured, 6.00%, 1/01/23 ...................................... 300,000 344,223
Moore Public Works Authority Revenue, Refunding, AMBAC Insured, 7.60%,
7/01/06 ............................................................................................ 5,000,000 5,164,050
Muskogee County, HFAR, SFMR, Refunding, Series A,
FGIC Insured, 7.60%, 12/01/10 ...................................................................... 420,000 435,124
Oklahoma State Turnpike Authority Turnpike Revenue, First Senior, Series A, AMBAC Insured, 6.00%,
1/01/12 ............................................................................................ 2,000,000 2,144,120
Pottawatomie County Development Authority Water Revenue, North Deer Creek Reservoir Project,
AMBAC Insured, Pre-Refunded, 7.375%, 7/01/26 ....................................................... 250,000 268,070
Tulsa County Home Finance Authority Mortgage Revenue, Series D, GNMA Secured, 6.95%, 12/01/22 .......... 250,000 263,123
Tulsa Industrial Authority Revenue, Holland Hall School Project, FSA Insured, 6.75%, 12/01/14 ......... 3,270,000 3,706,970
-----------
12,956,291
-----------
OREGON 1.9%
Chemeketa Community College District, FGIC Insured, Pre-Refunded, 5.95%, 6/01/16 ....................... 3,000,000 3,374,610
Clackamas Community College District, MBIA Insured, Pre-Refunded, 5.80%, 6/01/26 ...................... 2,500,000 2,788,750
Deschutes and Jefferson Counties School District No. 2-J, Redmond, MBIA Insured, 5.60%, 6/01/09 ....... 1,500,000 1,568,895
Josephine County School District No. 7, FGIC Insured, 5.70%, 6/01/13 .................................. 5,000,000 5,373,450
Medford Hospital Facilities Authority Revenue, Asante Health System, Series A, MBIA Insured,
5.00%, 8/15/24 ..................................................................................... 3,655,000 3,592,902
Northern Wasco County Peoples Utilities District Electric Revenue, FGIC Insured, 5.625%, 12/01/22 ..... 1,000,000 1,056,070
Ontario Catholic Health Revenue, Holy Rosary Medical Center, MBIA Insured, 5.50%, 11/15/12 ............ 700,000 749,364
Oregon Health Sciences University Revenue, Series B, MBIA Insured, 5.25%, 7/01/15 ..................... 1,500,000 1,554,735
Oregon State Department of Administrative Services COP, Series A,
AMBAC Insured, 5.80%, 5/01/24 ...................................................................... 5,000,000 5,417,250
MBIA Insured, 5.70%, 5/01/17 ....................................................................... 1,000,000 1,069,830
Port of Portland International Airport Revenue, Portland International Airport, Series 11,
FGIC Insured, 5.625%, 7/01/26 ...................................................................... 1,000,000 1,051,390
Washington County Unified Sewer Agency Revenue,
senior lien, FGIC Insured, 5.50%, 10/01/16 ......................................................... 1,845,000 1,945,054
senior lien, Series A, AMBAC Insured, Pre-Refunded, 6.125%, 10/01/12 ............................... 1,000,000 1,118,500
Western Lane Hospital District Hospital Facilities Authority Revenue, Sisters of
St. Joseph of Peace Health and Hospital Services, Refunding, MBIA Insured, 5.875%, 8/01/12 ......... 3,000,000 3,296,430
-----------
33,957,230
-----------
PENNSYLVANIA 1.6%
Beaver County GO, Series A, MBIA Insured, Pre-Refunded, 5.90%, 10/01/26 ................................ 2,000,000 2,246,240
Cambria County HDA, Hospital Revenue, Conemaugh Valley Memorial Hospital, Refunding,
Series B, 6.375%, 7/01/18 .......................................................................... 5,000,000 5,511,650
Lehigh County General Purpose Authority Revenue, Hospital Healtheast Inc., Refunding, Series A,
MBIA Insured, 7.00%, 7/01/15 ....................................................................... 100,000 105,625
Montgomery County IDAR, PCR, Philadelphia Electric Co., Series B, MBIA Insured, 6.70%, 12/01/21 ....... 8,000,000 8,642,400
Pennsylvania Convention Center Authority Revenue, ETM, Series A, FGIC Insured, 6.00%, 9/01/19 ......... 500,000 567,820
Pennsylvania State Pooled Finance Authority Lease Revenue, Capital Improvement, Series B, MBIA Insured,
Pre-Refunded, 8.00%, 11/01/09 ........................................................................ 2,740,000 2,759,235
Pennsylvania State Turnpike Oil Commission Franchise Tax Revenue, Refunding, Series P,
AMBAC Insured, 6.00%, 12/01/17 ..................................................................... 500,000 536,335
Philadelphia Airport Revenue, Philadelphia Airport System, Series A, AMBAC Insured, 6.10%, 6/15/25 .... 4,000,000 4,329,160
Philadelphia Water and Wastewater Revenue, Refunding, FSA Insured, 5.50%, 6/15/15 ..................... 1,000,000 1,038,050
Pittsburgh Water and Sewer System Authority Revenue, ETM, Refunding, FGIC Insured, 7.25%, 9/01/14 ..... 90,000 110,444
Quaker Valley School District, FGIC Insured, Pre-Refunded, 5.70%, 1/15/19 ............................. 2,000,000 2,187,060
-----------
28,034,019
-----------
</TABLE>
59
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
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LONG TERM INVESTMENTS (CONT.)
RHODE ISLAND 1.3%
Kent County Water Authority General Revenue, Series A, MBIA Insured, 6.35%, 7/15/14 ............... $ 2,100,000 $ 2,347,317
Providence GO, Series A, FSA Insured, 5.70%, 7/15/19 .............................................. 3,000,000 3,182,940
Rhode Island Clean Water Financing Agency Revenue, Cranston Wastewater Treatment System,
MBIA Insured, 5.80%, 9/01/22 .................................................................... 10,000,000 10,731,600
Rhode Island Port Authority and EDC Revenue, Shepard Building Project, Series B, AMBAC
Insured, Pre-Refunded, 6.75%, 6/01/25 ........................................................... 2,000,000 2,305,660
Rhode Island State GO, Series A, FGIC Insured, 6.25%, 6/15/07 ..................................... 175,000 190,176
Rhode Island State Health and Educational Building Corp. Revenue,
Higher Educational Facilities, Roger Williams Facility, Connie Lee Insured,
Pre-Refunded, 7.25%, 11/15/24 ................................................................... 2,000,000 2,377,080
Hospital Financing Lifespan Obligation Group, MBIA Insured, 5.75%, 5/15/23 ..................... 1,750,000 1,890,035
-----------
23,024,808
-----------
SOUTH CAROLINA .4%
Charleston Waterworks and Sewer Revenue, Refunding and Improvement, AMBAC Insured,
6.00%, 1/01/16 .................................................................................. 250,000 265,963
Edgefield County School District, ETM, Refunding, FSA Insured, 8.50%, 2/01/01 ..................... 250,000 273,388
Lexington Water and Sewer Revenue, FSA Insured, 5.45%, 4/01/19 .................................... 2,320,000 2,409,204
Piedmont Municipal Power Agency Electric Revenue, Refunding, FGIC Insured, 6.25%, 1/01/21 ......... 200,000 232,674
Richland County Hospital Facilities Revenue, Community Provider, Pooled Loan Program,
ETM, Series A, FSA Insured, 7.125%, 7/01/17 ..................................................... 3,000,000 3,618,780
Spartanburg Sanitation Sewer District Sewer System Revenue, Implementation, MBIA Insured,
5.50%, 6/01/27 .................................................................................. 500,000 517,910
-----------
7,317,919
-----------
SOUTH DAKOTA 1.0%
Brookings COP, AMBAC Insured, 5.10%, 12/01/18 ..................................................... 5,000,000 4,968,850
Grant County PCR, Refunding, MBIA Insured, 5.90%, 6/01/23 ......................................... 4,800,000 5,074,848
Lawrence County COP, Courthouse, FSA Insured, Pre-Refunded, 7.65%, 7/01/10 ........................ 2,000,000 2,151,640
Sioux Falls Medical Clinic Revenue, AMBAC Insured, 8.00%, 9/01/08 ................................. 2,095,000 2,138,618
South Dakota Lease Revenue, Series A, FSA Insured, 6.75%, 12/15/16 ................................ 2,720,000 3,330,858
South Dakota State University Revenue, Housing and Auxiliary Facilities, Refunding,
Series A, MBIA Insured, 5.50%, 4/01/17 .......................................................... 20,000 20,560
-----------
17,685,374
-----------
TENNESSEE 1.1%
Greater Tennessee Housing Assistance Revenue, Section 8, Refunding, Series A, MBIA
Insured, 6.00%, 7/01/24 ......................................................................... 1,420,000 1,468,947
Johnson City Health and Educational Revenue, Medical Center Hospital, Refunding and
Improvement, MBIA Insured,
5.125%, 7/01/25 ................................................................................ 5,000,000 4,897,050
5.25%, 7/01/28 ................................................................................. 8,500,000 8,461,495
Johnson County PBA Revenue, Public Facilities, MBIA Insured, 5.125%, 9/01/20 ...................... 1,665,000 1,678,070
Metropolitan Nashville Airport Authority Revenue, Series C, FGIC Insured, 6.60%, 7/01/15 .......... 200,000 215,222
Trenton Special School District, AMBAC Insured, 5.75%, 11/01/20 ................................... 3,000,000 3,369,030
-----------
20,089,814
-----------
TEXAS 8.3%
Austin Combined Utility System Revenue,
BIG Insured, Pre-Refunded, 8.625%, 11/15/17 .................................................... 1,000,000 1,150,520
Series A, BIG Insured, Pre-Refunded, 8.00%, 11/15/16 ........................................... 3,000,000 3,289,920
Austin Utility System Revenue,
FGIC Insured, 6.00%, 5/15/15 ................................................................... 35,000 36,164
Refunding, FGIC Insured, 6.00%, 5/15/15 ........................................................ 15,000 15,324
Bell County Health Facilities Development Corporate Revenue, Hospital Cook Children's
Medical, Refunding, FSA Insured, 5.30%, 12/01/23 ................................................. 5,000,000 5,065,050
Bexar County HFC Revenue, Series A, GNMA Secured, 8.20%, 4/01/22 .................................. 2,780,000 2,867,209
Brazos River Authority Revenue, Houston Light and Power Co.. Project, Refunding, Series A,
AMBAC Insured, 6.70%, 3/01/17 ................................................................... 2,000,000 2,172,860
Coastal Bend Health Facilities Development Corp., Series B, AMBAC Insured, 6.30%, 1/01/17 ......... 12,230,000 13,255,608
Dallas HFC, SFMR, GNMA Secured, 7.85%, 12/01/10 ................................................... 675,000 706,394
East Texas HFC, SFMR, Series 1990, GNMA Secured, 7.85%, 12/01/10 .................................. 540,000 566,514
Faulkey Gully MUD, GO, AMBAC Insured, 6.625%, 3/01/07 ............................................. 1,520,000 1,646,637
Fort Bend County Levee ID No. 011, AMBAC Insured, 6.00%,
9/01/21 ........................................................................................ 1,395,000 1,530,622
9/01/22 ........................................................................................ 1,495,000 1,640,344
9/01/23 ........................................................................................ 1,610,000 1,765,574
</TABLE>
60
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
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LONG TERM INVESTMENTS (CONT.)
TEXAS (CONT.)
Grand Prairie Health Facilities Development Corp., Dallas/Fort Worth Medical Center
Project, Refunding, AMBAC Insured, 6.875%, 11/01/10 .............................................. $ 2,700,000 $ 2,834,163
Harris County Hospital District Mortgage Revenue, Refunding, AMBAC Insured, 7.40%, 2/15/10 ......... 2,350,000 2,858,846
Harris County Toll Road,
senior lien, Series A, AMBAC Insured, 6.50%, 8/15/17 ............................................ 1,580,000 1,732,565
senior lien, Series B, AMBAC Insured, 6.625%, 8/15/17 ........................................... 240,000 243,636
Series A, FGIC Insured, 6.50%, 8/15/11 .......................................................... 35,000 38,119
Houston Airport System Revenue, sub. lien, Series A, FGIC Insured, 6.75%, 7/01/21 .................. 2,500,000 2,681,125
Houston Water and Sewer System Revenue,
junior lien, Refunding, Series C, AMBAC Insured, 6.375%, 12/01/17 ............................... 935,000 1,005,574
junior lien, Refunding, Series C, MBIA Insured, 5.75%, 12/01/15 ................................. 500,000 533,320
Series A, MBIA Insured, 6.375%, 12/01/22 ........................................................ 1,840,000 2,019,455
Series A, MBIA Insured, Pre-Refunded, 6.375%, 12/01/22 .......................................... 4,540,000 5,056,788
Lubbock HFC, SFMR, Mortgage Extension Program, Refunding, Series B, 8.875%, 12/01/12 ............... 665,000 666,230
Matagorda County Navigation District No. 1 PCR, Central Power and Light Co. Project,
AMBAC Insured, 7.50%, 12/15/14 .................................................................. 200,000 212,082
Refunding, Series E, MBIA Insured, 6.10%, 7/01/28 ............................................... 12,850,000 13,442,000
Matagorda County Navigation District No. 1 Revenue,
Houston Industries Inc. Project, Refunding, Series A, MBIA Insured, 5.25%, 11/01/29 ............. 3,185,000 3,193,026
Houston Industries Inc. Project, Refunding, Series B, MBIA Insured, 5.15%, 11/01/29 ............. 2,750,000 2,741,393
Houston Light and Power Co., Refunding, Series C, FGIC Insured, 7.125%, 7/01/19 ................. 2,000,000 2,063,160
Houston Light and Power Co., Refunding, Series E, FGIC Insured, 7.20%, 12/01/18 ................. 100,000 104,614
Palo Duro River Authority, Refunding, FSA Insured, 6.375%, 8/01/08 ................................. 6,000,000 6,066,480
Portland Community Center Complex Development Corp. Sales Tax Revenue, Refunding, AMBAC
Insured, 5.45%, 2/15/25 .......................................................................... 1,450,000 1,485,018
Sabine River Authority PCR, Texas Utilities Electric Co. Project, Collateralized, Refunding,
FGIC Insured, 6.55%, 10/01/22 .................................................................... 3,250,000 3,537,853
San Antonio Water Revenue,
Refunding and Improvement, MBIA Insured, 5.60%, 5/15/21 ......................................... 3,250,000 3,404,343
senior lien, MBIA Insured, 6.50%, 5/15/10 ....................................................... 2,920,000 3,166,360
San Marcos Waterworks and Sewer Systems Revenue, Series 1998, FSA Insured,
5.125%, 8/15/20 ................................................................................. 2,870,000 2,870,890
San Patricio County COP, MBIA Insured, Pre-Refunded, 6.60%, 4/01/07 ................................ 2,500,000 2,716,575
Smithville HDC, Mortgage Revenue, Smithville Retirement, Refunding, Series A, MBIA Insured,
6.40%, 1/01/22 .................................................................................. 1,055,000 1,124,187
Southeast HDC Mortgage Revenue, Stonegate Retirement, MBIA Insured, 6.40%, 1/01/24 ................. 1,170,000 1,258,405
Tarrant County Health Facilities Development Corp. Health Systems Revenue, Harris
Methodist Health, ETM, MBIA Insured, 6.00%, 9/01/24 .............................................. 3,250,000 3,527,778
Tarrant County Health Facilities Development Corp. Hospital Revenue, Fort Worth Osteopathic
Hospital, MBIA Insured, 5.125%, 5/15/21 .......................................................... 2,905,000 2,883,852
Texas Health Facilities Development Corp. Hospital Revenue, All Saints Episcopal Hospitals,
Refunding, Series B, MBIA Insured,
6.25%, 8/15/22 .................................................................................. 2,500,000 2,724,075
6.375%, 8/15/23 ................................................................................. 4,885,000 5,347,268
Texas State Turnpike Authority Revenue, Dallas North Tollway, Refunding, AMBAC Insured,
5.00%, 1/01/20 ................................................................................... 7,250,000 7,129,723
Texas Water Resources Finance Authority Revenue, AMBAC Insured, 7.50%, 8/15/13 ..................... 5,185,000 5,279,626
Travis County HFC, SFMR, GNMA Secured, 8.20%, 4/01/22 .............................................. 2,435,000 2,510,022
Tyler Health Facilities Development Corp. Hospital Revenue, East Texas Medical Center Project,
Series B, FSA Insured, 5.50%, 11/01/17 .......................................................... 1,000,000 1,051,840
Series C, FSA Insured, 5.60%, 11/01/27 .......................................................... 1,430,000 1,503,759
Series D, FSA Insured, 5.375%, 11/01/27 ......................................................... 14,500,000 14,404,445
------------
149,127,335
------------
US TERRITORIES .1%
District of Columbia HFA, RMR, Series 1986-1, FGIC Insured, 7.75%, 9/01/16 ...................... 740,000 747,400
------------
UTAH 1.3%
Intermountain Power Agency Power Supply Revenue, Refunding,
Series A, AMBAC Insured, 5.50%, 7/01/20 ......................................................... 4,680,000 4,810,338
Series B, MBIA Insured, 5.75%, 7/01/19 .......................................................... 3,250,000 3,548,058
Provo Electric System Revenue, ETM, Refunding, Series A, AMBAC Insured, 10.375%, 9/15/15 ........... 40,000 58,632
Utah County Hospital Revenue, IHC Health Services Inc., MBIA Insured, 5.25%,
8/15/21 ......................................................................................... 5,000,000 5,044,350
8/15/26 ......................................................................................... 5,000,000 5,033,150
</TABLE>
61
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
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LONG TERM INVESTMENTS (CONT.)
UTAH (CONT.)
Utah State Board of Regents Student Loan Revenue, Series H, AMBAC Insured, 6.70%, 11/01/15 .......... $ 1,080,000 $ 1,162,814
White City Water Implementation District GO, Refunding, AMBAC Insured, 5.30%, 2/01/25 ............... 3,435,000 3,476,873
-----------
23,134,215
-----------
VERMONT .7%
Swanton Village Electric System Revenue, Refunding, MBIA Insured, 5.75%, 12/01/19 ................... 1,740,000 1,884,959
Vermont COP, MBIA Insured, Pre-Refunded, 7.25%, 6/15/11 ............................................. 2,205,000 2,357,145
Vermont HFA, Home Mortgage Purchase, Series B, MBIA Insured, 7.60%, 12/01/24 ........................ 6,630,000 6,630,000
Vermont Municipal Bond Bank, Series 2, FSA Insured, 6.25%, 12/01/19 ................................. 1,000,000 1,073,300
-----------
11,945,404
-----------
VIRGINIA 1.5%
Chesapeake Bay Bridge and Tunnel Commission District Revenue, General Resolution, Refunding,
MBIA Insured, 5.75%, 7/01/25 ..................................................................... 9,850,000 10,363,284
Chesapeake IDA, Public Facilities Lease Revenue, Chesapeake Jail Project, MBIA Insured, 6.00%,
6/01/12 .......................................................................................... 5,000,000 5,482,350
Danville IDA, Hospital Revenue, Danville Regional Medical Center, FGIC Insured, Pre-Refunded,
6.50%, 10/01/24 .................................................................................. 1,000,000 1,142,630
Hampton Roads Regional Jail Authority Jail Facilities Revenue, Series A, MBIA Insured, 5.00%,
7/01/28 .......................................................................................... 3,405,000 3,337,990
Spotsylvania County Water and Sewer System Revenue GO, MBIA Insured, 5.40%, 6/01/27 ................. 3,850,000 3,965,731
Winchester IDA, Educational Facilities Revenue, First Mortgage, Shenandoah University Project,
MBIA Insured,
5.00%, 10/01/18 .................................................................................. 1,000,000 992,560
5.25%, 10/01/28 .................................................................................. 2,420,000 2,451,339
-----------
27,735,884
-----------
WASHINGTON 5.1%
Bellingham Housing Authority Revenue, Cascade Meadows Project, Refunding, MBIA Insured, 5.20%,
11/01/27 ......................................................................................... 4,000,000 4,014,800
Douglas County PUD No. 1 Electric Systems Revenue, MBIA Insured, 6.00%, 1/01/15 ..................... 900,000 988,686
Everett COP, Series A, AMBAC Insured, Pre-Refunded, 7.25%, 4/01/09 .................................. 850,000 915,085
Grant County PUD No. 2, Wanapum Hydroelectric Revenue, Second Series, Series B, AMBAC Insured,
6.75%, 1/01/23 ................................................................................... 2,000,000 2,152,800
King County Public Hospital District No. 001 Hospital Facilities Revenue, Valley Medical Center,
King County Sewer, MBIA Insured, 6.125%, 1/01/33 ................................................. 3,000,000 3,234,270
Kitsap County School District No. 100-C, MBIA Insured, Pre-Refunded, 6.60%, 12/01/08 ................ 1,015,000 1,102,534
Klickitat County PUD No. 001 Electric Revenue, FGIC Insured,
5.65%, 10/01/15 .................................................................................. 1,000,000 1,061,900
5.75%, 10/01/27 .................................................................................. 1,000,000 1,066,150
Mason County GO, School District No. 402, Pioneer, MBIA Insured, Pre-Refunded, 6.60%, 12/01/11 ...... 1,040,000
1,186,058
Pierce County GO, School District No. 003 Puyallup, FGIC Insured, 5.70%, 12/01/15 ................... 1,000,000 1,062,840
Port of Longview GO, MBIA Insured, 6.00%, 11/01/15 .................................................. 2,000,000 2,191,100
Seatac Storm Water Revenue, MBIA Insured, 6.50%, 12/01/13 ........................................... 2,890,000 3,219,142
Seattle Municipality Metropolitan Sewer Revenue, Series W, MBIA Insured, Pre-Refunded, 6.30%,
1/01/33 .......................................................................................... 11,000,000 12,202,520
Seattle Water System Revenue, FGIC Insured, 5.625%, 8/01/26 ......................................... 2,000,000 2,132,180
Snohomish County PUD No. 1 Electric Revenue, Generation System, ETM, FGIC Insured, 6.65%,
1/01/16 .......................................................................................... 4,250,000 4,617,923
Spokane Public Facilities District Hotel Motel and Sales Use Tax Revenue, Multi-Purpose Arena
Project, AMBAC Insured, 6.50%, 1/01/18 ........................................................... 5,000,000 5,364,350
Tacoma Electric System Revenue, Refunding,
AMBAC Insured, 6.25%, 1/01/11 .................................................................... 500,000 536,615
FGIC Insured, 6.25%, 1/01/15 ..................................................................... 6,190,000 6,766,103
Tacoma GO, Series A, MBIA Insured, 5.625%, 12/01/22 ................................................. 3,400,000 3,541,406
Thurston and Pierce Counties Community Schools, Series B, AMBAC Insured, 6.65%, 12/01/09 ............ 1,305,000 1,464,458
Washington State Health Care Facilities Authority Revenue, Swedish Health Services, Refunding,
AMBAC Insured, 5.50%, 11/15/28 ................................................................... 15,370,000 15,837,094
Washington State Housing Finance Commission MFMR, Series A, GNMA Secured, 7.70%, 7/01/32 ............ 2,850,000 2,939,205
Washington State Public Power Supply System Revenue, Nuclear Project No. 1,
Refunding, Series A, MBIA Insured, 6.25%, 7/01/17 ................................................ 420,000 450,912
Series C, FGIC Insured, Pre-Refunded, 7.75%, 7/01/08 ............................................. 2,500,000 2,692,775
Washington State University Revenues, Housing and Dining System, Refunding, MBIA Insured, 6.40%,
10/01/24 ......................................................................................... 6,130,000 6,794,431
Western Washington University Revenue, Housing and Dining System,
MBIA Insured, 6.375%, 10/01/22 ................................................................... 80,000 86,106
Refunding, 6.375%, 10/01/21 ...................................................................... 770,000 808,369
Refunding, MBIA Insured, 6.70%, 10/01/11 ......................................................... 235,000 249,852
</TABLE>
62
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
WASHINGTON (CONT.)
Whatcom County School District No. 501, GO, Bellingham, FGIC Insured, 6.125%, 12/01/13 .......... $ 2,000,000 $ 2,237,820
Yakima-Tieton Irrigation District Revenue, Refunding, FSA Insured, 6.20%, 6/01/19 ............... 350,000 379,656
--------------
91,297,140
--------------
WEST VIRGINIA 1.5%
Harrison County Community Solid Waste Disposal Revenue, Potomac Edison Co., Series C, AMBAC
Insured, 6.75%, 8/01/24 ...................................................................... 11,560,000 12,877,493
Monongalia County Building Community Hospital Revenue, Monongalia General Hospital,
Refunding, Series B, MBIA Insured, 6.50%, 7/01/17 ............................................ 1,000,000 1,066,190
West Virginia State GO, Series A, FGIC Insured, 5.00%, 11/01/21 ................................. 5,000,000 4,867,450
West Virginia State University Revenue, Refunding, AMBAC Insured, 6.00%, 4/01/12 ................ 2,250,000 2,443,545
West Virginia State Water Development Authority Revenue,
Loan Program II, Series B, FSA Insured, Pre-Refunded, 7.50%, 11/01/29 ........................ 3,000,000 3,147,390
Loan Program, Refunding, Series A, FSA Insured, 7.00%, 11/01/25 .............................. 2,750,000 2,980,093
--------------
27,382,161
--------------
WISCONSIN 1.6%
Superior Limited Obligation Revenue, Midwest Energy Resources, Refunding, Series E,
FGIC Insured, 6.90%, 8/01/21 ................................................................. 3,000,000 3,772,350
Wisconsin State Health and Educational Facilities Authority Revenue,
Aurora Health Care Inc., Refunding, MBIA Insured, 5.25%, 8/15/27 ............................. 20,275,000 20,404,152
SSM Health Care, Refunding, Series AA, MBIA Insured, 6.25%, 6/01/20 .......................... 500,000 532,720
Wisconsin State Health and Educational Revenue,
Community Provider Program, Series A, FSA Insured, 7.50%, 1/15/04 ............................ 1,965,000 2,031,869
Series A, FSA Insured, 7.50%, 1/15/09 ........................................................ 2,000,000 2,066,020
--------------
28,807,111
--------------
WYOMING 1.3%
Gillette Health Facilities Revenue, Lutheran Hospital and Home Society, Refunding, MBIA
Insured, 5.90%, 1/01/16 ...................................................................... 500,000 532,760
Natrona County Hospital Revenue, Wyoming Medical Center Projects, Refunding, AMBAC Insured,
6.00%, 9/15/24 ............................................................................... 9,885,000 10,699,623
University of Wyoming Revenues, Facilities, MBIA Insured, 7.10%, 6/01/10 ........................ 2,245,000 2,335,631
Wyoming CDA, SFMR, Series A, AMBAC Insured, 6.00%, 6/01/23 ...................................... 6,750,000 6,997,793
Wyoming Municipal Power Agency Power Supply System Revenue, Refunding, Series A, MBIA
Insured, 6.125%, 1/01/16 ..................................................................... 2,000,000 2,154,040
--------------
22,719,847
--------------
TOTAL LONG TERM INVESTMENTS (COST $1,662,859,661) ............................................... 1,773,752,781
--------------
(a)SHORT TERM INVESTMENTS .5%
Arkansas State Development Finance Authority Higher Education, Capital Asset, Series A, FGIC
Insured, Weekly VRDN and Put, 3.00%, 12/01/15 ................................................ 100,000 100,000
Connecticut State Special Tax Obligation Revenue, Weekly VRDN and Put, 2.40%, 12/01/10 .......... 500,000 500,000
Emmaus General Authority Revenue, FSA Insured, Weekly VRDN and Put, 3.00%, 12/01/28 ............. 500,000 500,000
Irvine Ranch Water District COP, Capital Improvement Project, Daily VRDN and Put, 2.85%, 8/01/16 2,600,000 2,600,000
Maricopa County PCC, PCR, Arizona Public Service Co., Refunding, Series D, Daily VRDN and Put,
3.05%, 5/01/29 ............................................................................... 2,250,000 2,250,000
Michigan State Strategic Fund Limited Obligation Revenue, Detroit Edison Co., Reserve 1,
Refunding, Daily VRDN and Put, 2.95%, 9/01/30 ................................................ 1,600,000 1,600,000
New York City Municipal Water Finance Authority Water and Sewer System Revenue, Series C, FGIC
Insured, Daily VRDN and Put, 3.00%, 6/15/23 .................................................. 1,400,000 1,400,000
--------------
TOTAL SHORT TERM INVESTMENTS (COST $8,950,000) .................................................. 8,950,000
--------------
TOTAL INVESTMENTS (COST $1,671,809,661) 99.5% ................................................... 1,782,702,781
OTHER ASSETS, LESS LIABILITIES .5% .............................................................. 9,477,293
--------------
NET ASSETS 100.0% ............................................................................... $1,792,180,074
==============
</TABLE>
See glossary of terms on page 89.
(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.
63
FRANKLIN TAX-FREE TRUST
Financial Highlights
FRANKLIN MASSACHUSETTS INSURED 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 ........ $ 11.75 $ 11.54 $ 11.65 $ 11.34 $ 11.81
----------- ----------- ----------- --------- -----------
Income from investment operations:
Net investment income .................... .59 .61 .63 .66 .66
Net realized and unrealized gains (losses) .03 .35 (.10) .31 (.47)
----------- ----------- ----------- --------- -----------
Total from investment operations .......... .62 .96 .53 .97 .19
----------- ----------- ----------- --------- -----------
Less distributions from:
Net investment income .................... (.59) (.61) (.64)(2) (.66) (.66)
In excess of net investment income ....... -- (.01) -- -- --
Net realized gains ....................... (.07) (.13) -- -- --
----------- ----------- ----------- --------- -----------
Total distributions ....................... (.66) (.75) (.64) (.66) (.66)
----------- ----------- ----------- --------- -----------
Net asset value, end of year .............. $ 11.71 $ 11.75 $ 11.54 $ 11.65 $ 11.34
=========== =========== =========== ========= ===========
Total return* ............................. 5.36% 8.50% 4.75% 8.80% 1.83%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ........... $ 340,109 $ 328,147 $ 325,065 $ 301,529 $ 288,331
Ratios to average net assets:
Expenses ................................. .68% .68% .68% .69% .67%
Net investment income .................... 4.99% 5.21% 5.51% 5.67% 5.89%
Portfolio turnover rate ................... 6.80% 30.46% 29.22% 10.29% 16.90%
CLASS C
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ........ $ 11.80 $ 11.59 $ 11.69 $ 11.36
---------- ---------- ----------- ---------
Income from investment operations:
Net investment income .................... .52 .55 .57 .50
Net realized and unrealized gains (losses) .03 .34 (.09) .32
---------- ---------- ----------- ---------
Total from investment operations .......... .55 .89 .48 .82
---------- ---------- ----------- ---------
Less distributions from:
Net investment income .................... (.52) (.55) (.58)(2) (.49)
Net realized gains ....................... (.07) (.13) -- --
---------- ---------- ----------- ---------
Total distributions ....................... (.59) (.68) (.58) (.49)
---------- ---------- ----------- ---------
Net asset value, end of year .............. $ 11.76 $ 11.80 $ 11.59 $ 11.69
========== ========== =========== =========
Total return* ............................. 4.74% 7.86% 4.22% 7.36%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ........... $ 26,271 $ 13,937 $ 6,378 $ 2,759
Ratios to average net assets:
Expenses ................................. 1.24% 1.25% 1.25% 1.26%**
Net investment income .................... 4.44% 4.59% 4.96% 5.06%**
Portfolio turnover rate ................... 6.80% 30.46% 29.22% 10.29%
</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.
See notes to financial statements.
64
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN MASSACHUSETTS INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS 98.2%
Amesbury GO, FGIC Insured, 5.00%, 3/15/18 ....................................................... $ 1,500,000 $ 1,503,765
Ashburnham and Westminister Regional School District, MBIA Insured, 6.00%, 12/15/13 ............ 2,700,000 2,950,236
Attleboro Municipal Purpose GO, AMBAC Insured, 6.00%,
7/01/11 ..................................................................................... 1,045,000 1,146,950
7/01/12 ..................................................................................... 1,045,000 1,144,327
7/01/13 ..................................................................................... 685,000 748,390
7/01/14 ..................................................................................... 755,000 822,610
Blackstone-Milville School District, AMBAC Insured, Pre-Refunded, 6.50%,
5/01/08 ..................................................................................... 705,000 779,244
5/01/09 ..................................................................................... 750,000 828,983
5/01/10 ..................................................................................... 795,000 878,721
Boston GO, Refunding, Series B, FGIC Insured, 5.25%, 4/01/14 ................................... 3,335,000 3,474,170
Boston Revenue, Boston City Hospital, Refunding, Series B, MBIA Insured, 5.75%, 2/15/23 ........ 10,500,000 10,840,305
Boston Water and Sewer Commission Revenue, Series A, GNMA Secured, Pre-Refunded, 7.10%, 11/01/19 1,400,000 1,465,142
Central Berkshire GO, School District, MBIA Insured, Pre-Refunded, 7.25%, 6/01/08 .............. 1,095,000 1,169,657
Chelsea GO, State Qualified, Refunding, AMBAC Insured, 5.125%, 6/15/16 ......................... 1,750,000 1,783,688
Framingham Housing Authority Mortgage Revenue, Beaver Terrace Apartments, Series A,
GNMA Secured, 6.65%, 2/20/32 ................................................................ 1,650,000 1,744,958
Greenfield GO, MBIA Insured, Pre-Refunded, 6.50%,
10/15/08 .................................................................................... 500,000 542,620
10/15/09 .................................................................................... 500,000 540,010
Holyoke GO, School Project Loans, MBIA Insured, Pre-Refunded, 8.05%, 6/15/04 ................... 1,000,000 1,164,950
Hudson GO, MBIA Insured, 6.00%,
5/15/13 ..................................................................................... 250,000 272,748
5/15/14 ..................................................................................... 240,000 261,134
Lenox GO, Refunding, AMBAC Insured,
6.60%, 10/15/11 ............................................................................. 1,000,000 1,084,830
6.625%, 10/15/15 ............................................................................ 500,000 541,160
Leominster GO, MBIA Insured, Pre-Refunded, 7.50%, 4/01/09 ...................................... 450,000 479,268
Ludlow GO, School Project, Limited Tax, MBIA Insured,
7.30%, 11/01/07 ............................................................................. 210,000 258,044
7.30%, 11/01/08 ............................................................................. 210,000 260,679
7.40%, 11/01/09 ............................................................................. 210,000 265,188
Lynn Water and Sewer Commission General Revenue, Series A,
FSA Insured, 5.125%, 12/01/17 ............................................................... 3,000,000 3,033,030
MBIA Insured, Pre-Refunded, 7.25%, 12/01/10 ................................................. 4,000,000 4,344,560
Mansfield Municipal Purpose Loan, FGIC Insured, 5.125%, 8/15/17 ................................ 1,685,000 1,711,539
Martha's Vineyard Regional High School District No. 100, AMBAC Insured,
6.55%, 12/15/10 ............................................................................. 830,000 945,901
6.60%, 12/15/11 ............................................................................. 725,000 831,321
6.65%, 12/15/12 ............................................................................. 880,000 1,011,296
6.70%, 12/15/14 ............................................................................. 210,000 240,813
Mashpee GO, MBIA Insured, 5.50%, 2/01/17 ....................................................... 2,000,000 2,106,120
Mashpee Water District GO, MBIA Insured, 6.40%, 10/15/12 ....................................... 500,000 548,850
Massachusetts Bay Transportation Authority COP, BIG Insured, 7.75%, 1/15/06 .................... 2,500,000 3,049,500
Massachusetts Bay Transportation Authority Revenue, General Transportation System,
Series A, FSA Insured, Pre-Refunded, 5.625%, 3/01/26 ........................................ 1,470,000 1,630,377
Series B, AMBAC Insured, 5.375%, 3/01/25 .................................................... 4,570,000 4,651,666
Massachusetts Education Loan Authority Revenue, Issue D, Series A, MBIA Insured, 7.25%, 1/01/09 1,740,000 1,829,819
Massachusetts Municipal Wholesale Electric Co. Power Supply System Revenue, Series D, MBIA
Insured, 6.125%, 7/01/19 .................................................................... 4,395,000 4,717,197
Massachusetts State GO, Series B,
AMBAC Insured, 6.50%, 8/01/11 ............................................................... 1,665,000 1,786,379
MBIA Insured, 6.50%, 8/01/11 ................................................................ 855,000 917,330
Massachusetts State Health and Educational Facilities Authority Revenue,
Bay State Medical Center, Refunding, Series D, FGIC Insured, 6.00%, 7/01/15 ................. 1,500,000 1,610,385
Bay State Medical Center, Series E, FSA Insured, 6.00%, 7/01/26 ............................. 5,000,000 5,398,500
Bentley College, Series I, MBIA Insured, 6.125%, 7/01/17 .................................... 1,250,000 1,336,400
Berkshire Health System, Series D, MBIA Insured, 6.00%, 10/01/19 ............................ 5,500,000 5,965,025
Beverly Hospital, Lot 1, Refunding, Series D, MBIA Insured, 7.30%, 7/01/13 .................. 1,900,000 1,960,439
</TABLE>
65
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN MASSACHUSETTS INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
Massachusetts State Health and Educational Facilities Authority Revenue, (cont.)
Beverly Hospital, Lot 2, Series D, MBIA Insured, Pre-Refunded, 7.30%, 7/01/19 ..................... $ 4,000,000 $ 4,135,920
Boston College, Series J, FGIC Insured, 6.625%, 7/01/21 ........................................... 20,000 21,608
Boston College, Series J, FGIC Insured, Pre-Refunded, 6.625%, 7/01/21 ............................. 2,230,000 2,430,745
Boston College, Series L, 5.00%, 6/01/26 .......................................................... 5,000,000 4,897,600
Brigham and Women's Hospital, Series C, MBIA Insured, Pre-Refunded, 7.00%, 6/01/18 ................ 500,000 514,840
Cable Housing and Health Services, Series A, MBIA Insured, 5.25%, 7/01/23 ......................... 1,000,000 1,001,070
Central New England Health, Series B, AMBAC Insured, 5.20%, 8/01/28 ............................... 2,500,000 2,466,500
Children's Hospital, Refunding, Series E, AMBAC Insured, 6.20%, 10/01/16 .......................... 2,200,000 2,353,714
Community College Program, Series A, Connie Lee Insured, Pre-Refunded, 6.50%, 10/01/09 ............ 1,000,000 1,114,100
Cooley Dickinson Hospital, Series B, AMBAC Insured, 5.50%, 11/15/18 ............................... 5,595,000 5,781,985
Cooley Dickinson Hospital, Series B, AMBAC Insured, 5.50%, 11/15/25 ............................... 7,720,000 7,923,268
Dana-Farber Cancer Institute, Refunding, Series F, FGIC Insured, 6.00%, 12/01/15 .................. 1,000,000 1,078,220
Lahey Clinic Medical Center, Series B, MBIA Insured, 5.375%, 7/01/23 .............................. 26,730,000 26,977,520
Massachusetts General Hospital, Refunding, Series F, AMBAC Insured, 6.00%, 7/01/15 ................ 2,500,000 2,683,975
Massachusetts General Hospital, Series F, AMBAC Insured, 6.25%, 7/01/20 ........................... 11,465,000 12,572,175
McLean Hospital, Refunding, Series C, FGIC Insured, 6.625%, 7/01/15 ............................... 1,280,000 1,400,602
Milton Hospital, Series B, MBIA Insured, 7.00%, 7/01/16 ........................................... 2,400,000 2,539,824
Mt. Auburn Hospital, Series B-1, MBIA Insured, 6.30%, 8/15/24 ..................................... 6,500,000 7,225,205
New England Deaconess Hospitals, Series D, AMBAC Insured, Pre-Refunded, 6.875%, 4/01/22 ........... 1,895,000 2,111,125
Newton-Wellesley Hospital, Series E, MBIA Insured, 6.00%, 7/01/18 ................................. 1,300,000 1,401,946
Newton-Wellesley Hospital, Series E, MBIA Insured, 6.00%, 7/01/25 ................................. 6,750,000 7,419,263
Northeastern University, Series D, AMBAC Insured, 7.125%, 10/01/10 ................................ 1,250,000 1,338,775
Northeastern University, Series E, MBIA Insured, 6.55%, 10/01/22 .................................. 3,900,000 4,287,738
Partners Healthcare System, Series A, MBIA Insured, 5.375%, 7/01/24 ............................... 5,000,000 5,080,850
Simmons College, Series C, MBIA Insured, 5.125%, 10/01/28 ......................................... 2,600,000 2,574,468
Springfield College, AMBAC Insured, 5.00%, 10/15/27 ............................................... 2,500,000 2,436,725
Stonehill College, MBIA Insured, 6.55%, 7/01/12 ................................................... 495,000 542,772
Stonehill College, Refunding, Series E, MBIA Insured, 6.60%, 7/01/20 .............................. 3,000,000 3,287,250
Stonehill College, Series D, AMBAC Insured, Pre-Refunded, 7.65%, 7/01/10 .......................... 1,025,000 1,103,423
Stonehill College, Series D, AMBAC Insured, Pre-Refunded, 7.70%, 7/01/20 .......................... 515,000 554,732
Stonehill College, Series E, MBIA Insured, Pre-Refunded, 6.55%, 7/01/12 ........................... 395,000 438,229
Stonehill College, Series F, AMBAC Insured, 5.75%, 7/01/26 ........................................ 1,690,000 1,776,477
Suffolk University, Series B, Connie Lee Insured, 6.35%, 7/01/22 .................................. 3,000,000 3,259,200
Tufts University, FGIC Insured, 5.95%, 8/15/18 .................................................... 5,000,000 5,328,150
University Hospital, Series C, MBIA Insured, Pre-Refunded, 7.25%, 7/01/19 ......................... 1,500,000 1,606,005
Wellesley College, Series F, 5.125%, 7/01/39 ...................................................... 5,000,000 5,001,900
Wentworth Institute of Technology, Series A, AMBAC Insured, Pre-Refunded, 7.40%, 4/01/10 .......... 1,820,000 1,936,462
Wheaton College, Series B, FSA Insured, Pre-Refunded, 7.25%, 7/01/19 .............................. 3,000,000 3,101,460
Williams College, Series F, MBIA Insured, 5.50%, 7/01/26 .......................................... 2,500,000 2,578,925
Massachusetts State HFA,
Housing Development, Series D, MBIA Insured, 5.40%, 6/01/20 ....................................... 4,270,000 4,338,021
Housing Revenue, SF, Series 53, MBIA Insured, 6.15%, 12/01/29 ..................................... 2,500,000 2,633,725
Housing Revenue, SF, Series 57, MBIA Insured, 5.55%, 6/01/25 ...................................... 5,080,000 5,162,855
Housing Revenue, SFMR, Series 18, MBIA Insured, 7.35%, 12/01/16 ................................... 1,500,000 1,570,590
MFHR, Section 8 Assisted, ETM, Series A, GNMA Secured, 7.00%, 4/01/21 ............................. 430,000 522,523
Massachusetts State Industrial Finance Agency Electrical Utility Revenue, Nantucket Electric Co.,
Series A, AMBAC Insured, 5.875%, 7/01/17 .......................................................... 4,000,000 4,279,600
Massachusetts State Industrial Finance Agency Revenue,
Babson College, Series A, MBIA Insured, Pre-Refunded, 6.375%, 10/01/09 ............................ 750,000 833,798
Babson College, Series A, MBIA Insured, Pre-Refunded, 6.50%, 10/01/22 ............................. 3,105,000 3,459,281
Brandeis University, Series C, MBIA Insured, 6.80%, 10/01/19 ...................................... 7,075,000 7,335,431
College of the Holy Cross, MBIA Insured, 5.00%, 9/01/23 ........................................... 2,050,000 2,001,887
College of the Holy Cross, Refunding, MBIA Insured, 5.625%, 3/01/26 ............................... 1,000,000 1,039,690
Combined Jewish Philanthropies, Refunding, Series A, AMBAC Insured, 6.375%, 2/01/15 ............... 2,010,000 2,222,578
Milton Academy, Series A, MBIA Insured, Pre-Refunded, 7.25%, 9/01/19 .............................. 1,000,000 1,040,920
Saint Marks School Issue, MBIA Insured, 5.375%, 1/01/21 ........................................... 2,665,000 2,712,570
Simons Rock College, AMBAC Insured, 5.50%, 6/01/17 ................................................ 1,000,000 1,045,330
Simons Rock College, AMBAC Insured, 5.50%, 6/01/27 ................................................ 1,560,000 1,606,675
</TABLE>
66
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN MASSACHUSETTS INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
Massachusetts State Industrial Finance Agency Revenue, (cont.)
Suffolk University, AMBAC Insured, 5.25%, 7/01/17 ............................................... $3,510,000 $3,571,355
Suffolk University, AMBAC Insured, 5.25%, 7/01/27 ............................................... 2,000,000 2,012,520
Trustees Deerfield Academy, 5.25%, 10/01/27 ..................................................... 2,800,000 2,854,544
Western New England College, AMBAC Insured, 5.00%, 7/01/28 ...................................... 4,000,000 3,885,880
WGBH Educational Foundation, AMBAC Insured, 5.00%, 3/01/28 ...................................... 1,250,000 1,220,088
Worcester Polytechnic Institute, Refunding, MBIA Insured, 5.125%, 9/01/17 ....................... 3,720,000 3,748,532
Worcester Polytechnic Institute, Refunding, Series II, MBIA Insured, 5.50%, 9/01/21 ............. 3,500,000 3,635,765
Worcester Polytechnic Institute, Refunding, Series II, MBIA Insured, 5.125%, 9/01/27 ............ 4,000,000 3,973,320
Massachusetts State Port Authority Revenue,
Series A, FGIC Insured, 7.50%, 7/01/20 .......................................................... 3,980,000 4,238,421
Series A, FGIC Insured, Pre-Refunded, 7.50%, 7/01/20 ............................................ 1,220,000 1,308,487
Special Facilities, Bosfuel Project, MBIA Insured, 5.625%, 7/01/19 .............................. 2,215,000 2,289,313
Special Facilities, Bosfuel Project, MBIA Insured, 5.625%, 7/01/22 .............................. 2,610,000 2,693,363
Special Facilities, Bosfuel Project, MBIA Insured, 5.625%, 7/01/27 .............................. 1,500,000 1,547,910
Special Facilities, Bosfuel Project, MBIA Insured, 5.75%, 7/01/29 ............................... 7,450,000 7,761,559
Special Facilities, Bosfuel Project, MBIA Insured, 5.75%, 7/01/39 ............................... 3,000,000 3,125,460
US Air Project, Series A, MBIA Insured, 5.875%, 9/01/23 ......................................... 4,500,000 4,770,315
Massachusetts State Turnpike Authority Metropolitan Highway System Revenue, Series A, MBIA
Insured, 5.00%,
1/01/37 ......................................................................................... 5,500,000 5,300,790
1/01/27 ......................................................................................... 4,500,000 4,387,455
Massachusetts State Turnpike Authority Western Turnpike Revenue, Series A, MBIA Insured,
5.55%, 1/01/17 .................................................................................. 1,865,000 1,875,164
Massachusetts State Water Resources Authority Revenue, Refunding, Series B, MBIA Insured,
5.00%, 3/01/22 .................................................................................. 1,500,000 1,465,920
Melrose Municipal Purpose GO, MBIA Insured,
6.00%, 8/15/11 .................................................................................. 200,000 219,838
6.05%, 8/15/12 .................................................................................. 200,000 220,114
6.10%, 8/15/13 .................................................................................. 200,000 220,286
6.10%, 8/15/14 .................................................................................. 200,000 219,672
Millis School Project GO, Unlimited Tax, AMBAC Insured, 7.40%,
5/01/06 ......................................................................................... 270,000 286,600
5/01/07 ......................................................................................... 270,000 286,440
5/01/08 ......................................................................................... 270,000 286,791
Norfolk GO, AMBAC Insured, 6.00%,
1/15/10 ......................................................................................... 450,000 487,278
1/15/11 ......................................................................................... 425,000 458,622
1/15/12 ......................................................................................... 375,000 406,065
1/15/13 ......................................................................................... 300,000 323,397
North Andover GO, FGIC Insured, 5.50%,
1/15/14 ......................................................................................... 850,000 905,327
1/15/15 ......................................................................................... 420,000 445,057
North Andover Municipal Purpose GO, Limited Tax, MBIA Insured, 7.40%, 9/15/09 ...................... 300,000 324,288
North Attleborough GO,
Limited Tax, AMBAC Insured, Pre-Refunded, 7.20%, 6/01/09 ........................................ 125,000 133,446
MBIA Insured, 5.70%, 1/15/16 .................................................................... 850,000 911,005
Northhampton GO, MBIA Insured, 5.60%, 5/15/17 ...................................................... 1,085,000 1,156,078
Puerto Rico HFC, SFMR, Portfolio No. 1, Series B, GNMA Secured, 7.65%, 10/15/22 .................... 285,000 298,828
Salem GO, AMBAC Insured,
6.70%, 8/15/05 .................................................................................. 425,000 461,104
6.80%, 8/15/07 .................................................................................. 500,000 543,390
Somerville Housing Authority Revenue, Clarendon Hill, GNMA Secured, 7.95%, 11/20/30 ................ 3,000,000 3,134,460
South Essex Sewer District GO,
AMBAC Insured, 6.25%, 11/01/11 .................................................................. 330,000 354,572
Series B, MBIA Insured, Pre-Refunded, 7.00%, 6/01/24 ............................................ 2,800,000 3,268,160
Southbridge GO, AMBAC Insured, 6.375%, 1/01/12 ..................................................... 2,375,000 2,580,058
Whately GO, AMBAC Insured,
6.20%, 1/15/07 .................................................................................. 215,000 231,579
6.30%, 1/15/08 .................................................................................. 215,000 232,215
6.40%, 1/15/10 .................................................................................. 200,000 216,602
</TABLE>
67
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN MASSACHUSETTS INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENT (CONT.)
Worcester GO, Refunding, Series E, MBIA Insured, 6.00%, 10/01/15 ................................ $ 1,335,000 $ 1,471,010
Worcester Municipal Purpose Loan, Refunding, Series A, AMBAC Insured, 5.25%, 8/01/16 ............ 1,410,000 1,452,145
------------
TOTAL LONG TERM INVESTMENTS (COST $338,031,592) ................................................. 359,869,032
------------
(a)SHORT TERM INVESTMENTS .7%
Massachusetts State Health and Educational Facilities Authority Revenue, Capital Assets
Program, Series D, MBIA Insured, Daily VRDN and Put, 3.15%, 1/01/35 (COST $2,600,000) .......... 2,600,000 2,600,000
------------
TOTAL INVESTMENTS (COST $340,631,592) 98.9% ..................................................... 362,469,032
OTHER ASSETS, LESS LIABILITIES 1.1% ............................................................. 3,911,451
------------
NET ASSETS 100.0% ............................................................................... $366,380,483
============
</TABLE>
See glossary of terms on page 89.
(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.
68
FRANKLIN TAX-FREE TRUST
Financial Highlights
FRANKLIN MICHIGAN INSURED 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 .......... $ 12.20 $ 12.00 $ 12.09 $ 11.76 $ 12.24
---------- ---------- ---------- ---------- ----------
Income from investment operations:
Net investment income ...................... .61 .63 .66 .68 .69
Net realized and unrealized gains (losses) . .13 .34 (.09) .34 (.48)
---------- ---------- ---------- ---------- ----------
Total from investment operations ............ .74 .97 .57 1.02 .21
---------- ---------- ---------- ---------- ----------
Less distributions from:
Net investment income ...................... (.61) (.63) (.66)(3) (.69)(2) (.69)
In excess of net investment income ......... -- (.01) -- -- --
Net realized gains ......................... (.05) (.13) -- -- --
---------- ---------- ---------- ---------- ----------
Total distributions ......................... (.66) (.77) (.66) (.69) (.69)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year ................ $ 12.28 $ 12.20 $ 12.00 $ 12.09 $ 11.76
========== ========== ========== ========== ==========
Total return* ............................... 6.23% 8.37% 4.90% 8.86% 1.87%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $1,161,345 $1,142,565 $1,111,537 $1,115,454 $1,037,717
Ratios to average net assets:
Expenses ................................... .63% .63% .62% .62% .61%
Net investment income ...................... 4.98% 5.24% 5.52% 5.65% 5.87%
Portfolio turnover rate ..................... 7.37% 20.08% 30.03% 9.38% 9.12%
CLASS C
- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 12.27 $ 12.07 $ 12.14 $ 11.77
---------- ---------- ---------- ----------
Income from investment operations:
Net investment income ...................... .55 .57 .59 .51
Net realized and unrealized gains (losses) . .13 .33 (.07) .37
---------- ---------- ---------- ----------
Total from investment operations ............ .68 .90 .52 .88
---------- ---------- ---------- ----------
Less distributions from:
Net investment income ...................... (.54) (.57) (.59) (.51)
Net realized gains ......................... (.05) (.13) -- --
---------- ---------- ---------- ----------
Total distributions ......................... (.59) (.70) (.59) (.51)
---------- ---------- ---------- ----------
Net asset value, end of year ................ $ 12.36 $ 12.27 $ 12.07 $ 12.14
========== ========== ========== ==========
Total return* ............................... 5.71% 7.70% 4.44% 7.58%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $ 49,970 $ 32,873 $ 20,162 $ 6,683
Ratios to average net assets:
Expenses ................................... 1.19% 1.20% 1.19% 1.20%**
Net investment income ...................... 4.42% 4.67% 4.94% 5.03%**
Portfolio turnover rate ..................... 7.37% 20.08% 30.03% 9.38%
</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
$.002.
See notes to financial statements.
69
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN MICHIGAN INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS 98.3%
Allegan Public School, AMBAC Insured, Pre-Refunded, 5.75%, 5/01/22 ................................. $ 4,165,000 $ 4,637,353
Allendale Public School, MBIA Insured,
5.875%, 5/01/14 ................................................................................. 1,335,000 1,427,315
Pre-Refunded, 5.875%, 5/01/14 ................................................................... 665,000 736,202
School Building, Pre-Refunded, 6.00%, 5/01/24 ................................................... 3,750,000 4,173,338
Almont Community Schools, FGIC Insured, 5.50%, 5/01/26 ............................................. 1,925,000 1,982,192
Alpena Public Schools GO, MBIA Insured, 5.625%, 5/01/22 ............................................ 1,665,000 1,839,509
Anchor Bay School District, MBIA Insured, 5.50%, 5/01/26 ........................................... 7,380,000 8,090,104
Avondale School District, AMBAC Insured, 5.75%, 5/01/22 ............................................ 3,850,000 4,286,629
Bath Community Schools GO, Refunding, FGIC Insured, Pre-Refunded, 5.75%, 5/01/25 ................... 1,625,000 1,812,086
Battle Creek Downtown Development Authority, Refunding, MBIA Insured, 5.125%, 5/01/20 .............. 4,500,000 4,514,355
Berkley City School District, FGIC Insured,
5.625%, 1/01/15 ................................................................................. 2,060,000 2,165,266
6.00%, 1/01/19 .................................................................................. 2,125,000 2,274,834
Big Rapids Public School District, Building and Site, FGIC Insured, 5.625%, 5/01/25 ................ 1,470,000 1,532,901
Brandon School District, FGIC Insured, Pre-Refunded, 5.875%,
5/01/16 ......................................................................................... 5,540,000 6,241,087
5/01/26 ......................................................................................... 7,000,000 7,885,850
Breitung Township School District GO,
FSA Insured, 7.20%, 5/01/19 ..................................................................... 7,500,000 7,843,200
Refunding, MBIA Insured, 6.30%, 5/01/15 ......................................................... 2,935,000 3,168,773
Byron Center Public Schools, Refunding, MBIA Insured, 5.875%, 5/01/2024 ............................ 5,250,000 5,863,246
Cadillac Area Public Schools, FGIC Insured, 5.50%, 5/01/22 ......................................... 5,375,000 5,541,249
Caledonia Community Schools,
MBIA Insured, 5.85%, 5/01/22 .................................................................... 4,400,000 4,699,420
Refunding, AMBAC Insured, 6.625%, 5/01/14 ....................................................... 3,750,000 4,090,238
Refunding, AMBAC Insured, 5.50%, 5/01/22 ........................................................ 1,500,000 1,548,870
Calumet, Laurium and Keweenaw Public Schools GO, FSA Insured, Pre-Refunded, 5.875%, 5/01/20 ........ 875,000 972,300
Cedar Springs Public School District, MBIA Insured, Pre-Refunded, 5.875%,
5/01/19 ......................................................................................... 2,175,000 2,416,860
5/01/24 ......................................................................................... 3,875,000 4,296,251
Central Michigan University Revenues, FGIC Insured, 5.625%, 10/01/22 ............................... 2,500,000 2,768,750
Chelsea School District, FGIC Insured, Pre-Refunded, 5.875%, 5/01/25 ............................... 3,140,000 3,510,457
Clarkston Community Schools, MBIA Insured, 5.25%, 5/01/23 .......................................... 1,925,000 1,937,551
Coldwater Community Schools, MBIA Insured, Pre-Refunded,
6.20%, 5/01/15 .................................................................................. 1,100,000 1,243,495
6.30%, 5/01/23 .................................................................................. 1,700,000 1,929,670
De Witt Public Schools, AMBAC Insured,
5.70%, 5/01/21 .................................................................................. 6,905,000 7,664,343
5.50%, 5/01/26 .................................................................................. 5,500,000 6,029,210
Dearborn EDC Hospital Revenue, Oakwood Obligation Group,
Refunding, Series A, MBIA Insured, 5.25%, 8/15/21 ............................................... 1,000,000 1,014,120
Series A, FGIC Insured, 5.875%, 11/15/25 ........................................................ 4,400,000 4,729,340
Detroit GO, City School District, Series A, AMBAC Insured, 5.70%, 5/01/25 .......................... 14,000,000 15,726,060
Detroit Sewage Disposal Revenue, Refunding, Series B, MBIA Insured, 5.25%, 7/01/21 ................. 12,585,000 12,744,955
Detroit State Aid GO, AMBAC Insured, Pre-Refunded, 7.20%, 5/01/09 .................................. 6,000,000 6,160,140
Detroit Water Supply System Revenue,
FGIC Insured, Pre-Refunded, 7.25%, 7/01/20 ...................................................... 3,500,000 3,749,725
Refunding, FGIC Insured, 6.25%, 7/01/12 ......................................................... 5,000,000 5,369,600
Series A, MBIA Insured, 5.00%, 7/01/27 .......................................................... 5,000,000 4,859,450
Detroit/Wayne County Stadium Authority, FGIC Insured, 5.25%, 2/01/27 ............................... 5,000,000 5,034,350
Dexter Community Schools, Refunding, AMBAC Insured, 5.70%, 5/01/14 ................................. 1,050,000 1,113,473
East Detroit School District, Refunding, FGIC Insured, 6.10%, 5/01/16 .............................. 6,000,000 6,548,340
East Lansing Building Authority GO, Refunding, AMBAC Insured, 7.00%, 10/01/16 ...................... 1,250,000 1,298,525
Eastern Michigan University Revenue,
FGIC Insured, 5.50%, 6/01/27 .................................................................... 9,100,000 9,439,703
Refunding, AMBAC Insured, 6.375%, 6/01/14 ....................................................... 1,000,000 1,081,260
Eaton Rapids Public Schools, Building and Site, MBIA Insured, 5.50%, 5/01/20 ....................... 2,435,000 2,512,969
</TABLE>
70
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN MICHIGAN INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
Ecorse Public School District, FGIC Insured, 5.50%, 5/01/17 ......................................... $ 5,000,000 $ 5,217,150
Farmington Hills Hospital Finance Authority Revenue, Botsford General Hospital, Refunding,
Series A, MBIA Insured, 7.10%, 2/15/14 ........................................................... 10,140,000 11,041,852
Fenton Area Public School GO, FGIC Insured, 5.00%, 5/01/24 .......................................... 2,000,000 1,957,820
Ferndale School District GO,
FGIC Insured, 5.50%, 5/01/22 ..................................................................... 4,525,000 4,680,886
Refunding, FGIC Insured, 5.375%, 5/01/21 ......................................................... 4,185,000 4,260,539
Ferris State College Revenue, AMBAC Insured, Pre-Refunded,
6.15%, 10/01/14 .................................................................................. 1,000,000 1,121,430
6.25%, 10/01/19 .................................................................................. 1,000,000 1,125,610
Ferris State University Revenue, AMBAC Insured, Pre-Refunded,
5.75%, 10/01/17 .................................................................................. 2,500,000 2,799,150
5.85%, 10/01/22 .................................................................................. 2,500,000 2,816,175
5.90%, 10/01/26 .................................................................................. 6,600,000 7,457,208
Fowlerville Community School District,
MBIA Insured, 5.60%, 5/01/21 ..................................................................... 2,000,000 2,206,180
Refunding, FGIC Insured, 5.75%, 5/01/20 .......................................................... 2,150,000 2,262,359
Gibraltar School District GO, FSA Insured, Pre-Refunded, 7.00%, 5/01/15 ............................. 4,000,000 4,025,840
Gladstone Area Public Schools GO, AMBAC Insured, 5.50%, 5/01/26 ..................................... 1,500,000 1,570,110
Godfrey-Lee Public School District GO, MBIA Insured, 5.50%, 5/01/27 ................................. 1,150,000 1,185,731
Gogebic-Iron Wastewater Authority Wastewater Treatment System Revenue, Refunding, MBIA Insured,
5.95%, 1/01/15 ................................................................................... 1,015,000 1,088,567
Grand Haven Area Public Schools GO, Refunding, MBIA Insured, 6.05%, 5/01/14 ......................... 5,000,000 5,387,700
Grand Ledge Public School District GO,
MBIA Insured, Pre-Refunded, 6.60%, 5/01/24 ....................................................... 10,000,000 11,465,100
Refunding, MBIA Insured, 5.375%, 5/01/24 ......................................................... 13,105,000 13,298,430
Grand Rapids Downtown Development Authority Tax Increment Revenue, MBIA Insured, 6.875%, 6/01/24 .... 7,500,000 8,468,325
Grand Rapids Sanitary Sewer System Revenue, Refunding and Improvement, MBIA Insured, Pre-Refunded,
6.00%, 1/01/20 ................................................................................... 3,850,000 3,945,134
Grand Rapids Water Supply System Revenue, FGIC Insured, Pre-Refunded, 7.25%, 1/01/20 ................ 5,375,000 5,664,928
Grand Traverse County Building Authority GO, AMBAC Insured, 5.75%, 9/01/15 .......................... 1,700,000 1,844,449
Grand Traverse County Hospital Finance Authority Revenue, Munson Healthcare, Refunding, Series A,
AMBAC Insured, 6.25%,
7/01/12 .......................................................................................... 2,500,000 2,706,675
7/01/22 .......................................................................................... 7,900,000 8,602,231
Greenville Public School Building GO, MBIA Insured, Pre-Refunded, 5.75%, 5/01/19 .................... 1,850,000 2,037,331
Grosse-Ile Township School District GO, FGIC Insured, Pre-Refunded, 6.00%, 5/01/22 .................. 5,100,000 5,766,060
Hancock Hospital Finance Authority Revenue, Portage Health, MBIA and FHA Insured, 5.45%, 8/01/47 .... 4,400,000 4,461,204
Harrison Community Schools GO, AMBAC Insured, 6.25%, 5/01/13 ........................................ 4,715,000 5,341,011
Haslett Public School District GO,
FSA Insured, Pre-Refunded, 7.50%, 5/01/20 ........................................................ 4,000,000 4,235,200
MBIA Insured, 5.70%, 5/01/26 ..................................................................... 3,900,000 4,328,883
Refunding, FSA Insured, 6.625%, 5/01/19 .......................................................... 3,875,000 4,218,131
Hastings School District, FGIC Insured, 5.625%, 5/01/15 ............................................. 1,000,000 1,080,370
Holland School District GO, Refunding, AMBAC Insured, 6.375%, 5/01/10 ............................... 2,000,000 2,163,080
Holly Area School District, FGIC Insured, 5.625%, 5/01/25 ........................................... 8,775,000 9,391,619
Hopkins Public Schools GO, FGIC Insured,
5.70%, 5/01/21 ................................................................................... 4,000,000 4,207,360
5.50%, 5/01/26 ................................................................................... 1,000,000 1,033,100
Houghton-Portage Township School District GO,
FSA Insured, Pre-Refunded, 7.00%, 5/01/17 ........................................................ 2,700,000 2,717,442
Refunding, AMBAC Insured, 6.00%, 5/01/14 ......................................................... 2,000,000 2,129,420
Howell Public Schools GO, MBIA Insured, 5.60%, 5/01/21 .............................................. 3,475,000 3,640,445
Hudsonville Public Schools GO, Series B, FGIC Insured, Pre-Refunded,
6.05%, 5/01/19 ................................................................................... 2,000,000 2,246,940
6.10%, 5/01/24 ................................................................................... 2,000,000 2,251,580
Huron Valley School District GO,
FGIC Insured, Pre-Refunded, 5.75%, 5/01/22 ....................................................... 2,350,000 2,616,514
Refunding, FGIC Insured, 6.125%, 5/01/20 ......................................................... 11,535,000 12,402,547
Kalamazoo Hospital Finance Authority Hospital Facility Revenue,
Borgess Medical Center, Series A, AMBAC Insured, 5.625%, 6/01/14 ................................. 3,805,000 4,019,374
Bronson Methodist Hospital, Refunding and Improvement, MBIA Insured, 5.875%, 5/15/26 ............. 25,940,000 27,872,530
</TABLE>
71
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN MICHIGAN INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
Kalamazoo Hospital Finance Authority Hospital Facility Revenue, (cont.)
Bronson Methodist Hospital, Refunding and Improvement, Series A, MBIA Insured, Pre-Refunded,
6.25%, 5/15/12 .................................................................................... $ 5,000,000 $ 5,587,550
Bronson Methodist Hospital, Refunding and Improvement, Series A, MBIA Insured, Pre-Refunded,
6.375%, 5/15/17 ................................................................................... 2,460,000 2,760,956
Bronson Methodist Hospital, Refunding, MBIA Insured, 5.50%, 5/15/28 ............................... 15,000,000 15,505,950
Kelloggsville Public School District GO, FGIC Insured, 5.75%, 5/01/13 ................................ 1,000,000 1,093,240
Kenowa Hills Public Schools, MBIA Insured, 5.875%,
5/01/21 ........................................................................................... 1,235,000 1,313,027
5/01/26 ........................................................................................... 9,000,000 9,551,790
Kent Hospital Finance Authority Health Care Revenue, Butterworth Health System, Series A,
MBIA Insured, Pre-Refunded, 5.625%, 1/15/26 ....................................................... 15,500,000 17,284,360
Lake Linden-Hubbell Public Schools, FSA Insured,
5.40%, 5/01/18 .................................................................................... 825,000 842,606
5.50%, 5/01/23 .................................................................................... 675,000 695,054
Lake Orion Community School District GO, Refunding, AMBAC Insured, 5.50%, 5/01/20 .................... 2,200,000 2,270,708
Lake Shore Public Schools GO, Macomb County, FSA Insured, 5.50%,
5/01/17 ........................................................................................... 4,500,000 4,670,325
5/01/20 ........................................................................................... 3,540,000 3,666,767
Lake Superior State University Revenue, AMBAC Insured, Pre-Refunded, 6.375%, 11/15/15 ................ 1,500,000 1,724,565
Lakeshore Public Schools GO, Berrien County, MBIA Insured, 5.70%, 5/01/22 ............................ 3,500,000 3,667,370
Lakeview Community Schools GO, Refunding, MBIA Insured, 6.75%, 5/01/13 ............................... 1,500,000 1,612,995
Lakewood Public Schools GO, MBIA Insured,
5.375%, 5/01/20 ................................................................................... 3,300,000 3,361,545
5.75%, 5/01/22 .................................................................................... 2,200,000 2,314,356
Lansing Building Authority, Refunding, MBIA Insured, 5.60%, 6/01/19 .................................. 1,470,000 1,527,477
Leslie Public Schools GO, Ingham and Jackson Counties, AMBAC Insured, Pre-Refunded, 6.00%, 5/01/25 ... 3,500,000 3,936,695
Lincoln Consolidated School District, FSA Insured, 5.00%, 5/01/28 .................................... 2,000,000 1,951,880
Lincoln Park School District, FGIC Insured,
5.85%, 5/01/15 .................................................................................... 2,885,000 3,245,625
5.90%, 5/01/26 .................................................................................... 6,050,000 6,825,005
Marquette City Hospital Finance Authority Revenue, Marquette General Hospital, Refunding,
Series C, AMBAC Insured, Pre-Refunded, 7.50%, 4/01/07 ............................................. 5,000,000 5,117,250
Series D, FSA Insured, 5.875%, 4/01/11 ............................................................ 4,525,000 4,938,449
Series D, FSA Insured, 6.10%, 4/01/19 ............................................................. 5,225,000 5,749,381
Marysville Public School District, MBIA Insured, 5.75%, 5/01/22 ...................................... 1,100,000 1,211,386
Mason Public School District GO, FGIC Insured, 5.40%, 5/01/21 ........................................ 1,400,000 1,430,464
Menominee Area Public School District GO, Refunding, AMBAC Insured, 6.00%, 5/01/20 ................... 2,675,000 2,853,128
Merrill Community School District GO, FGIC Insured, 5.60%, 5/01/26 ................................... 4,000,000 4,412,360
Michigan Higher Education Student Loan Authority Revenue, Series XIII-A, MBIA Insured,
7.40%, 10/01/04 ................................................................................... 1,360,000 1,424,478
7.55%, 10/01/08 ................................................................................... 1,325,000 1,380,955
Michigan Municipal Bond Authority Revenue, Local Government Loan Program,
Group 15, AMBAC Insured, 7.60%, 5/01/09 ........................................................... 285,000 292,461
Refunding, Series G, AMBAC Insured, 6.75%, 11/01/14 ............................................... 6,490,000 7,361,932
Refunding, Series G, AMBAC Insured, 6.80%, 11/01/14 ............................................... 1,650,000 1,875,770
Refunding, Series G, AMBAC Insured, 6.80%, 11/01/23 ............................................... 825,000 926,805
Series C, MBIA Insured, 6.00%, 11/01/10 ........................................................... 3,790,000 4,122,307
Michigan State Building Authority Revenue,
Detroit Regional Prisons, Series I, MBIA Insured, Pre-Refunded, 7.25%, 10/01/08 ................... 10,000,000 10,247,100
ETM, Series II, MBIA Insured, 7.40%, 4/01/01 ...................................................... 3,580,000 3,711,458
Refunding, Series I, AMBAC Insured, 6.25%, 10/01/20 ............................................... 1,500,000 1,595,580
Series II, MBIA Insured, 6.25%, 10/01/20 .......................................................... 4,645,000 4,952,731
Michigan State Comprehensive Transportation Revenue, Series A, MBIA Insured, 5.50%, 5/15/22 .......... 4,500,000 4,560,120
Michigan State HDA,
MFHR, Series A, FGIC Insured, 7.55%, 7/01/09 ...................................................... 2,880,000 2,974,320
MFHR, Series A, FGIC Insured, 7.65%, 7/01/15 ...................................................... 2,945,000 3,039,800
SFMR, Series A, AMBAC Insured, 5.95%, 6/01/17 ..................................................... 2,500,000 2,610,875
SFMR, Series A, AMBAC Insured, 6.05%, 12/01/27 .................................................... 1,000,000 1,049,730
</TABLE>
72
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN MICHIGAN INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
Michigan State Hospital Finance Authority Revenue,
Crittenton Hospital, Series A, FGIC Insured, 6.75%, 3/01/20 ..................................... $ 1,750,000 $ 1,820,315
Detroit Medical Group, Refunding, Series A, AMBAC Insured, 5.50%, 8/15/24 ....................... 15,000,000 15,480,900
Detroit Medical Group, Refunding, Series A, AMBAC Insured, 5.25%, 8/15/27 ....................... 10,000,000 10,079,700
Henry Ford Health, Refunding, Series A, 5.25%, 11/15/25 ......................................... 17,665,000 17,663,587
Holland Community Hospital, AMBAC Insured, 5.625%, 1/01/28 ...................................... 3,000,000 3,155,850
Mercy Health Services, Refunding, Series T, MBIA Insured, 5.75%, 8/15/15 ........................ 10,525,000 11,397,417
Mercy Health Services, Series Q, AMBAC Insured, 5.375%, 8/15/26 ................................. 12,090,000 12,300,245
Mercy Health Services, Series R, AMBAC Insured, 5.375%, 8/15/16 ................................. 1,500,000 1,543,050
Mercy Health Services, Series R, AMBAC Insured, 5.375%, 8/15/26 ................................. 1,750,000 1,780,433
Mercy Health Services, Series U, MBIA Insured, 5.75%, 8/15/26 ................................... 2,300,000 2,462,334
Mercy Health Services, Series W, FSA Insured, 5.25%, 8/15/27 .................................... 8,605,000 8,680,552
MidMichigan Obligation Group, Refunding, Series A, FSA Insured, 5.375%, 6/01/27 ................. 7,500,000 7,643,475
Oakland General Hospital Obligation, Refunding, AMBAC Insured, 7.00%, 7/01/15 ................... 9,020,000 9,317,750
Oakwood Obligation Group, Refunding, Series A, FSA Insured, 5.125%, 8/15/25 ..................... 10,375,000 10,190,429
Oakwood Obligation Group, Refunding, Series A, FSA Insured, 5.00%, 8/15/31 ...................... 7,050,000 6,755,381
Sparrow Obligation Group, Refunding, MBIA Insured, 6.50%, 11/15/11 .............................. 1,500,000 1,614,690
St. John's Hospital, Refunding, Series A, AMBAC Insured, 6.00%, 5/15/13 ......................... 3,445,000 3,723,838
St. John's Hospital, Refunding, Series A, AMBAC Insured, 6.25%, 5/15/14 ......................... 9,545,000 10,358,329
St. John's Hospital, Refunding, Series A, AMBAC Insured, 5.125%, 5/15/17 ........................ 14,500,000 14,554,085
Michigan State Strategic Fund Limited Obligation Revenue,
Detroit Edison Co., Pollution Project, Refunding, FGIC Insured, 6.875%, 12/01/21 ................ 20,000,000 21,712,000
Detroit Edison Co., Pollution Project, Refunding, Series AA, FGIC Insured, 6.95%, 5/01/11 ....... 5,000,000 6,142,600
Detroit Edison Co., Pollution Project, Refunding, Series BB, AMBAC Insured, 7.00%, 5/01/21 ...... 3,000,000 3,793,320
Detroit Edison Co., Pollution Project, Refunding, Series BB, MBIA Insured, 6.05%, 10/01/23 ...... 1,285,000 1,381,940
Detroit Edison Co., Pollution Project, Refunding, Series BB, MBIA Insured, 6.20%, 8/15/25 ....... 10,250,000 11,321,023
Detroit Edison Co., Pollution Project, Refunding, Series CC, FGIC Insured, 6.95%, 9/01/21 ....... 5,540,000 5,993,006
Detroit Edison Co., Pollution Project, Refunding, Series CC, MBIA Insured, 6.05%, 10/01/23 ...... 5,825,000 6,264,438
St. John-Bon Secours Continuing Care, 7.90%, 11/15/16 ........................................... 1,800,000 1,831,896
Michigan State Trunk Line,
Refunding, Series A, MBIA Insured, 5.00%, 11/01/26 .............................................. 5,000,000 4,896,900
Refunding, Series B, AMBAC Insured, 5.50%, 10/01/21 ............................................. 1,400,000 1,431,808
Refunding, Series B, MBIA Insured, 5.50%, 10/01/21 .............................................. 4,500,000 4,602,240
Series A, FGIC Insured, 5.625%, 11/01/20 ........................................................ 2,765,000 3,088,920
Series A, FGIC Insured, 5.50%, 10/01/21 ......................................................... 1,475,000 1,508,512
Series A, FGIC Insured, 5.80%, 11/15/24 ......................................................... 6,000,000 6,722,700
Series A, FGIC Insured, 5.625%, 11/01/26 ........................................................ 8,990,000 10,043,179
Monroe County PCR, Detroit Edison Co.,
Series 1, MBIA Insured, 6.875%, 9/01/22 ......................................................... 4,000,000 4,387,520
Series 1-B, MBIA Insured, 6.55%, 9/01/24 ........................................................ 4,000,000 4,353,080
Series CC, AMBAC Insured, 7.50%, 12/01/19 ....................................................... 10,000,000 10,563,000
Series CC, MBIA Insured, 6.55%, 6/01/24 ......................................................... 1,150,000 1,247,463
Morley-Stanwood Community Schools, Building and Site, FGIC Insured, 5.625%, 5/01/21 ................ 2,000,000 2,084,100
Muskegon Public Schools GO, Series 95, FGIC Insured, 5.25%,
5/01/18 ......................................................................................... 1,900,000 1,923,598
5/01/21 ......................................................................................... 2,000,000 2,017,660
Northern Michigan University Revenue, AMBAC Insured, 5.60%, 12/01/13 ............................... 1,715,000 1,874,701
Northview Public School District GO, Refunding,
FGIC Insured, 5.00%, 5/01/21 .................................................................... 3,500,000 3,449,040
MBIA Insured, 5.80%, 5/01/21 .................................................................... 4,500,000 4,782,015
Novi Community School District GO,
Building and Site, FGIC Insured, 5.30%, 5/01/21 ................................................. 1,960,000 1,986,656
FGIC Insured, Pre-Refunded, 6.125%, 5/01/18 ..................................................... 4,750,000 5,281,478
Oakland, Washtenaw, etc. Counties Community College District, AMBAC Insured, Pre-Refunded,
6.65%, 5/01/11 .................................................................................. 3,500,000 3,878,595
Oakridge Public Schools GO, FSA Insured, 5.00%, 5/01/23 ............................................ 500,000 490,340
Paw Paw Public School District, Building and Site, FGIC Insured, 5.625%, 5/01/25 ................... 3,500,000 3,837,680
Petoskey Hospital Finance Authority Facilities Revenue, Northern Michigan Hospital, MBIA
Insured, Pre-Refunded,
7.00%, 11/15/07 ................................................................................. 4,500,000 4,714,875
6.75%, 11/15/19 ................................................................................. 1,000,000 1,046,030
</TABLE>
73
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN MICHIGAN INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
Pinckney Community Schools, Livingston and Washtenaw Counties, FGIC Insured, 5.50%, 5/01/27 .......... $10,700,000 $11,032,449
Plymouth-Canton Community School District,
Refunding, AMBAC Insured, 5.50%, 5/01/13 .......................................................... 4,000,000 4,208,480
Series C, FGIC Insured, 6.50%, 5/01/16 ............................................................ 3,500,000 3,868,585
Series C, MBIA Insured, 6.50%, 5/01/16 ............................................................ 3,000,000 3,315,930
Port Huron School District,
FSA Insured, Pre-Refunded, 7.25%, 5/01/15 ......................................................... 5,500,000 5,860,855
Refunding, AMBAC Insured, 6.00%, 5/01/12 .......................................................... 4,500,000 4,848,075
Portage Lake Water and Sewer Authority GO, Refunding, AMBAC Insured,
6.10%, 10/01/14 ................................................................................... 770,000 851,866
6.20%, 10/01/20 ................................................................................... 670,000 737,744
Portage Public Schools GO, MBIA Insured, 5.625%, 5/01/19 ............................................. 2,750,000 2,993,265
Puerto Rico Commonwealth Aqueduct and Sewer Authority Revenue, ETM, Series A, FSA Insured,
8.75%, 7/01/00 .................................................................................... 500,000 536,095
Pre-Refunded, 9.00%, 7/01/09 ...................................................................... 2,500,000 3,097,725
Puerto Rico Commonwealth GO, Public Improvement, MBIA Insured, 6.75%, 7/01/06 ........................ 1,565,000 1,591,386
Puerto Rico Electric Power Authority Revenue, Refunding, Series U, FSA Insured, 6.00%, 7/01/14 ....... 3,400,000 3,736,838
Puerto Rico HFC, SFMR, Portfolio No. 1, Series C, GNMA Secured, 6.85%, 10/15/23 ...................... 1,290,000 1,360,008
Puerto Rico Port Authority Revenue, Series D, FGIC Insured, 7.00%, 7/01/14 ........................... 8,700,000 9,430,614
Redford USD, GO, FGIC Insured, Pre-Refunded, 6.00%, 5/01/22 .......................................... 14,090,000 15,982,005
Rockford Public Schools GO, Refunding,
AMBAC Insured, 5.875%, 5/01/19 .................................................................... 3,900,000 4,094,337
FGIC Insured, 5.25%, 5/01/22 ...................................................................... 1,250,000 1,259,813
FGIC Insured, 5.25%, 5/01/27 ...................................................................... 3,000,000 3,039,510
FSA Insured, 5.875%, 5/01/19 ...................................................................... 3,150,000 3,306,965
MBIA Insured, 5.875%, 5/01/12 ..................................................................... 1,850,000 1,970,898
MBIA Insured, 5.875%, 5/01/19 ..................................................................... 1,925,000 2,020,923
Romulus Community Schools GO, Refunding, FGIC Insured, 5.75%,
5/01/13 ........................................................................................... 690,000 737,355
5/01/17 ........................................................................................... 1,200,000 1,264,668
5/01/22 ........................................................................................... 5,435,000 5,713,109
Royal Oak Hospital Finance Authority Revenue, Refunding, MBIA Insured, 6.25%, 1/01/19 ................ 5,000,000 5,312,200
Saginaw Hospital Finance Authority Revenue, St. Luke's Hospital Project, Refunding, MBIA Insured,
Series C, 6.875%, 7/01/14 ......................................................................... 5,325,000 5,700,785
Series C, 6.75%, 7/01/17 .......................................................................... 2,000,000 2,132,460
Series C, 6.00%, 7/01/21 .......................................................................... 3,875,000 3,989,739
Series D, 6.50%, 7/01/11 .......................................................................... 1,000,000 1,069,040
Saginaw Valley State University Revenue, AMBAC Insured, 5.25%, 7/01/19 ............................... 2,540,000 2,583,231
Saranac Community School District GO, MBIA Insured, 5.25%, 5/01/21 ................................... 1,350,000 1,364,351
Sault Ste. Marie Water Treatment GO, AMBAC Insured, Pre-Refunded, 7.50%, 9/01/10 ..................... 2,000,000 2,084,260
Schoolcraft Community School District GO, FGIC Insured,
5.75%, 5/01/21 .................................................................................... 2,525,000 2,672,990
5.375%, 5/01/26 ................................................................................... 705,000 717,760
Pre-Refunded, 5.75%, 5/01/21 ...................................................................... 1,050,000 1,111,541
Pre-Refunded, 5.375%, 5/01/26 ..................................................................... 295,000 300,340
Shelby Public School District GO, MBIA Insured, 5.625%, 5/01/21 ...................................... 1,925,000 2,108,722
South Haven Public Schools GO, Refunding, FGIC Insured, 5.50%,
5/01/13 ........................................................................................... 1,000,000 1,052,120
5/01/17 ........................................................................................... 1,725,000 1,785,841
South Redford School District GO, FGIC Insured, 5.50%, 5/01/22 ....................................... 4,610,000 4,918,409
St. Clair County Building Authority GO, MBIA Insured, 5.25%,
4/01/18 ........................................................................................... 2,065,000 2,096,182
4/01/21 ........................................................................................... 2,400,000 2,431,008
St. Clair County EDC, PCR, Detroit Edison Co., Refunding, Series DD, AMBAC Insured, 6.05%, 8/01/24 ... 7,745,000 8,228,056
St. John's Public Schools, FGIC Insured,
5.625%, 5/01/20 ................................................................................... 7,000,000 7,730,660
5.75%, 5/01/25 .................................................................................... 2,000,000 2,222,360
</TABLE>
74
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN MICHIGAN INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
Sturgis Public School District, MBIA Insured, Pre-Refunded, 6.10%, 5/01/18 ...................... $ 1,000,000 $ 1,106,640
Thornapple Kellogg School District, FGIC Insured, 5.375%, 5/01/22 ............................... 1,960,000 1,994,202
Three Rivers Community Schools, Building and Site, MBIA Insured, Pre-Refunded, 6.00%, 5/01/23 ... 2,400,000 2,722,272
Traverse City Area Public Schools GO, Building and Site, Series I, MBIA Insured, 5.70%, 5/01/20 . 4,550,000 5,043,493
University of Michigan Revenues, Medical Service Plan, MBIA Insured, 6.50%, 12/01/21 ............ 2,365,000 2,526,222
Vestaburg Community Schools GO, Refunding, MBIA Insured, 5.50%, 5/01/26 ......................... 1,000,000 1,033,100
Vicksburg Community Schools GO, Refunding, MBIA Insured, 5.625%,
5/01/12 ...................................................................................... 2,175,000 2,311,786
5/01/20 ...................................................................................... 1,000,000 1,042,640
Walled Lake Consolidated School District GO, Refunding, MBIA Insured, 5.50%, 5/01/22 ............ 3,000,000 3,103,350
Wayland USD, GO, FGIC Insured, Pre-Refunded, 6.75%, 5/01/24 ..................................... 2,000,000 2,325,140
Wayne Charter County Airport Revenue, Detroit Metro Airport,
Series A, MBIA Insured, 5.25%, 12/01/18 ...................................................... 5,000,000 5,043,250
sub lien, Refunding, Series C, MBIA Insured, 5.25%, 12/01/21 ................................. 1,000,000 1,014,650
sub lien, Series B, MBIA Insured, 6.875%, 12/01/11 ........................................... 300,000 325,680
sub lien, Series B, MBIA Insured, 6.75%, 12/01/21 ............................................ 2,000,000 2,165,340
Wayne County Airport Revenue, Sub Lien, Series B, AMBAC Insured, 6.00%, 12/01/20 ................ 10,585,000 10,835,124
Wayne-Westland Community Schools GO, Refunding, FGIC Insured, 6.10%, 5/01/13 .................... 2,275,000 2,440,051
West Ottawa Public School District GO,
FGIC Insured, 5.60%, 5/01/21 ................................................................. 2,355,000 2,461,399
FGIC Insured, 5.60%, 5/01/26 ................................................................. 12,100,000 12,621,873
Refunding, FGIC Insured, 6.00%, 5/01/20 ...................................................... 6,630,000 7,012,551
Western School District GO, Refunding, MBIA Insured, 5.50%, 5/01/20 ............................. 1,660,000 1,713,352
Western Townships Utilities Authority GO, Sewer Disposal System, Refunding, FSA Insured,
6.75%, 1/01/15 ............................................................................... 18,710,000 20,040,468
6.50%, 1/01/19 ............................................................................... 4,915,000 5,206,361
White Cloud Public Schools GO, Refunding, FSA Insured, 5.50%, 5/01/20 ........................... 1,000,000 1,033,650
Williamston Community School District GO, Building and Site, MBIA Insured, 5.375%, 5/01/15 ...... 4,900,000 5,084,436
Williamston County GO, Refunding, AMBAC Insured, 6.90%, 11/01/17 ................................ 1,800,000 1,956,582
Wyandotte City School District GO, Refunding, FSA Insured, 5.625%, 5/01/13 ...................... 1,800,000 1,907,982
Wyandotte Electric Revenue, Refunding, MBIA Insured, 6.25%, 10/01/17 ............................ 9,980,000 10,828,200
Yale Public Schools District GO, AMBAC Insured,
5.375%, 5/01/17 .............................................................................. 2,000,000 2,059,080
5.50%, 5/01/19 ............................................................................... 1,500,000 1,554,660
Ypsilanti School District GO, Refunding, FGIC Insured,
5.375%, 5/01/26 .............................................................................. 3,000,000 3,054,300
Pre-Refunded, 5.75%, 5/01/20 ................................................................. 4,700,000 5,233,027
Zeeland Public Schools GO, Series B, MBIA Insured, Pre-Refunded,
6.05%, 5/01/19 ............................................................................... 2,900,000 3,258,063
6.10%, 5/01/24 ............................................................................... 4,000,000 4,503,160
-------------- --------------
TOTAL LONG TERM INVESTMENTS (COST $1,100,673,081) ............................................... 1,190,321,630
-------------- --------------
(a) SHORT TERM INVESTMENTS .4%
Delta County EDC, Environmental Improvement Revenue, Mead Escanaba Paper Project, Refunding,
Series C, Daily VRDN and Put, 3.10%, 12/01/23 ................................................ 1,400,000 1,400,000
Flint Hospital Building Authority Revenue, Hurley Medical Center, Series B, Weekly VRDN and
Put, 2.95%, 7/01/15 .......................................................................... 800,000 800,000
Grand Rapids Water Supply System Revenue, Daily VRDN and Put, 2.90%, 1/01/20 .................... 2,150,000 2,150,000
Michigan State Strategic Fund Limited Obligation Revenue, Detroit Edison Co., Reserve 1,
Refunding, Daily VRDN and Put, 3.15%, 9/01/30 ................................................ 400,000 400,000
Midland County EDC, Limited Obligation Revenue, Dow Chemical Co. Project, Refunding, Series B,
Daily VRDN and Put, 3.20%, 12/01/15 .......................................................... 325,000 325,000
Puerto Rico Commonwealth Government Development Bank, Refunding, MBIA Insured, Weekly VRDN
and Put, 2.40%, 12/01/15 ..................................................................... 200,000 200,000
</TABLE>
75
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN MICHIGAN INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(a) SHORT TERM INVESTMENTS (CONT.)
Puerto Rico Commonwealth Highway and Transportation Authority Revenue, Series A, AMBAC
Insured, Weekly VRDN and Put, 2.60%, 7/01/28 $ 400,000 $ 400,000
--------------
TOTAL SHORT TERM INVESTMENTS (COST $5,675,000) 5,675,000
--------------
TOTAL INVESTMENTS (COST $1,106,348,081) 98.7% 1,195,996,630
OTHER ASSETS, LESS LIABILITIES 1.3% 15,318,720
--------------
NET ASSETS 100.0% $1,211,315,350
==============
</TABLE>
See glossary of terms on page 89.
(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.
76
FRANKLIN TAX-FREE TRUST
Financial Highlights
FRANKLIN MINNESOTA INSURED 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 ........ $ 12.16 $ 12.01 $ 12.14 $ 11.88 $ 12.33
--------- ---------- --------- ----------- -----------
Income from investment operations:
Net investment income .................... .61 .64 .65 .67 .69
Net realized and unrealized gains (losses) .01 .25 (.12) .27 (.45)
--------- ---------- --------- ----------- -----------
Total from investment operations .......... .62 .89 .53 .94 .24
--------- ---------- --------- ----------- -----------
Less distributions from:
Net investment income .................... (.62)(3) (.64) (.66) (.68) (.69)(2)
Net realized gains ....................... (.02) (.10) -- -- --
--------- ---------- --------- ----------- -----------
Total distributions ....................... (.64) (.74) (.66) (.68) (.69)
--------- ---------- --------- ----------- -----------
Net asset value, end of year .............. $ 12.14 $ 12.16 $ 12.01 $ 12.14 $ 11.88
--------- ---------- --------- ----------- -----------
Total return* ............................. 5.18% 7.60% 4.54% 8.06% 2.12%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ........... $ 515,174 $ 495,315 $ 482,128 $ 492,139 $ 479,934
Ratios to average net assets:
Expenses ................................. .67% .65% .66% .66% .66%
Net investment income .................... 5.01% 5.29% 5.47% 5.58% 5.81%
Portfolio turnover rate ................... 16.25% 14.87% 14.40% 17.72% 17.59%
CLASS C
- -------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ........ $ 12.21 $ 12.05 $ 12.17 $ 11.89
--------- ---------- --------- -----------
Income from investment operations:
Net investment income .................... .54 .57 .59 .50
Net realized and unrealized gains (losses) .01 .26 (.12) .28
--------- ---------- --------- -----------
Total from investment operations .......... .55 .83 .47 .78
--------- ---------- --------- -----------
Less distributions from:
Net investment income .................... (.55)(3) (.57) (.59) (.50)
Net realized gains ....................... (.02) (.10) -- --
--------- ---------- --------- -----------
Total distributions ....................... (.57) (.67) (.59) (.50)
--------- ---------- --------- -----------
Net asset value, end of year .............. $ 12.19 $ 12.21 $ 12.05 $ 12.17
--------- ---------- --------- -----------
Total return* ............................. 4.58% 7.04% 3.98% 6.67%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ........... $ 20,896 $ 10,131 $ 4,844 $ 1,152
Ratios to average net assets:
Expenses ................................. 1.23% 1.22% 1.23% 1.25%**
Net investment income .................... 4.44% 4.72% 4.87% 4.94%**
Portfolio turnover rate ................... 16.25% 14.87% 14.40% 17.72%
</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 from net realized gains of $.004.
(3)Includes distributions in excess of net investment income in the amount of
$.001.
See notes to financial statements.
77
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN MINNESOTA INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS 97.9%
Albany ISD No. 745, Series A, FSA Insured, 6.00%, 2/01/16 ........................................... $2,295,000 $2,492,416
Albert Lea Minnesota ISD No. 241, MBIA Insured, 5.00%, 2/01/18 ...................................... 2,000,000 1,997,480
Anoka County Housing and Redevelopment Authority,
City of Ramsey, Housing Development, AMBAC Insured, 5.00%, 1/01/28 ............................... 2,045,000 2,014,141
Ice Arena, Series A, MBIA Insured, 5.70%, 2/01/23 ................................................ 2,195,000 2,314,803
Anoka County Resource Recovery Revenue, Northern States Power Co., AMBAC Insured, 7.15%,
12/01/08 ......................................................................................... 2,100,000 2,195,004
Becker GO,
Tax Increment, Refunding, Series D, MBIA Insured, 6.25%, 8/01/15 ................................. 4,870,000 5,282,343
Wastewater Treatment Facility, Series A, MBIA Insured, Pre-Refunded, 5.90%, 2/01/12 .............. 625,000 676,000
Wastewater Treatment Facility, Series A, MBIA Insured, Pre-Refunded, 5.95%, 2/01/15 .............. 610,000 661,124
Benson ISD No. 777 GO, FSA Insured, 6.00%, 2/01/15 .................................................. 290,000 302,186
Big Lake ISD No. 727, MBIA Insured,
5.625%, 2/01/19 .................................................................................. 500,000 525,855
5.70%, 2/01/21 ................................................................................... 3,085,000 3,265,843
Bloomington Health Care Facilities Revenue, Masonic Home Care Center, AMBAC Insured, 5.875%,
7/01/22 .......................................................................................... 2,685,000 2,847,469
Braham ISD No. 314, MBIA Insured, 5.20%, 2/01/19 .................................................... 1,800,000 1,813,086
Brainerd Health Care Facilities Revenue, Benedictine Health St. Joseph, Refunding, Series D,
MBIA Insured, 5.875%, 2/15/13 .................................................................... 3,500,000 3,761,345
Buffalo GO,
AMBAC Insured, 5.55%, 6/01/17 .................................................................... 1,000,000 1,042,250
ISD No. 877, Formerly Wright County ISD No.23, Refunding, 5.00%, 2/01/22 ......................... 6,255,000 6,195,765
ISD No. 877, FSA Insured, Pre-Refunded, 6.15%, 2/01/18 ........................................... 2,800,000 3,021,088
Burnsville ISD, Series A, FSA Insured, 6.20%, 2/01/17 ............................................... 2,105,000 2,329,056
Champlin EDA, Housing Development, MBIA Insured, 5.625%, 2/01/26 .................................... 1,000,000 1,038,460
Chanhassen Apartments Project GO, Series B, AMBAC Insured, 6.20%, 1/01/25 ........................... 2,975,000 3,218,831
Columbia Heights ISD, No. 013, FSA Insured,
5.375%, 2/01/19 .................................................................................. 2,450,000 2,509,315
5.50%, 2/01/23 ................................................................................... 6,000,000 6,193,740
Dakota County Housing and Redevelopment Authority SFMR,
FNMA and GNMA Secured, 5.75%, 4/01/18 ............................................................ 2,992,000 3,104,709
FNMA and GNMA Secured, 5.85%, 10/01/30 ........................................................... 4,988,000 5,170,910
Refunding, GNMA Secured, 8.10%, 3/01/16 .......................................................... 295,000 303,850
Dakota County Housing and Redevelopment Authority, Governmental Housing Revenue, Eagan Senior
Housing Facility, MBIA Insured, 5.40%, 1/01/27 ................................................... 1,315,000 1,339,880
Dakota, Washington and Stearns County SFMR, Series 1990, GNMA Secured,
7.80%, 12/01/10 .................................................................................. 660,000 689,700
7.85%, 12/01/30 .................................................................................. 2,430,000 2,535,997
Dilworth ISD No. 147, MBIA Insured, 6.00%, 2/01/15 .................................................. 1,040,000 1,116,523
Duluth EDA,
Health Care Facilities Revenue, The Duluth Clinic, Ltd., AMBAC Insured, 6.20%, 11/01/12 .......... 2,880,000 3,141,360
Health Care Facilities Revenue, The Duluth Clinic, Ltd., AMBAC Insured, 6.30%, 11/01/22 .......... 5,405,000 5,877,019
Health Care Facilities Revenue, The Duluth Clinic, Ltd., AMBAC Insured, Pre-Refunded, 6.20%,
11/01/12 ....................................................................................... 1,120,000 1,258,723
Health Care Facilities Revenue, The Duluth Clinic, Ltd., AMBAC Insured, Pre-Refunded, 6.30%,
11/01/22 ....................................................................................... 2,125,000 2,398,955
Hospital Facilities Revenue, St. Lukes Hospital, Series A, Connie Lee Insured, 6.40%, 5/01/12 .... 3,000,000 3,071,130
Tax Increment Revenue, MBIA Insured, Pre-Refunded, 7.25%, 8/01/08 ................................ 3,500,000 3,561,600
Eagan MFMR, Forest Ridge Apartments, Refunding, BIG Insured, 7.50%, 3/01/27 ......................... 4,420,000 4,584,778
Eden Prairie ISD No. 272, Series A,
FGIC Insured, 5.45%, 2/01/08 ..................................................................... 1,000,000 1,035,820
FSA Insured, 5.75%, 2/01/15 ...................................................................... 4,980,000 5,233,432
Eden Prairie MFHR, Olympic Ridge, Refunding, Series A, GNMA Secured, 6.25%,
1/20/31 .......................................................................................... 2,000,000 2,143,300
Eveleth EDA, Housing Development, MBIA Insured, 5.80%, 7/01/25 ...................................... 1,000,000 1,059,190
Faribault ISD No. 656, FSA Insured, 5.75%, 6/01/15 .................................................. 1,500,000 1,619,295
Ham Lake GO, Anoka County Housing, Senior Housing Project, Series B, MBIA Insured, 6.10%, 1/01/26 ... 2,180,000 2,292,641
Hibbing Health Care Facilities Revenue, The Duluth Clinic Ltd., FSA Insured, 5.00%, 11/01/25 ........ 9,300,000 9,085,077
Hopkins Elderly Housing Revenue, St. Therese Project, Refunding, Series A, GNMA Secured,
5.60%, 11/20/17 .................................................................................. 750,000 776,213
5.70%, 11/20/32 .................................................................................. 3,000,000 3,096,870
Inner Grove Heights Tax Increment, Series D, MBIA Insured, 5.50%, 2/01/19 ........................... 1,000,000 1,026,740
Kenyon Wanamingo ISD No. 2172, MBIA Insured, 6.00%, 2/01/22 ......................................... 4,030,000 4,417,082
</TABLE>
78
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN MINNESOTA INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
Lakeville ISD No. 194,
FGIC Insured, 5.40%, 2/01/13 ...................................................................... $ 1,000,000 $ 1,042,260
Series C, MBIA Insured, 5.125%, 2/01/13 ........................................................... 5,325,000 5,400,988
Minneapolis and St. Paul Housing RDA, Health Care System Revenue,
Children's Health Care, Series A, FSA Insured, 5.70%, 8/15/16 ..................................... 1,005,000 1,075,842
Health One Obligated Group, Series A, MBIA Insured, 7.40%, 8/15/11 ................................ 10,390,000 11,080,304
Health One Obligated Group, Series A, MBIA Insured, 6.75%, 8/15/14 ................................ 3,950,000 4,178,903
Minneapolis and St. Paul Metropolitan Airport Commission Airport Revenue, Series A, AMBAC Insured,
5.00%, 1/01/22 .................................................................................... 11,750,000 11,654,355
5.20%, 1/01/24 .................................................................................... 6,600,000 6,648,444
5.00%, 1/01/30 .................................................................................... 33,405,000 32,835,445
Minneapolis CDA and St. Paul Housing RDA, Health Care Facilities Revenue, Carondelet Community
Hospitals Inc., Series B, BIG Insured, Pre-Refunded, 8.875%, 11/01/15 ............................. 900,000 1,198,782
Minneapolis CDA, Tax Increment Revenue, Series 1990, MBIA Insured, 7.00%, 3/01/01 .................... 2,100,000 2,244,165
Minneapolis GO, Sports Arena Project, Refunding, 5.20%, 10/01/24 ..................................... 3,750,000 3,831,488
Minneapolis Hospital Facilities Revenue, Fairview Hospital and Healthcare, Refunding,
Series A, MBIA Insured, 6.50%, 1/01/11 ............................................................ 600,000 648,906
Series B, MBIA Insured, 6.70%, 1/01/17 ............................................................ 7,815,000 8,473,570
Minneapolis MFR, Riverside Plaza, Refunding, GNMA Secured, 5.20%, 12/20/30 ........................... 6,320,000 6,324,298
Minneapolis Revenue University Gateway Project, Series A, 5.25%, 12/01/24 ............................ 3,000,000 3,029,070
Minneapolis Special School District No. 001, Series A, MBIA Insured, 5.90%, 2/01/17 .................. 5,000,000 5,402,350
Minneapolis St. Paul Housing Finance Board SFMR,
Phase VI, Series A, GNMA Secured, 8.30%, 8/01/21 .................................................. 2,030,000 2,059,902
Series A, GNMA Secured, 8.375%, 11/01/17 .......................................................... 410,000 419,426
Series C, GNMA Secured, 8.875%, 11/01/18 .......................................................... 310,000 317,068
Minnesota Agriculture and Economic Development Board Revenue,
Evangelical Lutheran Good Samaritan, AMBAC Insured, 5.00%, 12/01/23 ............................... 2,750,000 2,700,005
Evangelical Lutheran Good Samaritan, Society Project, AMBAC Insured, 5.15%, 12/01/22 .............. 5,180,000 5,196,524
Health Care System, Fairview Hospital, Refunding, Series A, MBIA Insured, 5.75%, 11/15/26 ......... 14,000,000 14,968,660
Minnesota State GO, Refunding, MBIA Insured, 5.40%, 8/01/09 .......................................... 3,000,000 3,137,310
Minnesota State HFA,
Rental Housing, Refunding, Series D, MBIA Insured, 5.90%, 8/01/15 ................................. 1,245,000 1,314,085
Rental Housing, Refunding, Series D, MBIA Insured, 5.95%, 2/01/18 ................................. 2,705,000 2,847,608
Rental Housing, Refunding, Series D, MBIA Insured, 6.00%, 2/01/22 ................................. 3,165,000 3,339,930
SFMR, Series D, AMBAC Insured, 7.30%, 7/01/09 ..................................................... 2,650,000 2,717,443
SFMR, Series E, AMBAC Insured, 5.40%, 1/01/25 ..................................................... 9,000,000 9,077,310
SFMR, Series F, MBIA Insured, 6.30%, 7/01/25 ...................................................... 1,500,000 1,585,740
SFMR, Series G, AMBAC Insured, 6.25%, 7/01/26 ..................................................... 2,550,000 2,691,219
SFMR, Series I, MBIA Insured, 6.25%, 1/01/15 ...................................................... 1,400,000 1,473,682
Minnesota State Higher Education Facilities Authority Revenue, Bethel College and Seminary,
Refunding, 5.10%, 4/01/28 ......................................................................... 4,100,000 4,089,627
Minnesota State Higher Educational Facilities Authority Revenue, Series 3, Connie Lee Insured,
Pre-Refunded, 6.50%, 1/01/17 ...................................................................... 3,940,000 4,128,568
Minnetonka MFHR,
Brier Creek Project, Refunding, Series A, GNMA Secured, 6.45%, 6/20/24 ............................ 2,720,000 2,918,506
Cedar Hills East Project, FGIC Insured, 7.40%, 12/01/07 ........................................... 350,000 364,119
Cedar Hills East Project, FGIC Insured, 7.50%, 12/01/27 ........................................... 1,000,000 1,035,540
New Hope MFR, North Ridge, Refunding, Series A, GNMA Secured,
6.05%, 1/01/17 .................................................................................... 450,000 480,047
6.20%, 1/01/31 .................................................................................... 5,470,000 5,781,462
North Branch ISD No. 138 GO, Series A, FGIC Insured, 5.625%, 2/01/17 ................................. 1,240,000 1,334,959
North St. Paul Maplewood ISD No. 622 GO,
Refunding, Series A, 5.125%, 2/01/25 .............................................................. 2,275,000 2,294,770
Series A, MBIA Insured, Pre-Refunded, 7.10%, 2/01/19 .............................................. 2,000,000 2,334,880
Northeast Metropolitan ISD No. 916 GO, FSA Insured, 5.80%, 1/01/16 ................................... 5,475,000 5,764,244
Northern Municipal Power Agency Electric System Revenue,
Refunding, FSA Insured, 5.00%, 1/01/12 ............................................................ 1,780,000 1,844,685
Refunding, FSA Insured, 5.25%, 1/01/17 ............................................................ 1,000,000 1,030,760
Refunding, FSA Insured, 5.30%, 1/01/21 ............................................................ 1,000,000 1,028,150
Refunding, Series B, AMBAC Insured, 5.50%, 1/01/18 ................................................ 8,150,000 8,440,629
</TABLE>
79
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN MINNESOTA INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
Northern Municipal Power Agency Electric System Revenue, (cont.)
Series C, AMBAC Insured, 6.125%, 1/01/20 .......................................................... $ 8,090,000 $ 8,790,837
Owatonna Public Utilities Commission Public Utilities Revenue, Refunding, Series A, AMBAC
Insured, 5.45%, 1/01/16 ........................................................................... 3,350,000 3,438,239
Plymouth Health Facilities Revenue, Westhealth Project, Series A, FSA Insured,
6.25%, 6/01/16 .................................................................................... 1,600,000 1,768,176
6.125%, 6/01/24 ................................................................................... 1,815,000 1,997,045
Princeton Hospital Revenue, Fairview Hospital and Healthcare, Series C, MBIA Insured, 6.25%,
1/01/21 ........................................................................................... 7,205,000 7,710,575
Princeton ISD, No. 477, Mille Lacs County,
FSA Insured, 5.125%, 2/01/24 ...................................................................... 2,190,000 2,193,416
Series A, FSA Insured, 5.375%, 2/01/17 ............................................................ 2,540,000 2,591,968
Puerto Rico Commonwealth GO, Public Improvement,
5.00%, 7/01/28 .................................................................................... 10,000,000 9,818,100
MBIA Insured, Pre-Refunded, 6.50%, 7/01/23 ........................................................ 3,000,000 3,431,790
Series A, FGIC Insured, Pre-Refunded, 7.375%, 7/01/04 ............................................. 10,000,000 10,294,400
Puerto Rico HFC, SFMR, Portfolio No. 1, Series B, GNMA Secured, 7.65%, 10/15/22 ...................... 750,000 786,390
Puerto Rico Port Authority Revenue, Series D, FGIC Insured, 7.00%, 7/01/14 ........................... 1,300,000 1,409,174
Robbinsdale Hospital Revenue, North Memorial Medical Center Project,
Refunding, Series A, AMBAC Insured, 5.45%, 5/15/13 ................................................ 2,000,000 2,088,460
Refunding, Series A, AMBAC Insured, 5.55%, 5/15/19 ................................................ 1,000,000 1,038,100
Series B, AMBAC Insured, 5.45%, 5/15/13 ........................................................... 2,900,000 3,028,267
Series B, AMBAC Insured, 5.50%, 5/15/23 ........................................................... 7,900,000 8,124,676
Rochester Health Care Facilities Revenue, Mayo Foundation, Series B, 5.50%, 11/15/27 ................. 5,000,000 5,216,400
Roseville ISD No. 623, Series A,
FGIC Insured, 6.00%, 2/01/23 ...................................................................... 1,250,000 1,303,338
FSA Insured, 5.80%, 2/01/19 ....................................................................... 1,200,000 1,258,308
FSA Insured, 5.85%, 2/01/24 ....................................................................... 2,470,000 2,584,361
FSA Insured, 6.00%, 2/01/25 ....................................................................... 4,260,000 4,535,963
Scott County Housing and Redevelopment Authority Facilities Lease Revenue, AMBAC Insured,
5.25%, 12/01/11 ................................................................................... 2,380,000 2,518,278
5.50%, 12/01/15 ................................................................................... 1,750,000 1,850,590
Scott County Housing and Redevelopment Authority Housing Development Revenue, River City Centre
Project, Series A, FSA Insured,
5.35%, 2/01/20 .................................................................................... 760,000 782,762
5.375%, 2/01/27 ................................................................................... 1,520,000 1,559,414
Scott County Housing and Redevelopment Authority Special Benefits Tax Revenue, River City Centre
Project, Series B, AMBAC Insured, 5.50%, 2/01/27 .................................................. 675,000 700,967
Scott County Housing and Redevelopment Authority Tax Increment Development Revenue, River City
Centre Project, Series E, FSA Insured, 5.375%, 2/01/25 ............................................ 1,170,000 1,200,338
Shakopee Public Utilities Commission Revenue, AMBAC Insured, 5.60%, 8/01/18 .......................... 1,750,000 1,809,185
South Washington County ISD No. 833 GO, Refunding, Series A, FGIC Insured, 6.125%, 6/01/10 ........... 2,080,000 2,179,757
Southern Minnesota Municipal Power Agency Power Supply System Revenue,
Refunding, Series A, MBIA Insured, ETM, 5.75%, 1/01/18 ............................................ 1,000,000 1,073,000
Series A, AMBAC Insured, 5.75%, 1/01/18 ........................................................... 2,250,000 2,382,413
Series A, FGIC Insured, 5.75%, 1/01/18 ............................................................ 1,000,000 1,058,850
Series A, MBIA Insured, 5.00%, 1/01/12 ............................................................ 5,975,000 6,104,777
Series A, MBIA Insured, 5.75%, 1/01/18 ............................................................ 8,865,000 9,386,705
Series B, AMBAC Insured, 6.00%, 1/01/16 ........................................................... 5,000,000 5,376,150
Series C, AMBAC Insured, 5.00%, 1/01/17 ........................................................... 1,000,000 999,930
St. Cloud Hospital Facilities Revenue, St. Cloud Hospital, Refunding,
Series A, AMBAC Insured, 5.00%, 7/01/15 ........................................................... 2,165,000 2,182,515
Series C, AMBAC Insured, 5.30%, 10/01/20 .......................................................... 1,230,000 1,253,173
St. Cloud Housing and RDA, Sales Tax Revenue, Paramount Theater Project, Refunding, Series A,
FGIC Insured, 5.00%, 3/01/22 ...................................................................... 1,250,000 1,223,250
St. Francis ISD No. 015, Series A, FSA Insured,
6.35%, 2/01/13 .................................................................................... 1,500,000 1,686,870
6.375%, 2/01/16 ................................................................................... 5,465,000 6,153,918
St. Louis Park Health Care Facilities Revenue, Health System of Minnesota Obligated Group,
Refunding, Series A, AMBAC Insured, 5.20%,
7/01/16 ........................................................................................... 1,000,000 1,014,450
7/01/23 ........................................................................................... 9,000,000 9,042,660
</TABLE>
80
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1998 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN MINNESOTA INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
St. Louis Park Hospital Facilities Revenue, Methodist Hospital Project,
Refunding, Series A, AMBAC Insured, 7.25%,
7/01/08 ................................................................... $ 4,115,000 $ 4,397,412
7/01/15 ................................................................... 1,000,000 1,068,630
St. Paul Housing and Redevelopment Authority Parking Revenue, Series A, FSA
Insured, 5.75%, 8/01/13 ................................................... 5,105,000 5,458,368
St. Paul ISD No. 625,
Series A, FSA Insured, 5.75%, 2/01/16 ..................................... 3,500,000 3,678,395
Series C, MBIA Insured, 6.10%, 2/01/14 .................................... 1,075,000 1,158,818
Series C, MBIA Insured, 6.10%, 2/01/15 .................................... 500,000 537,840
St. Paul Port Authority IDR, Series K, FGIC Insured, 9.50%,
12/01/01 .................................................................. 5,000 5,113
12/01/02 .................................................................. 5,000 5,190
12/01/14 .................................................................. 190,000 187,422
Stillwater ISD No. 834 GO, MBIA Insured, 5.75%, 2/01/15 ...................... 2,990,000 3,238,379
Todd Morrisson and Stearns Counties ISD No. 2753 GO, MBIA Insured, 5.00%,
4/01/17 ................................................................... 2,500,000 2,499,900
Virginia Governmental Housing Project GO, Refunding, MBIA Insured, 5.90%,
2/01/26 ................................................................... 2,915,000 3,071,652
Wadena ISD No. 819, GO, Refunding, AMBAC Insured, 5.60%, 2/01/20 ............. 3,150,000 3,222,702
Washington County Housing and RDAR, Government Housing, Landfall Terrace
Project, Refunding,
5.35%, 2/01/22 ............................................................ 1,000,000 1,017,360
5.40%, 8/01/27 ............................................................ 2,015,000 2,049,920
Washington County SFRMR, Housing and RDA, GNMA Secured, 7.60%, 12/01/11 ...... 125,000 125,245
Western Minnesota Municipal Power Agency Power Supply Revenue, Refunding,
Series A,
AMBAC Insured, 5.50%, 1/01/12 ............................................. 2,745,000 2,938,852
AMBAC Insured, 5.50%, 1/01/13 ............................................. 4,500,000 4,800,915
MBIA Insured, 5.50%, 1/01/15 .............................................. 5,425,000 5,441,058
Western Minnesota Municipal Power Agency Transmission Project Revenue,
Refunding, AMBAC Insured, 6.75%, 1/01/16 .................................. 2,000,000 2,126,480
Worthington ISD No. 518, GO, Formerly Nobles County Consolidated School
District No. 119, FSA Insured, 5.00%, 2/01/24 ............................. 5,675,000 5,595,210
------------
TOTAL LONG TERM INVESTMENTS (COST $499,681,161) .............................. 524,997,218
------------
(a)SHORT TERM INVESTMENTS 1.1%
Beltrami County Environmental Control Revenue, Northwood Panelboard,
Daily VRDN and Put, 3.20%, 7/01/25 ........................................ 1,700,000 1,700,000
Refunding, Daily VRDN and Put, 3.10%, 12/01/21 ............................ 400,000 400,000
Duluth Tax Increment Revenue, Lake Superior Paper, Registered, Weekly VRDN and
Put, 3.00%, 9/01/10 ....................................................... 2,650,000 2,650,000
Hutchinson IDR, Hutchinson Technology Inc. Project, Refunding, Weekly VRDN and
Put, 3.05%, 6/01/04 ....................................................... 1,000,000 1,000,000
------------
SHORT TERM INVESTMENTS (COST $ 5,750,000) .................................... 5,750,000
------------
TOTAL INVESTMENTS (COST $505,431,161) 99.0% .................................. 530,747,218
OTHER ASSETS, LESS LIABILITIES 1.0% .......................................... 5,322,732
------------
NET ASSETS 100.0% ............................................................ $536,069,950
============
</TABLE>
See glossary of terms on page 89.
(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.
81
FRANKLIN TAX-FREE TRUST
Financial Highlights
FRANKLIN OHIO INSURED 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 .......... $ 12.45 $ 12.19 $ 12.22 $ 11.90 $ 12.40
---------------------------------------------------------------------------------
Income from investment operations:
Net investment income ...................... .62 .64 .66 .68 .69
Net realized and unrealized gains (losses) . .07 .33 (.03) .33 (.50)
---------------------------------------------------------------------------------
Total from investment operations ............ .69 .97 .63 1.01 .19
---------------------------------------------------------------------------------
Less distributions from:
Net investment income ...................... (.62) (.64)(4) (.66)(3) (.69)(2) (.69)
Net realized gains ......................... (.03) (.07) -- -- --
---------------------------------------------------------------------------------
Total distributions ......................... (.65) (.71) (.66) (.69) (.69)
---------------------------------------------------------------------------------
Net asset value, end of year ................ $ 12.49 $ 12.45 $ 12.19 $ 12.22 $ 11.90
=================================================================================
Total return* ............................... 5.63% 8.22% 5.35% 8.66% 1.74%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $ 776,592 $ 741,079 $ 698,360 $ 685,783 $ 652,545
Ratios to average net assets:
Expenses ................................... .65% .64% .64% .64% .63%
Net investment income ...................... 4.98% 5.24% 5.43% 5.58% 5.83%
Portfolio turnover rate ..................... 6.56% 12.84% 14.95% 11.47% 11.76%
CLASS C
- ----------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 12.51 $ 12.24 $ 12.26 $ 11.90
---------------------------------------------------------------
Income from investment operations:
Net investment income ...................... .55 .58 .59 .52
Net realized and unrealized gains (losses) . .08 .34 (.02) .35
---------------------------------------------------------------
Total from investment operations ............ .63 .92 .57 .87
---------------------------------------------------------------
Less distributions from:
Net investment income ...................... (.55) (.58) (.59) (.51)
Net realized gains ......................... (.03) (.07) -- --
---------------------------------------------------------------
Total distributions ......................... (.58) (.65) (.59) (.51)
---------------------------------------------------------------
Net asset value, end of year ................ $ 12.56 $ 12.51 $ 12.24 $ 12.26
===============================================================
Total return* ............................... 5.10% 7.66% 4.79% 7.43%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $ 42,258 $ 28,178 $ 15,786 $ 6,085
Ratios to average net assets:
Expenses ................................... 1.21% 1.20% 1.20% 1.22%**
Net investment income ...................... 4.42% 4.67% 4.80% 4.99%**
Portfolio turnover rate ..................... 6.56% 12.84% 14.95% 11.47%
</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
$.003.
(4) Includes distributions in excess of net investment income in the amount of
$.007.
See notes to financial statements.
82
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999
<TABLE>
<CAPTION>
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FRANKLIN OHIO INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS 99.1%
Akron Bath Copley Joint Township Hospital Revenue, Akron General Medical Center
Project, Refunding, AMBAC Insured, 5.375%,
1/01/17 ................................................................................. $ 1,000,000 $ 1,040,580
1/01/22 ................................................................................. 1,500,000 1,538,460
1/01/27 ................................................................................. 1,000,000 1,023,300
Akron GO, Limited Tax, FGIC Insured, 7.50%, 9/01/05 ........................................ 500,000 598,905
Akron Sewer System Revenue, Refunding, MBIA Insured, 5.55%, 12/01/16 ....................... 3,660,000 3,867,229
Akron Waterworks System First Mortgage Revenue, FGIC Insured, 6.00%, 3/01/14 ............... 1,000,000 1,095,640
Allen County GO, Refunding, AMBAC Insured, 5.30%, 12/01/15 ................................. 1,250,000 1,280,325
Allen County Sewer Revenue, MBIA Insured, 5.70%, 12/01/13 .................................. 1,200,000 1,272,756
Archbold Area Local School District GO,
AMBAC Insured, 6.00%, 12/01/21 .......................................................... 2,000,000 2,188,060
Refunding, MBIA Insured, 5.90%, 12/01/11 ................................................ 600,000 625,506
Aurora City School District GO, Refunding and Improvement, FGIC Insured, 5.80%,
12/01/16 ................................................................................ 1,075,000 1,158,302
Avon Local School District, AMBAC Insured, 6.00%, 12/01/20 ................................. 2,500,000 2,727,875
Barberton City School District, FGIC Insured, 5.125%, 11/01/22 ............................. 9,740,000 9,743,506
Beavercreek Local School District GO, FGIC Insured, 5.70%, 12/01/20 ........................ 8,375,000 8,882,860
Belmont County Correctional Facility, MBIA Insured, 5.85%, 12/01/16 ........................ 500,000 542,110
Bluffton Exempt Village School District, AMBAC Insured, 5.50%, 12/01/16 .................... 1,000,000 1,049,920
Brunswick City School District, AMBAC Insured, 6.90%, 12/01/12 ............................. 2,295,000 2,514,287
Butler County GO, AMBAC Insured, 5.75%, 12/01/16 ........................................... 1,000,000 1,074,400
Butler County Hospital Facilities Revenue, Middletown Regional Hospital,
Refunding and Improvement, FGIC Insured, 6.75%, 11/15/10 ................................ 2,150,000 2,348,811
Butler County Transportation Improvement, Series A, FSA Insured, 5.125%, 4/01/17 ........... 2,000,000 2,029,480
Butler County Waterworks Revenue,
AMBAC Insured, 6.35%, 12/01/08 .......................................................... 790,000 861,582
AMBAC Insured, 6.40%, 12/01/12 .......................................................... 500,000 546,165
AMBAC Insured, 5.45%, 12/01/16 .......................................................... 1,000,000 1,045,890
(b)Butler County Water, Refunding and Improvement, FSA Insured, 5.00%, 12/01/19 ......... 1,500,000 1,484,600
Canal Winchester Local School District GO, Franklin and Fairfield Co. Ohio, 5.30%, 12/01/25. 5,705,000 5,799,361
Cardington and Lincoln Local School District, MBIA Insured, 6.60%, 12/01/14 ................ 400,000 433,596
Celina Wastewater System Mortgage Revenue, FGIC Insured, 6.55%, 11/01/16 ................... 1,200,000 1,279,392
Centerville GO, Capital Facilities, MBIA Insured, 5.65%, 12/01/18 .......................... 2,265,000 2,380,379
Chillicothe GO, Limited Tax, AMBAC Insured, 6.05%, 12/01/12 ................................ 675,000 723,823
Claymont City School District, FGIC Insured, 5.70%, 12/01/21 ............................... 1,000,000 1,065,300
Clermont County Hospital Facilities Revenue, Mercy Health System,
Refunding, Series B, AMBAC Insured, 6.00%, 9/01/19 ...................................... 1,750,000 1,871,818
Series A, AMBAC Insured, Pre-Refunded, 7.50%, 9/01/19 ................................... 515,000 564,445
Clermont County Sewer System Revenue, AMBAC Insured, Pre-Refunded, 7.10%, 12/01/15 ......... 4,280,000 4,493,315
Clermont County Waterworks Revenue, Refunding, AMBAC Insured, 5.80%, 12/01/18 .............. 11,000,000 11,709,060
Cleveland Airport Systems Revenue,
Series A, FGIC Insured, 6.25%, 1/01/20 .................................................. 3,000,000 3,260,070
Series A, FSA Insured, 5.125%, 1/01/27 .................................................. 5,900,000 5,817,754
Series B, FGIC Insured, Pre-Refunded, 6.00%, 1/01/14 .................................... 985,000 1,096,128
Series B, FGIC Insured, Pre-Refunded, 6.10%, 1/01/24 .................................... 1,450,000 1,619,926
Cleveland GO, Series 1994, MBIA Insured, Pre-Refunded, 6.70%, 11/15/18 ..................... 2,000,000 2,321,280
Cleveland Public Power Systems Revenue, First Mortgage, Subordinated, Refunding,
Series 1, MBIA Insured, 5.00%, 11/15/24 ................................................. 2,220,000 2,197,645
Cleveland Waterworks Revenue,
Refunding and Improvement, Series I, FSA Insured, 5.00%, 1/01/28 ........................ 23,375,000 22,987,676
Refunding, Series F, AMBAC Insured, 6.25%, 1/01/16 ...................................... 2,000,000 2,153,700
Series F-92A, AMBAC Insured, Pre-Refunded, 6.25%, 1/01/15 ............................... 1,000,000 1,090,080
Series H, Pre-Refunded, 5.75%, 1/01/26 .................................................. 19,750,000 22,097,485
Clinton-Massie Local School District, Issue I, AMBAC Insured, Pre-Refunded,
7.50%, 12/01/11 ........................................................................... 1,000,000 1,123,320
Columbiana County, Refunding, FSA Insured,
5.25%, 12/01/24 ........................................................................... 1,000,000 1,012,210
Columbus GO, Limited Tax, FGIC Insured,
9.50%, 4/15/03 ............................................................................ 975,000 1,189,032
Columbus Municipal Airport Authority Revenue,
Airport Improvement, Port Columbus International, Series B, AMBAC Insured,
5.00%, 1/01/18 ............................................................................ 3,815,000 3,821,066
Columbus State Community College General Receipts, AMBAC Insured, 5.75%, 12/01/16 .......... 2,100,000 2,300,508
Coshocton Sewer System GO, AMBAC Insured, 6.50%, 12/01/12 .................................. 1,530,000 1,685,800
Crestview Local School District GO, Construction and Improvement, AMBAC Insured, 6.65%,
12/01/14 .................................................................................. 1,650,000 1,822,277
</TABLE>
83
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
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PRINCIPAL
FRANKLIN OHIO INSURED TAX-FREE INCOME FUND AMOUNT VALUE
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<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
Cuyahoga County GO, Limited Tax, MBIA Insured, 9.375%, 10/01/04 ............................ $ 100,000 $ 126,743
Cuyahoga County Hospital Revenue, Metrohealth System Project, Refunding and
Improvement, MBIA Insured, 5.50%, 2/15/27 ............................................... 3,915,000 4,060,638
Cuyahoga County Utility System Revenue,
AMBAC Insured, 5.125%, 2/15/28 .......................................................... 1,750,000 1,753,588
Medical Center Co. Project, Refunding, Series B, MBIA Insured, 6.10%, 8/15/15 ........... 2,945,000 3,212,229
Dayton Airport Revenue, Refunding, AMBAC Insured, 5.25%, 12/01/15 .......................... 2,000,000 2,057,480
Dayton Water System Mortgage Revenue, Refunding, MBIA Insured, 6.75%, 12/01/10 ............. 1,395,000 1,427,810
Defiance GO, MBIA Insured,
6.10%, 12/01/14 ......................................................................... 1,000,000 1,096,680
6.20%, 12/01/20 ......................................................................... 750,000 823,860
Delaware City School District, FGIC Insured, 5.75%, 12/01/15 ............................... 1,640,000 1,754,324
Dover City School District, AMBAC Insured, 6.25%, 12/01/16 ................................. 2,000,000 2,146,860
Dover Municipal Electric System Revenue, FGIC Insured, 6.00%, 12/01/19 ..................... 1,625,000 1,773,379
Dover Waterworks Systems Revenue, AMBAC Insured, 6.00%, 12/01/13 ........................... 1,100,000 1,217,975
East Liverpool Hospital Revenue, East Liverpool City Hospital Project, Series B,
FSA Insured, 5.00%, 10/01/21 ............................................................. 1,000,000 986,640
Fairborn GO, Limited Tax, Series 1991, MBIA Insured, 7.00%, 10/01/11 ....................... 1,390,000 1,547,348
Fairfield City School District GO, FGIC Insured, 6.00%, 12/01/20............................ 1,000,000 1,074,910
Finneytown Local School District, FGIC Insured, 5.80%, 12/01/24 ............................ 1,980,000 2,139,350
Forest Hills Local School District, MBIA Insured, 5.70%, 12/01/16 .......................... 1,500,000 1,610,010
Fostoria City School District GO, AMBAC Insured, Pre-Refunded, 6.70%, 12/01/16 ............. 2,500,000 2,808,100
Franklin County Convention Facilities Authority Tax and Lease Revenue,
Anticipation Bonds, MBIA Insured, 5.00%, 12/01/27 ........................................ 5,350,000 5,261,404
Franklin County Hospital Revenue, Holy Cross Health Systems, AMBAC Insured,
5.875%, 6/01/21........................................................................... 2,500,000 2,706,075
Green County Sewer System Revenue, Governmental Enterprise, MBIA Insured, 5.25%, 12/01/25... 6,000,000 6,126,180
Green County Water System Revenue, Series A, FGIC Insured, 6.125%, 12/01/21 ................ 2,100,000 2,359,728
Green Local School District GO, Summit County, FGIC Insured,
5.875%, 12/01/14 ....................................................................... 2,800,000 3,031,672
5.90%, 12/01/19 ........................................................................ 5,150,000 5,528,319
Hamilton City Electric System Mortgage Revenue,
Refunding, Series A, FGIC Insured, 6.00%, 10/15/23 ..................................... 18,450,000 19,702,940
Series B, FGIC Insured, 6.30%, 10/15/25 ................................................ 2,340,000 2,536,841
Hamilton County Hospital Facilities Revenue,
Bethesda Hospital, Refunding, Series A, AMBAC Insured, 6.25%, 1/01/12 .................. 3,650,000 3,991,713
Children's Hospital Medical Center, Series G, MBIA Insured, 5.00%, 5/15/23 ............. 9,590,000 9,443,753
Hamilton County Sewer System Revenue, Refunding, Series A, FGIC Insured, 6.05%, 12/01/15 ... 3,010,000 3,341,762
Hamilton Wastewater System Revenue, Series A, FSA Insured,
5.90%, 10/15/21 ........................................................................ 3,040,000 3,284,355
5.20%, 10/15/23 ........................................................................ 7,525,000 7,616,429
Hamilton Waterworks Mortgage Revenue, Series A, MBIA Insured, 6.30%, 10/15/21............... 4,665,000 4,975,596
Hillard School District GO, Refunding, FGIC Insured, 6.55%, 12/01/05........................ 500,000 573,725
Hudson Local School District GO, Refunding, FGIC Insured, 5.60%, 12/15/14 ,,,,,,,,,,,,,,,,,, 2,750,000 2,903,560
Indian Lake Local School District GO, Construction and Improvement, FGIC Insured,
5.375%, 12/01/23 ......................................................................... 1,000,000 1,020,540
Indian Valley Local School District GO, AMBAC Insured, 5.75%, 12/01/19 ..................... 1,000,000 1,068,580
Ironton Building Improvement, AMBAC Insured, 5.50%, 12/01/22 ............................... 1,000,000 1,041,250
Jackson Local School District GO, Stark and Summit Counties School Building, Construction
and Improvement, MBIA Insured,
5.40%, 12/01/13 ........................................................................ 2,750,000 2,903,313
5.50%, 12/01/21 ........................................................................ 3,060,000 3,188,612
Jackson Waterworks Revenue, AMBAC Insured, 5.60%, 12/01/18 ................................. 500,000 518,310
Kent City School District, FGIC Insured, 5.75%, 12/01/21 ................................... 1,500,000 1,610,565
Kent State University Revenues, General Receipts,
AMBAC Insured, Pre-Refunded, 6.45%, 5/01/12 ............................................ 1,195,000 1,319,077
MBIA Insured, 5.50%, 5/01/28 ........................................................... 5,920,000 6,157,984
Kettering City School District, FGIC Insured, 5.25%, 12/01/22 .............................. 1,000,000 1,008,780
Lake County Hospital Facilities Revenue, Lake Hospital System Inc., AMBAC
Insured, 5.00%, 8/15/23 .................................................................. 7,500,000 7,385,325
Lake County Hospital Improvement Revenue, Lake Hospital System Inc., Series B
and C, AMBAC Insured,
7.875%, 1/01/05 ........................................................................ 1,940,000 1,966,035
8.00%, 1/01/13 ......................................................................... 2,185,000 2,217,032
Lake Local School District GO, Stark County, AMBAC Insured, 6.25%, 12/01/09 ................ 1,000,000 1,093,010
Lakota Local District GO, AMBAC Insured, Pre-Refunded, 6.125%, 12/01/17 .................... 3,200,000 3,618,432
</TABLE>
84
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN OHIO INSURED TAX-FREE INCOME FUND AMOUNT VALUE
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<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
Lebanon Electric Revenue Mortgage, AMBAC Insured, 5.60%, 12/01/16 ........................ $ 795,000 $ 837,016
Liberty Benton Local School District, AMBAC Insured, Pre-Refunded,
6.00%, 12/01/15 ....................................................................... 2,000,000 2,257,240
6.10%, 12/01/19 ....................................................................... 2,045,000 2,318,498
Lincolnview Local School District, FGIC Insured, 5.50%, 12/01/25 ......................... 4,225,000 4,392,648
Lorain County Hospital Revenue, Catholic Healthcare Partners, Refunding,
Series B, MBIA Insured, 5.50%, 9/01/27 ................................................ 12,200,000 12,673,238
Lucas County GO, Limited Tax, FGIC Insured, 8.00%,
12/01/06 .............................................................................. 120,000 151,046
12/01/08 .............................................................................. 110,000 142,622
12/01/09 .............................................................................. 120,000 157,750
12/01/10 .............................................................................. 220,000 291,293
Lucas County Hospital Revenue,
Promedica Healthcare Obligation, Refunding, MBIA Insured, 5.75%, 11/15/14 ............. 5,000,000 5,497,650
St. Vincent Medical Center, Refunding, Series B, MBIA Insured, 5.25%, 8/15/20 ......... 3,500,000 3,543,785
Mahoning County GO, Bridge Improvement,
Limited Tax, AMBAC Insured, 7.20%, 12/01/09 ........................................... 1,500,000 1,567,500
Unlimited Tax, AMBAC Insured, 7.15%, 12/01/04 ......................................... 1,500,000 1,569,120
Mahoning County Hospital Facilities Revenue,
Western Reserve Care, MBIA Insured, ETM, 5.50%, 10/15/25 .............................. 5,000,000 5,249,450
Youngstown Hospital Inc. Project, Series B, MBIA Insured, Pre-Refunded, 7.00%, 10/15/08 2,000,000 2,224,980
Mansfield Hospital Improvement Revenue, Mansfield General Hospital Project,
AMBAC Insured, 6.70%, 12/01/09 ........................................................ 2,500,000 2,728,725
Marietta City School District, Series B, AMBAC Insured, 5.75%, 12/01/07 .................. 1,000,000 1,072,400
Marietta Sewer System Mortgage Revenue, BIG Insured, 7.50%, 11/01/07 ..................... 465,000 475,114
Marietta Water Revenue, AMBAC Insured, 5.95%, 12/01/21 ................................... 3,875,000 4,218,364
Marysville Exempted Village School District GO, MBIA Insured, 5.75%, 12/01/23 ............ 1,000,000 1,058,770
Marysville Water Systems, Refunding, AMBAC Insured,
5.40%, 12/01/13 ....................................................................... 1,000,000 1,037,860
5.50%, 12/01/18 ....................................................................... 1,500,000 1,545,975
Mason Sewer Systems Revenue, FGIC Insured, 6.00%, 12/01/19 ............................... 1,935,000 2,091,232
Maumee Hospital Revenue, Saint Luke's Hospital Project, Refunding, AMBAC Insured,
5.80%, 12/01/14 ....................................................................... 2,755,000 2,997,468
Mentor Exempted Village School District, MBIA Insured,
5.375%, 12/01/11 ...................................................................... 1,000,000 1,047,970
6.625%, 12/01/13 ...................................................................... 2,000,000 2,181,860
Pre-Refunded, 7.40%, 12/01/11 ......................................................... 2,040,000 2,146,141
Miami County Hospital Facilities Revenue, Upper Valley Medical Center, Nursing Care Inc.,
Series B, MBIA Insured, 6.50%, 5/01/21 ................................................ 1,340,000 1,421,995
Middleburg Heights Hospital Revenue, Southwest General Health Center, Refunding,
FSA Insured, 5.75%, 8/15/21 ........................................................... 1,500,000 1,627,125
Montgomery County Hospital Facilities Revenue, Kettering Medical Center Facilities,
MBIA Insured,
7.40%, 4/01/09 ........................................................................ 15,000,000 15,337,650
5.50%, 4/01/26 ........................................................................ 2,000,000 2,070,700
Pre-Refunded, 7.50%, 4/01/14 .......................................................... 5,000,000 5,117,050
Montgomery County Revenue,
Miami Valley Hospital, Refunding, Series A, AMBAC Insured, 6.25%, 11/15/12 ............ 1,600,000 1,749,040
Miami Valley Hospital, Refunding, Series A, AMBAC Insured, 6.25%, 11/15/16 ............ 3,250,000 3,515,298
Sisters of Charity Health Care, Series A, MBIA Insured, 6.625%, 5/15/21 .................. 1,565,000 1,677,195
Muskingum County GO,
County Office Building Improvement, AMBAC Insured, 7.20%, 12/01/10 .................... 1,000,000 1,073,920
Justice Center Improvement, AMBAC Insured, Pre-Refunded, 6.375%, 12/01/17 ............. 1,695,000 1,887,942
Napoleon City School District GO, AMBAC Insured, 5.375%, 12/01/18 ........................ 1,000,000 1,024,080
New Lexington HDC, Mortgage Revenue, Lincoln Park, Refunding, Series A, MBIA Insured,
5.85%, 1/01/21 ........................................................................ 1,070,000 1,112,500
New Philadelphia City School District GO, School Improvement, AMBAC Insured,
6.25%, 12/01/17 ....................................................................... 2,000,000 2,158,380
New Richmond Exempted Village School District GO, AMBAC Insured, 7.125%, 9/01/09 ......... 1,500,000 1,539,810
North Olmsted GO, AMBAC Insured, 6.25%, 12/15/12 ......................................... 3,800,000 4,149,942
North Ridgeville GO, City School District, AMBAC Insured, 6.30%, 12/01/17 ................ 2,900,000 3,134,204
Northeastern Local School District GO, Clark County Improvement, FGIC Insured,
5.55%, 12/01/18 ....................................................................... 1,000,000 1,047,430
Northridge Local School District GO, Licking, Knox and Del Counties Improvement,
FSA Insured, 5.75%, 12/01/18 .......................................................... 1,090,000 1,158,180
Northwest Local School District GO,
Hamilton County, FGIC Insured, 5.15%, 12/01/22 ........................................ 3,400,000 3,415,232
Scioto County, AMBAC Insured, 7.05%, 12/01/14 ......................................... 2,000,000 2,193,880
</TABLE>
85
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN OHIO INSURED TAX-FREE INCOME FUND AMOUNT VALUE
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<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
Oak Hills Local School District GO, MBIA Insured, 5.45%, 12/01/21 .................... $ 5,000,000 $ 5,191,000
Ohio Capital Corp. HMR,
Refunding, Series G, MBIA Insured, 6.35%, 7/01/22 ................................. 2,000,000 2,134,180
Refunding, Series H, MBIA Insured, 6.90%, 7/01/24 ................................. 4,215,000 4,441,514
Refunding, Series J, MBIA Insured, 6.50%, 1/01/25 ................................. 3,500,000 3,644,970
Westview Apartments, Refunding, Series A, MBIA Insured, 6.125%, 1/01/15 ........... 1,625,000 1,736,410
Westview Apartments, Refunding, Series A, MBIA Insured, 6.25%, 1/01/23 ............ 2,565,000 2,727,698
Ohio HFA,
MFHR, Northridge Apartments, FGIC Insured, 10.35%, 12/01/25 ....................... 760,000 829,335
MFHR, Wind River Apartment Project, Series A, GNMA Secured, 5.65%, 5/01/32 ........ 2,035,000 2,087,279
RMR, Residential, Series A-1, GNMA Secured, 5.40%, 9/01/29 ........................ 3,900,000 3,954,873
SFMR, Series A, GNMA Secured, 7.65%, 3/01/29 ...................................... 2,960,000 3,048,682
SFMR, Series B, GNMA Secured, 7.40%, 9/01/15 ...................................... 635,000 659,809
SFMR, Series C, GNMA Secured, 7.85%, 9/01/21 ...................................... 1,455,000 1,530,034
SFMR, Series C, GNMA Secured, Pre-Refunded, 8.00%, 9/01/08 ........................ 1,690,000 1,740,700
SFMR, Series C, GNMA Secured, Pre-Refunded, 8.125%, 3/01/20 ....................... 1,560,000 1,606,800
SFMR, Series D, GNMA Secured, 7.50%, 9/01/13 ...................................... 945,000 990,436
SFMR, Series D, GNMA Secured, 7.05%, 9/01/16 ...................................... 3,760,000 3,944,503
SFMR, Series I, GNMA Secured, 7.60%, 9/01/16 ...................................... 2,640,000 2,768,726
Ohio Municipal Electric Generation Agency Joint Venture 5, Certificates of
Beneficial Interest, AMBAC Insured,
5.625%, 2/15/16 ................................................................... 13,000,000 13,651,950
5.375%, 2/15/24 ................................................................... 7,680,000 7,854,182
Ohio State Air Quality Development Authority Revenue,
Cincinnati Gas and Electric, Refunding, Series B, MBIA Insured, 5.45%, 1/01/24 .... 5,000,000 5,128,400
Columbus and Southern Power, Series A, FGIC Insured, 6.375%, 12/01/20 ............. 4,000,000 4,372,520
JMG Funding LP Project, AMBAC Insured, 5.625%, 10/01/22 ........................... 7,500,000 7,794,975
JMG Funding LP Project, Refunding, AMBAC Insured, 6.375%, 1/01/29 ................. 1,230,000 1,347,084
JMG Funding LP Project, Refunding, AMBAC Insured, 6.375%, 4/01/29 ................. 15,245,000 16,696,172
PCR, Ohio Edison, Refunding, Series A, FGIC Insured, 7.45%, 3/01/16 ............... 1,000,000 1,054,250
PCR, Ohio Edison, Refunding, Series B, AMBAC Insured, 5.625%, 11/15/29 ............ 5,400,000 5,630,256
PCR, Pennsylvania Power Co., Refunding, Series A, AMBAC Insured, 6.45%, 5/01/27 ... 7,000,000 7,590,520
Ohio State Building Authority Revenue, Adult Correctional Facilities, Series A,
AMBAC Insured, 5.60%, 4/01/16 ..................................................... 2,000,000 2,119,640
MBIA Insured, 6.125%, 10/01/13 .................................................... 13,000,000 14,452,360
Ohio State Department of Transportation COP, Panhandle Rail Line Project, FSA Insured,
6.50%, 4/15/12 .................................................................... 1,100,000 1,198,538
Ohio State Education Loan Revenue, Series A-1, AMBAC Insured, 5.85%, 12/01/19 ........ 5,000,000 5,202,750
Ohio State Higher Educational Facility Commission Revenue,
(b)Higher Educational Facility Oberlin College, AMBAC Insured, 5.00%, 10/01/26 ........ 5,000,000 4,955,450
University Dayton Project, FGIC Insured, 5.80%, 12/01/14 .......................... 1,300,000 1,399,255
University Dayton Project, FGIC Insured, 6.75%, 12/01/15 .......................... 1,725,000 1,901,537
University Dayton Project, FGIC Insured, Pre-Refunded, 7.25%, 12/01/12 ............ 450,000 486,995
Xavier University Higher Educational Facility, MBIA Insured, 5.375%, 5/15/22 ...... 5,000,000 5,152,050
Ohio State Turnpike Commission Turnpike Revenue, Series A,
FGIC Insured, Pre-Refunded, 5.75%, 2/15/24 ........................................ 1,000,000 1,103,810
MBIA Insured, Pre-Refunded, 5.50%, 2/15/26 ........................................ 19,400,000 21,444,760
Ohio State Water Development Authority PCR, Facilities Revenue,
Pennsylvania Power Co. Project, Refunding, AMBAC Insured, 6.15%, 8/01/23 .......... 3,420,000 3,719,524
Water Control Loan Fund, Water Quality Series, MBIA Insured, 5.125%, 6/01/19 ...... 5,000,000 5,051,050
Ohio State Water Development Authority Revenue,
Cincinnati Gas, Refunding, Series A, MBIA Insured, 5.45%, 1/01/24 ................. 4,000,000 4,102,720
Dayton Power, Refunding, Series A, AMBAC Insured, 6.40%, 8/15/27 .................. 5,000,000 5,379,400
Fresh Water Service, AMBAC Insured, 5.90%, 12/01/21 ............................... 8,750,000 9,467,500
Pure Water, Refunding and Improvement, AMBAC Insured, 5.50%, 12/01/11 ............. 1,000,000 1,069,950
Pure Water, Refunding and Improvement, AMBAC Insured, ETM, 5.50%, 12/01/18 ........ 4,450,000 4,617,988
Pure Water, Series I, AMBAC Insured, ETM, 7.00%, 12/01/09 ......................... 2,000,000 2,371,180
Olentangy Local School District GO, BIG Insured, 7.75%,
12/01/08 .......................................................................... 375,000 476,040
12/01/09 .......................................................................... 375,000 481,605
12/01/10 .......................................................................... 375,000 490,433
</TABLE>
86
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN OHIO INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
Olmsted Falls Local School District, FGIC Insured,
5.85%, 12/15/17 ...................................................................... $ 1,500,000 $ 1,608,495
Pre-Refunded, 7.05%, 12/15/11 ........................................................ 1,000,000 1,112,870
Ontario Local School District GO, FSA Insured, 5.125%, 12/01/18 ......................... 4,000,000 4,018,960
Orrville Water Systems Improvement Revenue, MBIA Insured, 6.125%, 12/01/18 .............. 1,150,000 1,258,319
Ottawa County GO, Catawba Isle, AMBAC Insured, Pre-Refunded, 7.00%, 9/01/11 ............. 1,500,000 1,641,645
Ottawa County Sewer System Revenue, Danbury Project, Refunding, AMBAC Insured,
5.50%, 10/01/14 ...................................................................... 1,950,000 2,038,335
Painesville Township Local School District GO, Lake County, FGIC Insured,
5.625%, 12/01/09 ..................................................................... 3,240,000 3,456,432
5.65%, 12/01/15 ...................................................................... 4,490,000 4,731,113
Perrysburg Exempted Village School District, AMBAC Insured, 6.00%, 12/01/15 ............. 2,000,000 2,163,080
Pickerington Local School District GO,
AMBAC Insured, 5.00%, 12/01/25 ....................................................... 8,335,000 8,142,045
Refunding, AMBAC Insured, 5.55%, 12/01/07 ............................................ 1,000,000 1,076,570
Powell Village GO, Series A, MBIA Insured,
5.55%, 12/01/17 ...................................................................... 840,000 881,168
5.60%, 12/01/22 ...................................................................... 445,000 468,518
Puerto Rico Commonwealth GO,
FSA Insured, 5.40%, 7/01/25 .......................................................... 3,000,000 3,095,130
Refunding, MBIA Insured, 5.75%, 7/01/24 .............................................. 2,000,000 2,140,560
Puerto Rico PBA Revenue, Government Facilities, Series A, AMBAC Insured,
5.50%, 7/01/21 ....................................................................... 4,000,000 4,176,120
Puerto Rico Port Authority Revenue, Series D, FGIC Insured, 6.00%, 7/01/21 .............. 11,000,000 11,325,710
Revere Local School District GO, AMBAC Insured,
5.25%, 12/01/16 ...................................................................... 2,000,000 2,039,640
6.00%, 12/01/16 ...................................................................... 1,600,000 1,727,280
Reynoldsburg City School District GO, Refunding, FGIC Insured, 5.45%, 12/01/17 .......... 4,075,000 4,243,461
Salem GO, AMBAC Insured, 6.50%, 12/01/06 ................................................ 2,000,000 2,311,280
South Range Local School District GO, MBIA Insured, 6.15%, 12/01/18 ..................... 700,000 760,753
SouthWest Regional Water District Revenue, MBIA Insured, 6.00%,
12/01/15 ............................................................................. 1,000,000 1,096,810
12/01/20 ............................................................................. 700,000 763,070
South-Western City School District of Ohio Franklin and Pickway Counties GO,
FGIC Insured, ETM, 7.875%,
12/01/04 ............................................................................. 550,000 661,496
12/01/06 ............................................................................. 600,000 748,938
12/01/07 ............................................................................. 600,000 757,410
Springboro Sewer Systems Revenue, Refunding, MBIA Insured, 5.70%, 6/01/18 ............... 1,410,000 1,505,908
Springboro Water Systems Revenue, Refunding, AMBAC Insured, 5.45%, 12/01/18 ............. 1,125,000 1,153,868
St. Mary's Electric System Mortgage Revenue, AMBAC Insured, 6.65%, 12/01/11 ............. 600,000 655,440
St. Mary's Waterworks Revenue, AMBAC Insured, 6.65%, 12/01/11 ........................... 750,000 819,300
Stark County GO, Refunding, AMBAC Insured, 5.70%, 11/15/17 .............................. 2,775,000 2,939,252
Stark County Sewer District Improvement Bonds, FGIC Insured, 5.80%, 12/01/16 ............ 1,000,000 1,084,590
Steubenville City School District, Series A, AMBAC Insured, Pre-Refunded, 6.20%, 12/01/17 2,075,000 2,333,566
Struthers City School District, AMBAC Insured, 6.50%, 12/01/14 .......................... 1,750,000 1,919,208
Summit County GO, Limited Tax, Refunding, Series B, AMBAC Insured, 6.95%, 8/01/08 ....... 400,000 434,216
Sylvania City School District, FGIC Insured, 5.75%, 12/01/22 ............................ 4,830,000 5,120,283
Toledo GO, Limited Tax,
AMBAC Insured, 5.95%, 12/01/15 ....................................................... 3,715,000 4,055,071
AMBAC Insured, 6.00%, 12/01/16 ....................................................... 1,000,000 1,100,880
FGIC Insured, 7.375%, 12/01/00 ....................................................... 500,000 535,640
FGIC Insured, 7.375%, 12/01/02 ....................................................... 400,000 451,376
FGIC Insured, 7.375%, 12/01/03 ....................................................... 650,000 747,221
FGIC Insured, 7.375%, 12/01/04 ....................................................... 650,000 760,812
FGIC Insured, 7.375%, 12/01/05 ....................................................... 650,000 768,385
FGIC Insured, 7.375%, 12/01/06 ....................................................... 625,000 745,400
Toledo Sewerage System Mortgage Revenue, Series B, MBIA Insured, 7.75%, 11/15/17 ........ 2,320,000 2,386,166
Trumbull County Hospital Revenue,
Refunding and Improvement, Series A, FGIC Insured, 6.25%, 11/15/12 ................... 1,000,000 1,109,020
Refunding, Series B, FGIC Insured, 6.90%, 11/15/12 ................................... 2,000,000 2,269,020
</TABLE>
87
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN OHIO INSURED TAX-FREE INCOME FUND AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
Twinsburg City School District, FSA Insured, 6.70%, 12/01/11 .................... $ 4,000,000 $ 4,350,600
University of Cincinnati COP, MBIA Insured, 6.75%, 12/01/09 ..................... 1,600,000 1,766,144
University of Cincinnati General Receipt,
Series AD, MBIA Insured, 5.125%, 6/01/20 ..................................... 1,500,000 1,503,375
Series W, MBIA Insured, 5.85%, 6/01/16 ....................................... 1,630,000 1,760,693
University of Puerto Rico Revenues, Series M, MBIA Insured, 5.25%, 6/01/25 ...... 6,000,000 6,116,100
University of Toledo General Receipt,
FGIC Insured, 5.30%, 6/01/18 ................................................. 2,000,000 2,044,460
Refunding, Series A, FGIC Insured, 5.90%, 6/01/20 ............................ 5,500,000 5,810,310
Upper Arlington County School District GO, MBIA Insured, 5.25%, 12/01/22 ........ 5,000,000 5,059,000
Urbana Wastewater Treatment Plant GO, Improvement, AMBAC Insured, 7.05%, 12/01/11 1,000,000 1,118,900
Valley Local School District, AMBAC Insured, 7.00%, 12/01/13 .................... 1,400,000 1,596,420
Warren GO,
MBIA Insured, 6.65%, 11/01/12 ................................................ 2,415,000 2,752,424
Refunding, AMBAC Insured, 5.50%, 11/15/13 .................................... 1,015,000 1,089,633
Wausen Exempt Village School District GO, Refunding and School Improvements,
MBIA Insured, 5.50%, 12/01/17 ................................................ 1,800,000 1,883,214
Wayne Local School District GO, Warren County, AMBAC Insured, 6.10%, 12/01/24 ... 1,800,000 1,976,868
Westerville, Minerva Park, and Blendon Joint Township Hospital District Revenue,
St. Ann's Hospital, Refunding, Series B,
AMBAC Insured, ETM, 7.00%, 9/15/12 ........................................... 5,000,000 5,329,450
Wilmington City School District GO, FGIC Insured, 6.30%, 12/01/14 ............... 2,000,000 2,147,120
Wilmington Sewer System Revenue, First Mortgage, Refunding, MBIA Insured,
5.30%, 2/15/18 ............................................................... 1,170,000 1,200,993
Wilmington Water Revenue, First Mortgage System, AMBAC Insured,
5.90%, 6/15/14 ............................................................... 1,275,000 1,394,761
6.00%, 6/15/21 ............................................................... 2,510,000 2,736,703
Woodmore Local School District GO, Refunding, AMBAC Insured, 5.65%, 12/01/08 .... 500,000 538,170
Wooster City School District GO, AMBAC Insured, 6.50%, 12/01/17 ................. 8,700,000 9,711,810
Worthington City School District GO, Refunding, FGIC Insured, 6.375%, 12/01/12 .. 2,350,000 2,552,641
Youngstown State University General Receipts, AMBAC Insured, 6.00%, 12/15/16 .... 2,250,000 2,540,880
Zane Trace Local School District GO, AMBAC Insured, 5.45%, 12/01/19 ............. 1,000,000 1,039,770
------------
TOTAL LONG TERM INVESTMENTS (COST $759,384,531) ................................. 811,625,146
------------
(a)SHORT TERM INVESTMENTS .5%
Cuyahoga County IDR, Allen Group Inc. Project, Weekly VRDN and Put,
2.95%, 12/01/15 .............................................................. 300,000 300,000
Ohio State Air Quality Development Authority Revenue, Cincinnati Gas and
Electric, Refunding, Series A,
Daily VRDN and Put, 3.15%, 9/01/30 ........................................... 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 ............................................................... 2,200,000 2,200,000
------------
TOTAL SHORT TERM INVESTMENTS (COST $4,000,000) .................................. 4,000,000
------------
TOTAL INVESTMENTS (COST $763,384,531) 99.6% ..................................... 815,625,146
OTHER ASSETS, LESS LIABILITIES .4% .............................................. 3,225,425
------------
NET ASSETS 100.0% ............................................................... $818,850,571
============
</TABLE>
See glossary of terms on page 89.
(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.
88
FRANKLIN TAX-FREE TRUST
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (CONT.)
GLOSSARY OF TERMS
- --------------------------------------------------------------------------------
AD - Assessment District
AMBAC - American Municipal Bond Assurance Corp.
BART - Bay Area Rapid Transit
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
COP - Certificate of Participation
EDA - Economic Development Authority
EDC - Economic Development Corp.
ETM - Escrow to Maturity
FGIC - Financial Guaranty Insurance Co.
FHA - Federal Housing Authority/Agency
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
HDC - Housing Development Corp.
HFA - Housing Finance Authority/Agency
HFAR - Housing Finance Authority Revenue
HFC - Housing Finance Corp.
HMR - Home Mortgage Revenue
ID - Improvement District
IDA - Industrial Development Authority/Agency
IDAR - Industrial Development Authority/Agency Revenue
IDR - Industrial Development Revenue
ISD - Independent School District
LP - Limited Partnership
MBIA - Municipal Bond Investors Assurance Corp.
MF - Multi-Family
MFHR - Multi-Family Housing Revenue
MFMR - Multi-Family Mortgage Revenue
MFR - Multi-Family Revenue
MTA - Metropolitan Transit Authority
MUD - Municipal Utility District
PBA - Public Building Authority
PCC - Pollution Control Corporation
PCR - Pollution Control Revenue
PUD - Public Utility District
RDA - Redevelopment Authority/Agency
RDAR - Redevelopment Authority/Agency Revenue
RMR - Residential Mortgage Revenue
SF - Single Family
SFM - Single Family Mortgage
SFMR - Single Family Mortgage Revenue
SFRMR - Single Family Residential Mortgage Revenue
UHSD - Unified High School District
USD - Unified School District
89
FRANKLIN TAX-FREE TRUST
Financial Statements
STATEMENTS OF ASSETS AND LIABILITIES
FEBRUARY 28, 1999
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN
ARIZONA INSURED FLORIDA INSURED FRANKLIN
TAX-FREE TAX-FREE INSURED TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
--------------- --------------- ---------------
<S> <C> <C> <C>
Assets:
Investments in securities:
Cost ............................................................... $ 76,557,736 $ 115,940,869 $ 1,671,809,661
=====================================================
Value .............................................................. 80,031,977 122,730,335 1,782,702,781
Cash ................................................................ 12,357 11,359 3,916,593
Receivables:
Capital shares sold ................................................ 301,093 193,329 1,657,856
Interest ........................................................... 761,155 2,069,351 23,907,792
-----------------------------------------------------
Total assets ......................................................... 81,106,582 125,004,374 1,812,185,022
-----------------------------------------------------
Liabilities:
Payables:
Investment securities purchased .................................... -- -- 11,879,828
Capital shares redeemed ............................................ 93,331 86,779 1,905,738
Affiliates ......................................................... 43,761 64,549 1,032,266
Shareholders ....................................................... 190,944 218,465 2,979,752
Distributions to shareholders ....................................... 88,859 137,240 2,115,033
Other liabilities ................................................... 5,262 9,519 92,331
-----------------------------------------------------
Total liabilities .................................................... 422,157 516,552 20,004,948
-----------------------------------------------------
Net assets, at value ................................................ $ 80,684,425 $ 124,487,822 $ 1,792,180,074
=====================================================
Net assets consist of:
Undistributed net investment income ................................. $ 67,696 $ 40,425 $ --
Accumulated distributions in excess of net investment income ........ -- -- (1,730,568)
Net unrealized appreciation ......................................... 3,474,241 6,789,466 110,893,120
Accumulated net realized gain (loss) ................................ (182,835) (1,267,548) 3,062,284
Capital shares ...................................................... 77,325,323 118,925,479 1,679,955,238
-----------------------------------------------------
Net assets, at value ................................................ $ 80,684,425 $ 124,487,822 $ 1,792,180,074
=====================================================
Class A:
Net assets, at value ................................................ $ 80,684,425 $ 124,487,822 $ 1,727,013,645
=====================================================
Shares outstanding .................................................. 7,442,975 11,825,883 140,839,755
=====================================================
Net asset value per share* .......................................... $ 10.84 $ 10.53 $ 12.26
=====================================================
Maximum offering price per share (net asset value per share / 95.75%) $ 11.32 $ 11.00 $ 12.80
=====================================================
Class C:
Net assets, at value ................................................ -- -- $ 65,166,429
=====================================================
Shares outstanding .................................................. -- -- 5,284,153
=====================================================
Net asset value per share* .......................................... -- -- $ 12.33
=====================================================
Maximum offering price per share (net asset value per share / 99.00%) -- -- $ 12.45
=====================================================
</TABLE>
* Redemption price is equal to net asset value less any applicable contingent
deferred sales charge.
See notes to financial statements.
90
FRANKLIN TAX-FREE TRUST
Financial Statements (continued)
STATEMENTS OF ASSETS AND LIABILITIES (CONT.)
FEBRUARY 28, 1999
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN
MASSACHUSETTS MICHIGAN MINNESOTA OHIO
INSURED INSURED INSURED INSURED
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 ............................................................... $340,631,592 $1,106,348,081 $505,431,161 $763,384,531
===========================================================
Value .............................................................. 362,469,032 1,195,996,630 530,747,218 815,625,146
Cash ................................................................ 243,854 478,098 869,149 439,000
Receivables:
Capital shares sold ................................................ 540,540 1,301,117 1,366,844 978,222
Interest ........................................................... 4,760,073 18,808,415 5,265,115 11,920,017
-----------------------------------------------------------
Total assets ......................................................... 368,013,499 1,216,584,260 538,248,326 828,962,385
-----------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased .................................... -- -- -- 6,492,427
Capital shares redeemed ............................................ 116,805 898,357 464,032 622,561
Affiliates ......................................................... 242,193 730,703 331,595 511,693
Shareholders ....................................................... 831,335 2,196,624 716,246 1,488,143
Distributions to shareholders ....................................... 419,797 1,385,215 625,772 946,716
Other liabilities ................................................... 22,886 58,011 40,731 50,274
-----------------------------------------------------------
Total liabilities .................................................... 1,633,016 5,268,910 2,178,376 10,111,814
-----------------------------------------------------------
Net assets, at value ................................................ $366,380,483 $1,211,315,350 $536,069,950 $818,850,571
===========================================================
Net assets consist of:
Accumulated distributions in excess of net investment income ........ $ (184,372) $ (1,057,561) $ (47,855) $ (27,565)
Net unrealized appreciation ......................................... 21,837,440 89,648,549 25,316,057 52,240,615
Accumulated net realized gain (loss) ................................ -- (84,031) 1,059,053 1,147,411
Capital shares ...................................................... 344,727,415 1,122,808,393 509,742,695 765,490,110
-----------------------------------------------------------
Net assets, at value ................................................ $366,380,483 $1,211,315,350 $536,069,950 $818,850,571
===========================================================
Class A:
Net assets, at value ................................................ $340,109,185 $1,161,345,331 $515,173,828 $776,592,398
===========================================================
Shares outstanding .................................................. 29,050,502 94,578,729 42,439,549 62,170,225
===========================================================
Net asset value per share* .......................................... $ 11.71 $ 12.28 $ 12.14 $ 12.49
===========================================================
Maximum offering price per share (net asset value per share / 95.75%) $ 12.23 $ 12.83 $ 12.68 $ 13.04
===========================================================
Class C:
Net assets, at value ................................................ $ 26,271,298 $ 49,970,019 $ 20,896,122 $ 42,258,173
===========================================================
Shares outstanding .................................................. 2,233,198 4,043,774 1,713,805 3,365,166
===========================================================
Net asset value per share* .......................................... $ 11.76 $ 12.36 $ 12.19 $ 12.56
===========================================================
Maximum offering price per share (net asset value per share / 99.00%) $ 11.88 $ 12.48 $ 12.31 $ 12.69
===========================================================
</TABLE>
* Redemption price is equal to net asset value less any applicable contingent
deferred sales charge.
See notes to financial statements.
91
FRANKLIN TAX-FREE TRUST
Financial Statements (continued)
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED FEBRUARY 28, 1999
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN
ARIZONA INSURED FLORIDA INSURED FRANKLIN
TAX-FREE TAX-FREE INSURED TAX-FREE
INCOME FUND INCOME FUND INCOME FUND
-------------------------------------------------
<S> <C> <C> <C>
Investment income:
Interest ................................................ $ 3,526,936 $ 5,997,743 $ 100,799,419
-------------------------------------------------
Expenses:
Management fees (Note 3) ................................ 444,848 697,080 8,186,468
Distribution fees (Note 3)
Class A ................................................ 66,900 113,229 1,477,735
Class C ................................................ -- -- 330,443
Transfer agent fees (Note 3) ............................ 19,479 36,373 639,009
Custodian fees .......................................... 637 1,098 17,493
Reports to shareholders ................................. 6,949 12,162 226,595
Registration and filing fees ............................ 9,273 8,760 122,126
Professional fees ....................................... 2,545 3,558 42,309
Trustees' fees and expenses ............................. 699 1,106 15,828
Other ................................................... 16,204 21,813 119,602
-------------------------------------------------
Total expenses ......................................... 567,534 895,179 11,177,608
Expenses waived/paid by affiliate (Note 3) ............. (315,223) (417,537) --
-------------------------------------------------
Net expenses ............................................ 252,311 477,642 11,177,608
-------------------------------------------------
Net investment income .................................. 3,274,625 5,520,101 89,621,811
-------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain from investments ...................... 64,058 2,867 10,620,546
Net unrealized appreciation (depreciation) on investments 334,186 979,147 (3,082,372)
-------------------------------------------------
Net realized and unrealized gain ......................... 398,244 982,014 7,538,174
Net increase in net assets resulting from operations ..... $ 3,672,869 $ 6,502,115 $ 97,159,985
=================================================
</TABLE>
See notes to financial statements.
92
FRANKLIN TAX-FREE TRUST
Financial Statements (continued)
STATEMENTS OF OPERATIONS (CONT.)
FOR THE YEAR ENDED FEBRUARY 28, 1999
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN
MASSACHUSETTS MICHIGAN MINNESOTA OHIO
INSURED TAX-FREE INSURED TAX-FREE INSURED TAX-FREE INSURED TAX-FREE
INCOME FUND INCOME FUND INCOME FUND INCOME FUND
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment income:
Interest ................................................ $ 20,020,960 $ 66,806,324 $ 29,428,362 $ 44,538,395
-------------------------------------------------------------------
Expenses:
Management fees (Note 3) ................................ 1,842,232 5,623,372 2,591,321 3,822,228
Distribution fees (Note 3)
Class A ................................................ 296,450 1,014,288 443,034 680,046
Class C ................................................ 124,618 269,619 100,209 229,041
Transfer agent fees (Note 3) ............................ 141,391 564,054 236,613 361,491
Custodian fees .......................................... 3,521 11,911 5,222 7,928
Reports to shareholders ................................. 46,822 169,807 77,042 119,373
Registration and filing fees ............................ 13,174 21,155 12,682 29,030
Professional fees ....................................... 9,111 31,600 12,831 18,851
Trustees' fees and expenses ............................. 3,297 10,773 4,805 7,086
Other ................................................... 36,619 27,547 51,466 75,266
-------------------------------------------------------------------
Total expenses ..................................... 2,517,235 7,744,126 3,535,225 5,350,340
-------------------------------------------------------------------
Net investment income .............................. 17,503,725 59,062,198 25,893,137 39,188,055
-------------------------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain from investments ...................... 549,086 2,222,023 1,829,574 2,482,460
Net unrealized appreciation (depreciation) on investments (1,068) 10,636,500 (1,790,539) 1,410,754
-------------------------------------------------------------------
Net realized and unrealized gain ......................... 548,018 12,858,523 39,035 3,893,214
-------------------------------------------------------------------
Net increase in net assets resulting from operations ..... $ 18,051,743 $ 71,920,721 $ 25,932,172 $ 43,081,269
===================================================================
</TABLE>
See notes to financial statements.
93
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 INSURED FRANKLIN FLORIDA INSURED
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 ................................... $ 3,274,625 $ 2,419,028 $ 5,520,101 $ 4,570,472
Net realized gain from investments ...................... 64,058 186,266 2,867 139,100
Net unrealized appreciation on investments .............. 334,186 1,729,964 979,147 3,782,107
----------------------------------------------------------------
Net increase in net assets resulting from operations ...... 3,672,869 4,335,258 6,502,115 8,491,679
Distributions to shareholders from net investment income . (3,262,224) (2,451,451) (5,528,406) (4,572,391)
Capital share transactions: (Note 2) ..................... 22,215,047 16,481,798 22,008,531 20,409,395
----------------------------------------------------------------
Net increase in net assets ................................ 22,625,692 18,365,605 22,982,240 24,328,683
Net assets:
Beginning of year ........................................ 58,058,733 39,693,128 101,505,582 77,176,899
----------------------------------------------------------------
End of year .............................................. $ 80,684,425 $ 58,058,733 $ 124,487,822 $ 101,505,582
================================================================
Undistributed net investment income included in net assets:
End of year .............................................. $ 67,696 $ 55,295 $ 40,425 $ 48,730
================================================================
</TABLE>
See notes to financial statements.
94
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 INSURED FRANKLIN MASSACHUSETTS INSURED
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 ................................... $ 89,621,811 $ 92,090,668 $ 17,503,725 $ 17,761,637
Net realized gain from investments ...................... 10,620,546 23,962,647 549,086 4,132,958
Net unrealized appreciation (depreciation) on investments (3,082,372) 16,269,474 (1,068) 6,206,833
----------------------------------------------------------------------
Net increase in net assets resulting from operations ...... 97,159,985 132,322,789 18,051,743 28,101,428
Distributions to shareholders from:
Net investment income:
Class A ................................................ (87,334,716) (90,659,720) (16,632,794) (17,272,533)
Class C ................................................ (2,287,095) (1,442,616) (844,761) (450,151)
In excess of net investment income:
Class A ................................................ (856,324) (860,908) -- (212,790)
Class C ................................................ (22,408) -- -- --
Net realized gains:
Class A ................................................ (13,902,736) (16,811,655) (1,931,958) (3,803,786)
Class C ................................................ (425,541) (343,655) (108,794) (118,051)
----------------------------------------------------------------------
Total distributions to shareholders ...................... (104,828,820) (110,118,554) (19,518,307) (21,857,311)
Capital share transactions: (Note 2)
Class A ................................................ 49,150,017 1,404,896 13,335,276 (2,973,753)
Class C ................................................ 27,381,709 16,099,401 12,428,507 7,370,054
----------------------------------------------------------------------
Total capital share transactions ......................... 76,531,726 17,504,297 25,763,783 4,396,301
Net increase in net assets ................................ 68,862,891 39,708,532 24,297,219 10,640,418
Net assets:
Beginning of year ........................................ 1,723,317,183 1,683,608,651 342,083,264 331,442,846
----------------------------------------------------------------------
End of year .............................................. $ 1,792,180,074 $ 1,723,317,183 $ 366,380,483 $ 342,083,264
======================================================================
Accumulated distributions in excess of net investment
income included in net assets:
End of year ............................................. $ (1,730,568) $ (851,836) $ (184,372) $ (210,542)
======================================================================
</TABLE>
See notes to financial statements.
95
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 INSURED FRANKLIN MINNESOTA INSURED
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 ...................................... $ 59,062,198 $ 59,917,823 $ 25,893,137 $ 25,936,826
Net realized gain from investments ......................... 2,222,023 10,732,851 1,829,574 4,596,300
Net unrealized appreciation (depreciation) on investments .. 10,636,500 21,097,599 (1,790,539) 5,746,112
------------------------------------------------------------------
Net increase in net assets resulting from operations ......... 71,920,721 91,748,273 25,932,172 36,279,238
Distributions to shareholders from:
Net investment income:
Class A ................................................... (56,963,881) (58,492,475) (25,368,828) (25,706,309)
Class C ................................................... (1,809,222) (1,211,205) (681,854) (335,992)
In excess of net investment income:
Class A ................................................... -- (1,347,076) (46,601) --
Class C ................................................... -- -- (1,254) --
Net realized gains:
Class A ................................................... (5,139,566) (12,008,053) (856,454) (3,868,308)
Class C ................................................... (185,565) (284,824) (29,745) (68,525)
------------------------------------------------------------------
Total distributions to shareholders ........................ (64,098,234) (73,343,633) (26,984,736) (29,979,134)
Capital share transactions: (Note 2)
Class A ................................................... 11,242,515 13,102,580 20,874,563 6,985,703
Class C ................................................... 16,812,877 12,231,280 10,802,209 5,188,792
------------------------------------------------------------------
Total capital share transactions ........................... 28,055,392 25,333,860 31,676,772 12,174,495
Net increase in net assets ................................... 35,877,879 43,738,500 30,624,208 18,474,599
Net assets:
Beginning of year ........................................... 1,175,437,471 1,131,698,971 505,445,742 486,971,143
------------------------------------------------------------------
End of year ................................................. $1,211,315,350 $1,175,437,471 $ 536,069,950 $ 505,445,742
==================================================================
Undistributed net investment income (accumulated distributions
in excess of net investment income) included in net assets:
End of year ................................................ $ (1,057,561) $ (1,346,656) $ (47,855) $ 157,545
==================================================================
</TABLE>
See notes to financial statements.
96
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 OHIO INSURED
TAX-FREE INCOME FUND
------------------------------
1999 1998
------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income ............................................................ $ 39,188,055 $ 38,568,347
Net realized gain from investments ............................................... 2,482,460 5,741,354
Net unrealized appreciation on investments ....................................... 1,410,754 14,279,319
------------------------------
Net increase in net assets resulting from operations ............................... 43,081,269 58,589,020
Distributions to shareholders from:
Net investment income:
Class A ......................................................................... (37,252,026) (37,331,056)
Class C ......................................................................... (1,528,613) (963,819)
In excess of net investment income:
Class A ......................................................................... -- (449,596)
Net realized gains:
Class A ......................................................................... (1,823,769) (3,968,675)
Class C ......................................................................... (89,688) (134,989)
------------------------------
Total distributions to shareholders ............................................... (40,694,096) (42,848,135)
Capital share transactions: (Note 2)
Class A ......................................................................... 33,237,755 27,458,447
Class C ......................................................................... 13,967,984 11,912,652
------------------------------
Total capital share transactions .................................................. 47,205,739 39,371,099
Net increase in net assets ......................................................... 49,592,912 55,111,984
Net assets
Beginning of year ................................................................. 769,257,659 714,145,675
------------------------------
End of year ....................................................................... $ 818,850,571 $ 769,257,659
==============================
Accumulated distributions in excess of net investment income included in net assets:
End of year ....................................................................... $ (27,565) $ (434,981)
==============================
</TABLE>
See notes to financial statements.
97
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 Arizona Insured Tax-Free Income Fund and the Franklin
Florida Insured 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. INSURANCE
The scheduled payments of interest and principal for each long-term municipal
security in the Trust are insured by either a new issue insurance policy, a
portfolio insurance policy, a secondary insurance policy, or by collateral
guaranteed by an agency of the U.S. government. Depending on the type of
coverage, premiums for insurance are either added to the cost basis of the
security, included as an expense of the fund, or paid by a third party.
e. 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.
98
FRANKLIN TAX-FREE TRUST
Notes to Financial Statements (continued)
2. SHARES OF BENEFICIAL INTEREST
The Funds, except the Franklin Arizona Insured Tax-Free Income Fund and the
Franklin Florida Insured Tax-Free Income Fund, offer two classes of shares:
Class A and Class C. Effective January 1, 1999, Class I and Class II were
renamed Class A and Class C, respectively. 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 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 FLORIDA INSURED
INSURED 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 .................................. 2,370,125 $ 25,660,758 3,700,444 $ 38,909,596
Shares issued in reinvestment of distributions 146,945 1,590,252 182,603 1,917,371
Shares redeemed .............................. (466,289) (5,035,963) (1,790,202) (18,818,436)
-------------------------------------------------------------------
Net increase .................................. 2,050,781 $ 22,215,047 2,092,845 $ 22,008,531
===================================================================
Year ended February 28, 1998
Shares sold .................................. 2,255,909 $ 23,825,186 3,398,220 $ 34,631,405
Shares issued in reinvestment of distributions 93,722 989,777 152,966 1,558,437
Shares redeemed .............................. (788,836) (8,333,165) (1,546,829) (15,780,447)
-------------------------------------------------------------------
Net increase .................................. 1,560,795 $ 16,481,798 2,004,357 $ 20,409,395
===================================================================
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN INSURED FRANKLIN MASSACHUSETTS
TAX-FREE INCOME FUND INSURED TAX-FREE INCOME FUND
-------------------------------------------------------------------
CLASS A SHARES: ............................... SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended February 28, 1999
Shares sold .................................. 20,347,674 $ 250,574,059 3,673,445 $ 43,120,431
Shares issued in reinvestment of distributions 3,787,915 46,606,128 740,160 8,686,439
Shares redeemed .............................. (20,145,689) (248,030,170) (3,280,706) (38,471,594)
-------------------------------------------------------------------
Net increase .................................. 3,989,900 $ 49,150,017 1,132,899 $ 13,335,276
===================================================================
Year ended February 28, 1998
Shares sold .................................. 17,269,623 $ 211,180,919 3,519,323 $ 40,939,910
Shares issued in reinvestment of distributions 3,958,810 48,486,276 897,006 10,455,135
Shares redeemed .............................. (21,131,863) (258,262,299) (4,661,188) (54,368,798)
-------------------------------------------------------------------
Net increase (decrease) ....................... 96,570 $ 1,404,896 (244,859) $ (2,973,753)
===================================================================
CLASS C SHARES:
Year ended February 28, 1999
Shares sold .................................. 2,858,182 $ 35,405,965 1,236,934 $ 14,603,154
Shares issued in reinvestment of distributions 143,445 1,775,301 59,445 700,881
Shares redeemed .............................. (791,952) (9,799,557) (243,865) (2,875,528)
-------------------------------------------------------------------
Net increase .................................. 2,209,675 $ 27,381,709 1,052,514 $ 12,428,507
===================================================================
Year ended February 28, 1998
Shares sold .................................. 1,667,248 $ 20,488,591 765,610 $ 8,960,256
Shares issued in reinvestment of distributions 94,459 1,164,085 37,126 435,243
Shares redeemed .............................. (450,124) (5,553,275) (172,483) (2,025,445)
-------------------------------------------------------------------
Net increase .................................. 1,311,583 $ 16,099,401 630,253 $ 7,370,054
===================================================================
</TABLE>
99
FRANKLIN TAX-FREE TRUST
Notes to Financial Statements (continued)
2. SHARES OF BENEFICIAL INTEREST (CONT.)
<TABLE>
<CAPTION>
FRANKLIN MICHIGAN INSURED FRANKLIN MINNESOTA INSURED
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 .................................. 8,062,766 $ 98,708,500 4,579,843 $ 55,803,476
Shares issued in reinvestment of distributions 2,592,822 31,727,653 1,138,659 13,862,003
Shares redeemed .............................. (9,743,467) (119,193,638) (4,006,455) (48,790,916)
-------------------------------------------------------------------
Net increase .................................. 912,121 $ 11,242,515 1,712,047 $ 20,874,563
===================================================================
Year ended February 28, 1998
Shares sold .................................. 7,753,171 $ 93,289,744 3,600,732 $ 43,558,572
Shares issued in reinvestment of distributions 3,048,762 36,772,450 1,292,002 15,628,194
Shares redeemed .............................. (9,724,796) (116,959,614) (4,323,207) (52,201,063)
-------------------------------------------------------------------
Net increase .................................. 1,077,137 $ 13,102,580 569,527 $ 6,985,703
===================================================================
CLASS C SHARES:
Year ended February 28, 1999
Shares sold .................................. 1,687,220 $ 20,782,927 967,191 $ 11,818,508
Shares issued in reinvestment of distributions 114,497 1,411,093 38,858 475,238
Shares redeemed .............................. (437,096) (5,381,143) (121,981) (1,491,537)
-------------------------------------------------------------------
Net increase .................................. 1,364,621 $ 16,812,877 884,068 $ 10,802,209
===================================================================
Year ended February 28, 1998
Shares sold .................................. 1,286,100 $ 15,582,043 456,070 $ 5,531,391
Shares issued in reinvestment of distributions 87,059 1,057,035 21,848 265,662
Shares redeemed .............................. (364,733) (4,407,798) (50,255) (608,261)
-------------------------------------------------------------------
Net increase .................................. 1,008,426 $ 12,231,280 427,663 $ 5,188,792
===================================================================
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN OHIO INSURED
TAX-FREE INCOME FUND
-------------------------------
CLASS A SHARES: SHARES AMOUNT
-------------------------------
<S> <C> <C>
Year ended February 28, 1999
Shares sold .................................. 7,474,825 $ 93,338,302
Shares issued in reinvestment of distributions 1,562,346 19,499,382
Shares redeemed .............................. (6,380,336) (79,599,929)
-------------------------------
Net increase .................................. 2,656,835 $ 33,237,755
===============================
Year ended February 28, 1998
Shares sold .................................. 6,967,848 $ 85,498,458
Shares issued in reinvestment of distributions 1,663,920 20,491,535
Shares redeemed .............................. (6,397,990) (78,531,546)
-------------------------------
Net increase .................................. 2,233,778 $ 27,458,447
===============================
CLASS C SHARES:
Year ended February 28, 1999
Shares sold .................................. 1,355,256 $ 17,004,771
Shares issued in reinvestment of distributions 92,437 1,159,580
Shares redeemed .............................. (334,322) (4,196,367)
-------------------------------
Net increase .................................. 1,113,371 $ 13,967,984
===============================
Year ended February 28, 1998
Shares sold .................................. 1,087,152 $ 13,445,487
Shares issued in reinvestment of distributions 64,382 798,328
Shares redeemed .............................. (188,923) (2,331,163)
-------------------------------
Net increase .................................. 962,611 $ 11,912,652
===============================
</TABLE>
100
FRANKLIN TAX-FREE TRUST
Notes to Financial Statements (continued)
3. TRANSACTIONS WITH AFFILIATES
Certain officers and trustees of the Trust are also officers and/or directors of
Franklin Advisers, Inc. (Advisers), Franklin/Templeton Distributors, Inc.
(Distributors), Franklin/Templeton Investor Services, Inc. (Investor Services),
and Franklin Templeton Services, Inc. (FT Services), the Funds' investment
manager, principal underwriter, transfer agent, and administrative manager,
respectively.
The Funds pay an investment management fee to Advisers 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 an agreement with Advisers, FT Services provides administrative services
to the Funds. The fee is paid by Advisers based on average daily net assets, and
is not an additional expense of the Funds.
Advisers agreed in advance to waive management fees for the Franklin Arizona
Insured Tax-Free Income Fund and the Franklin Florida Insured Tax-Free Income
Fund, as noted in the Statement of Operations.
The Funds reimburse Distributors up to .10% and .65% per year of their average
daily net asset of Class A and Class C, respectively, for costs incurred in
marketing the Funds' shares.
Distributors 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 FRANKLIN FRANKLIN
ARIZONA FLORIDA FRANKLIN MASSACHUSETTS MICHIGAN MINNESOTA OHIO
INSURED INSURED INSURED INSURED INSURED INSURED INSURED
TAX-FREE TAX-FREE TAX-FREE TAX-FREE TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND INCOME FUND INCOME FUND INCOME FUND INCOME FUND
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net commissions paid $ (4,607) $ (33,186) $(470,475) $(125,545) $(149,844) $(110,017) $(158,520)
Contingent deferred
sales charges ..... $ -- $ 85 $ 38,597 $ 24,083 $ 10,821 $ 6,400 $ 15,696
</TABLE>
The Funds paid transfer agent fees of $1,998,410, of which $1,774,653 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 ARIZONA FRANKLIN FLORIDA
INSURED TAX-FREE INSURED TAX-FREE
INCOME FUND INCOME FUND
------------------------------------
<S> <C> <C>
Capital loss carryovers expiring in:
2003 $ 165,472 $1,100,392
2005 17,363 167,156
------------------------------------
$ 182,835 $1,267,548
====================================
</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.
101
FRANKLIN TAX-FREE TRUST
Notes to Financial Statements (continued)
4. INCOME TAXES (CONT.)
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 FRANKLIN
ARIZONA FLORIDA FRANKLIN MASSACHUSETTS MICHIGAN MINNESOTA
INSURED INSURED INSURED INSURED INSURED INSURED
TAX-FREE TAX-FREE TAX-FREE 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>
Investments at cost $ 76,557,736 $ 115,940,869 $ 1,671,812,780 $ 340,631,592 $ 1,106,460,107 $ 505,431,161
=====================================================================================================
Unrealized appreciation $ 3,585,252 $ 6,842,756 $ 112,093,475 $ 22,007,097 $ 89,647,421 $ 25,705,710
Unrealized depreciation (111,011) (53,290) (1,203,474) (169,657) (110,898) (389,653)
-----------------------------------------------------------------------------------------------------
Net unrealized appreciation $ 3,474,241 $ 6,789,466 $ 110,890,001 $ 21,837,440 $ 89,536,523 $ 25,316,057
=====================================================================================================
<CAPTION>
FRANKLIN
OHIO
INSURED
TAX-FREE
INCOME FUND
-------------
<S> <C>
Investments at cost $ 763,384,531
=============
Unrealized appreciation $ 52,869,355
Unrealized depreciation (628,740)
-------------
Net unrealized appreciation $ 52,240,615
=============
</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 FRANKLIN FRANKLIN
ARIZONA FLORIDA FRANKLIN MASSACHUSETTS MICHIGAN MINNESOTA OHIO
INSURED INSURED INSURED INSURED INSURED INSURED INSURED
TAX-FREE TAX-FREE TAX-FREE TAX-FREE TAX-FREE TAX-FREE TAX-FREE
INCOME FUND INCOME FUND INCOME FUND INCOME FUND INCOME FUND INCOME FUND INCOME FUND
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Purchases $ 26,194,202 $ 24,905,353 $294,028,629 $ 45,875,516 $ 98,564,045 $112,821,458 $102,300,207
Sales $ 7,077,328 $ 1,978,380 $228,566,473 $ 23,690,822 $ 86,721,405 $ 83,015,134 $ 51,154,467
</TABLE>
6. CREDIT RISK
All Funds, except the Franklin Insured Tax-Free Income Fund, have investments in
excess of 10% of their total net assets in their respective states. Such
concentration may subject the Funds more significantly to economic changes
occurring within those states.
102
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 seven 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 the 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
103
FRANKLIN TAX-FREE TRUST
Tax Information
Under Section 852(b)(3)(C) of the Internal Revenue Code, the Trust hereby
designates the following amounts as capital gain dividends for the fiscal year
ended February 28, 1999:
<TABLE>
<S> <C>
Franklin Insured Tax-Free Income Fund $10,162,031
Franklin Massachusetts Insured Tax-Free Income Fund $ 575,532
Franklin Michigan Insured Tax-Free Income Fund $ 1,872,168
Franklin Minnesota Insured Tax-Free Income Fund $ 1,828,580
Franklin Ohio Insured Tax-Free Income Fund $ 2,482,460
</TABLE>
Under Section 852(b)(5)(A) of the Internal Revenue Code, the Trust hereby
designates 100% of the distributions paid from net investment income as
exempt-interest dividends for the fiscal year ended February 28, 1999.
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 MICHIGAN 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 Michigan Tax-Free Income Fund (the "Income Fund")
that the undersigned is entitled to vote at Income 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. Is 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 MICHIGAN 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 MICHIGAN TAX-FREE INCOME FUND PURSUANT TO THE PLAN OF
REORGANIZATION WITH FRANKLIN MICHIGAN INSURED 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 a plan or Reorganization FOR AGAINST ABSTAIN
by Franklin Tax-Free Trust, on behalf
of its series, Franklin Michigan [_] [_] [_]
Tax-Free Income Fund ("Income Fund")
and Franklin Michigan Insured Tax-Free
Income Fund, that provides for the
acquisition of substantially all of the
assets of Income Fund in exchange for
shares of Franklin Michigan Insured
Tax-Free Income Fund-Class A, the
distribution of such shares of the
shareholders of Income Fund, and the
dissolution of Income Fund
(the "Reorganization").
2. To grant the proxyholders the GRANT WITHHOLD
authority to 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 TAX-FREE TRUST
DATED APRIL 21, 1999
Acquisition of the Assets of the
FRANKLIN MICHIGAN TAX-FREE INCOME FUND
By and in exchange for shares of the
FRANKLIN MICHIGAN INSURED 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
Michigan Tax-Free Income Fund (the "Income Fund") for shares of Franklin
Michigan Insured Tax-Free Income Fund - Class A.
This SAI consists of this Cover Page and the following documents. Each
of these documents is attached and is legally considered to be a part of this
SAI:
1. Statement of Additional Information of Franklin Michigan
Insured Tax-Free Income Fund dated July 1, 1998, as
supplemented April 1, 1999.
2. Annual Report to Shareholders of Income 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 21, 1999, relating to the
above-referenced transaction. Audited financial statement information for
Franklin Michigan Insured Tax-Free Income Fund is contained in that Fund's
Annual Report to Shareholders dated February 28, 1999, which is attached to
and is a part of the Prospectus/Proxy Statement. You can request a copy of
the Prospectus/Proxy Statement by calling 1-800/DIAL BEN(R) or by writing to
Income Fund, or to Franklin Michigan Insured Tax-Free Income Fund, 777
Mariners Island Boulevard, P.O. Box 7777, San Mateo, CA 94403-7777.
o TF1 *SA1
TF2 *SA1
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SHARE CLASS REDESIGNATION
EFFECTIVE JANUARY 1, 1999
Class A - Formerly Class I
Class C - Formerly Class II
- --------------------------------------------------------------------------------
SUPPLEMENT DATED APRIL 1, 1999
TO THE STATEMENTS OF ADDITIONAL INFORMATION OF
FRANKLIN TAX-FREE TRUST
(TF1 - ARIZONA, FLORIDA, INSURED, MASSACHUSETTS, MICHIGAN, MINNESOTA AND OHIO
INSURED TAX-FREE INCOME FUNDS)
(TF2 - ALABAMA, FLORIDA, GEORGIA, KENTUCKY, LOUISIANA, MARYLAND, MISSOURI,
NORTH CAROLINA, TEXAS AND VIRGINIA TAX-FREE INCOME FUNDS)
DATED JULY 1, 1998
The Statement of Additional Information is amended as follows:
I. As of January 1, 1999, Class I shares are designated Class A and Class II
shares are designated Class C. 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 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
its commission in connection with the purchase.
III. Under "Miscellaneous Information," 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.
Please keep this supplement for future reference.
FRANKLIN TAX-FREE TRUST
FRANKLIN ARIZONA INSURED TAX-FREE INCOME FUND
FRANKLIN FLORIDA INSURED TAX-FREE INCOME FUND
FRANKLIN INSURED TAX-FREE INCOME FUND
FRANKLIN MASSACHUSETTS INSURED TAX-FREE INCOME FUND
FRANKLIN MICHIGAN INSURED TAX-FREE INCOME FUND
FRANKLIN MINNESOTA INSURED TAX-FREE INCOME FUND
FRANKLIN OHIO INSURED TAX-FREE INCOME FUND
STATEMENT OF
ADDITIONAL INFORMATION
JULY 1, 1998
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/DIAL BEN(R)
TABLE OF CONTENTS
How Do the Funds Invest Their Assets? .................................. 2
What Are the Risks
of Investing in the Funds? ............................................ 7
Investment Restrictions ................................................ 11
Officers and Trustees .................................................. 12
Investment Management
and Other Services .................................................... 15
How Do the Funds Buy
Securities for Their Portfolios? ...................................... 17
How Do I Buy, Sell
and Exchange Shares? .................................................. 17
How Are Fund Shares Valued? ............................................ 20
Additional Information on
Distributions and Taxes ............................................... 21
The Funds' Underwriter ................................................. 24
How Do the Funds
Measure Performance? .................................................. 27
Miscellaneous Information .............................................. 31
Financial Statements ................................................... 33
Useful Terms and Definitions ........................................... 33
Appendices ............................................................ 34
Description of Ratings ................................................ 34
State Tax Treatment ................................................... 37
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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 funds are series of the Franklin Tax-Free Trust (the "Trust"), an open-end
management investment company. The Prospectus, dated July 1, 1998, which we may
amend from time to time, contains the basic information you should know before
investing in the funds. 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 EACH
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.
- --------------------------------------------------------------------------------
TF1 SAI 07/98
HOW DO THE FUNDS INVEST THEIR ASSETS?
WHAT ARE THE FUNDS' GOALS?
The investment goal of each fund is to provide 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. Each state fund also tries
to provide a maximum level of income that is exempt from personal income taxes,
if any, for resident shareholders of the fund's state. These goals are
fundamental, which means that they may not be changed without shareholder
approval.
The following gives more detailed information about each fund's investment
policies and the types of securities that it may buy. Please read this
information together with the section "How Do the Funds Invest Their Assets?" in
the Prospectus.
MORE INFORMATION ABOUT
THE KINDS OF SECURITIES THE FUNDS BUY
Each 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.
Some states may require a fund to invest a certain amount of its assets in
securities of that state, or in securities that are otherwise tax-free under the
laws of that state, in order for any portion of the fund's distributions to be
free from the state's personal income taxes. If a fund's state requires this,
the fund will try to invest its assets as required so that its distributions
will be free from personal income taxes for resident shareholder's of the fund's
state.
Below is a description of various types of municipal and other securities that
each fund may buy. Other types of municipal securities may become available that
are similar to those described below and in which each 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. Each 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. Each fund may invest in municipal lease
obligations, including certificates of participation. The Board reviews a 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, each 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 each
fund can invest in municipal lease obligations without percentage limits, the
funds' holdings in municipal lease obligations were:
AS OF FEBRUARY 28, 1998
(as a percentage of net assets)
Arizona Fund ............................... 9.62%
Florida Fund ............................... 6.20%
Insured Fund ............................... 5.76%
Massachusetts Fund ......................... 4.75%
Michigan Fund .............................. 2.61%
Minnesota Fund ............................. 2.10%
Ohio Fund .................................. 2.80%
CALLABLE BONDS. Each 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 a 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 a 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 each fund's pricing policies and certain
amortization procedures required by the IRS, the funds do not expect to suffer
any material adverse impact related to the value at which they have 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. Each 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 a 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, a 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. Each 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. Each fund may invest in taxable commercial paper only
for temporary defensive purposes.
MORE INFORMATION ABOUT SOME OF THE FUNDS' 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 a 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 a 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 funds believe that their Net Asset
Value or income will not be negatively affected by their purchase of municipal
securities on a when-issued basis. The funds will not engage in when-issued
transactions for investment leverage purposes.
Although a 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 a 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 a fund are held in cash
pending the settlement of a purchase of securities, the fund will not earn
income on those assets.
ILLIQUID INVESTMENTS. Each 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. All of the funds, except the Arizona and Florida funds, are
diversified funds. The Arizona and Florida funds are non-diversified. As a
fundamental policy, none of the diversified funds will buy a security if, with
respect to 75% of its net assets, more than 5% would be in the securities of any
single issuer (with the exception of obligations of the U.S. government). For
this purpose, 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.
Each fund, including the Arizona and Florida funds, intends to meet certain
diversification requirements for tax purposes. These requirements are discussed
under "Additional Information on Distributions and Taxes."
Each 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 for each fund 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.
INSURANCE. Each fund invests primarily in insured municipal securities. Each
insured municipal security in a fund's portfolio is covered by either a "New
Issue Insurance Policy," a "Portfolio Insurance Policy" or a "Secondary
Insurance Policy." Normally, the underlying rating of an insured security is one
of the top three ratings of Fitch, Moody's or S&P. An insurer may insure
municipal securities that are rated below the top three ratings or that are
unrated if the securities otherwise meet the insurer's quality standards.
A fund will only enter into a contract to buy an insured municipal security if
either permanent insurance or an irrevocable commitment to insure the municipal
security by a qualified municipal bond insurer is in place. The insurance
feature insures the scheduled payment of principal and interest, but does not
guarantee (i) the market value of the insured municipal security, (ii) the value
of a fund's shares, or (iii) a fund's dividend distributions.
NEW ISSUE INSURANCE POLICY. An issuer may obtain a New Issue Insurance Policy,
also called a "Primary Insurance Policy," when securities are issued. The issuer
pays all premiums on the policy in advance. The policy continues in effect as
long as the securities are outstanding and the insurer remains in business, and
may not otherwise be canceled. Since the policy remains in effect as long as the
securities are outstanding, the insurance is likely to increase the credit
rating of the security, as well as its purchase price and resale value.
PORTFOLIO INSURANCE POLICY. Each fund may obtain a Portfolio Insurance Policy,
which is effective only as long as the fund holds the securities described in
the policy and the insurer is in business and meeting its obligations. If the
fund sells a security or the principal amount of the security is paid before
maturity, the policy terminates as to that security and will continue to cover
only those securities the fund still holds. A Portfolio Insurance Policy may not
otherwise be canceled, unless the fund fails to pay the premium. If a security
covered by a Portfolio Insurance Policy is pre-refunded and irrevocably secured
by a U.S. government security, the insurance will no longer be required for that
security.
Because coverage under a Portfolio Insurance Policy ends when the fund sells a
security, the insurance does not affect the resale value of the security.
Therefore, the fund may hold any security insured under a Portfolio Insurance
Policy that is in default or in significant risk of default. Advisers will
consider the value of the insurance for the principal and interest payments, the
market value of the security, the market value of securities of similar issuers
whose securities carry similar interest rates, and the discounted present value
of the principal and interest payments to be received from the insurance company
in its evaluation of the security. Absent any unusual or unforeseen
circumstances as a result of the Portfolio Insurance Policy, Advisers would
likely recommend that the fund value the defaulted security, or security for
which there is a significant risk of default, at the same price as securities of
a similar nature that are not in default. While a defaulted security is held in
the fund's portfolio, the fund continues to pay the insurance premium on the
security but also collects interest payments from the insurer and retains the
right to collect the full amount of principal from the insurer when the security
comes due.
The insurer may not change premium rates for securities covered by a Portfolio
Insurance Policy, regardless of the issuer's ability or willingness to meet its
obligations. Premiums are payable monthly and are adjusted for purchases and
sales of covered securities during the month. The premium on a Portfolio
Insurance Policy is a fund expense. If the fund fails to pay its premium, the
insurer may take action against the fund to recover any premium payments that
are due.
SECONDARY INSURANCE POLICY. Under its agreement with the provider of the
Portfolio Insurance Policy, each fund may at any time buy a permanent Secondary
Insurance Policy on any municipal security insured under the Portfolio Insurance
Policy, even if the security is currently in default. When the fund buys a
Secondary Insurance Policy, the coverage and obligation of the fund to pay
monthly premiums for the security under the Portfolio Insurance Policy ends. The
insurer may not change the price of the Secondary Insurance Policy, regardless
of the security issuer's ability to meet its debt obligations.
With a Secondary Insurance Policy, the fund obtains insurance against nonpayment
of scheduled principal and interest for the remaining term of a security. This
insurance coverage continues in effect as long as the insured security is
outstanding and may not otherwise be canceled. Thus, the fund has the
opportunity to sell a security in default rather than hold it in its portfolio
in order to continue, in force, the applicable Portfolio Insurance Policy. When
the fund buys a Secondary Insurance Policy on a security, the single premium is
added to the cost basis of the security and is not considered a fund expense. A
defaulted security covered by a Secondary Insurance Policy would be valued at
its market value.
One of the reasons a fund may buy a Secondary Insurance Policy is to enable it
to sell a security to a third party as a triple A rated or equivalent insured
security. In doing so, the fund may be able to sell the security at a market
price that is higher than what it may otherwise be without the insurance. The
triple A or equivalent rating is not automatic, however, and must specifically
be requested from Fitch, Moody's or S&P for each security.
A fund is likely to buy a Secondary Insurance Policy if, in Advisers' opinion,
the market value or net proceeds of the sale of a security by the fund may
exceed the current value of the security, without insurance, plus the cost of
the insurance. Any difference between the excess of a security's market value as
a triple A rated or equivalent security over its market value without such
rating, including the cost of insurance, inures to the fund in determining the
net capital gain or loss realized by the fund upon the sale of the security.
Each fund may buy a Secondary Insurance Policy instead of a Portfolio Insurance
Policy at any time, regardless of the effect of market value on the underlying
municipal security, if Advisers believes such insurance would best serve the
fund's interests in meeting its investment goals.
QUALIFIED MUNICIPAL BOND INSURERS. Insurance policies may be issued by any one
of several qualified municipal bond insurers, which allows Advisers to diversify
among credit enhancements. Each fund buys insured municipal securities only if
they are secured by an insurance policy issued by an insurer whose claims paying
ability is rated triple A or its equivalent by Fitch, Moody's or S&P.
A qualified municipal bond insurer is a company whose charter limits its risk
assumption to insurance of financial obligations. This precludes the assumption
of other types of risk, such as life, medical, fire and casualty, and auto and
home insurance. The bond insurance industry is a regulated industry. All bond
insurers must be licensed in each state in order to write financial guarantees
in that jurisdiction. Regulations vary from state to state. Most regulators,
however, require minimum standards of solvency and limitations on leverage and
investment of assets. Regulators also place restrictions on the amount an
insurer can guarantee in relation to the insurer's capital base. Neither the
funds nor Advisers makes any representations as to the ability of any insurance
company to meet its obligation to a fund if called upon to do so.
Currently, to the best of our knowledge, there are no securities in the funds'
portfolios on which an insurer is paying the principal or interest otherwise
payable by the issuer of the bond.
GENERAL. Under the provisions of an insurance policy, the insurer
unconditionally and irrevocably agrees to pay the appointed trustee or its
successor and its agent (the "Trustee") the portion of the principal or interest
on an insured security that is due for payment but that has not been paid by the
issuer. The insurer makes such payments to the Trustee on the date the principal
or interest becomes due for payment or on the next business day following the
day on which the insurer receives notice of nonpayment, whichever is later. The
Trustee then disburses the amount of principal or interest due to the fund after
the Trustee receives (i) evidence of the fund's right to receive payment of the
principal or interest due for payment, and (ii) evidence, including any
appropriate instruments of assignment, that all of the rights to payment of the
principal or interest due for payment will vest in the insurer. After the
disbursement, the insurer becomes the owner of the security, appurtenant coupon,
or right to payment of principal or interest on the security and is fully
subrogated to all of the fund's rights with respect to the security, including
the right to payment. The insurer's rights to the security or to payment of
principal or interest are limited, however, to the amount the insurer has paid.
If the issuer of an insured municipal security fails to pay an installment of
principal or interest that is due for payment, the fund will receive an
insurance payment in the amount of the payment due. When referring to the
principal amount, the term "due for payment" means the security's stated
maturity date or its call date for mandatory sinking fund redemption. It does
not mean any earlier date when payment is due because of a call for redemption
(other than by mandatory sinking fund redemption), acceleration or other
advancement of maturity. When referring to the interest on a security, the term
"due for payment" means the stated date for payment of interest.
The term "due for payment" may have another meaning if the interest on a
security is determined to be subject to federal income taxation, as provided in
the security's underlying documentation. When referring to the principal amount
in this case, the term also means the call date for mandatory redemption as a
result of the determination of taxability, and when referring to the interest on
the security, the term also means the accrued interest, to the call date for
mandatory redemption, at the rate provided in the security's documentation
together with any applicable redemption premium.
WHAT ARE THE RISKS OF INVESTING IN THE FUNDS?
The following gives more information about the risks of investing in the funds.
Please read this information together with the section "What Are the Risks of
Investing in the Funds?" in the Prospectus.
STATE RISKS. Since each state fund mainly invests in the municipal securities of
its state, its performance is closely tied to the ability of issuers of
municipal securities in its state to continue to make principal and interest
payments on their securities. The issuers' ability to do this is in turn
dependent on economic, political and other conditions within the state. Below is
a discussion of certain conditions that may affect municipal issuers in the
funds' various states. It is not a complete analysis of every material fact that
may affect the ability of issuers of municipal securities to meet their debt
obligations or the economic or political conditions within any state. The
information below is based on the most recent data available to the funds from
Fitch, Moody's and S&P, three historically reliable sources, but the funds have
not independently verified it.
The ability of issuers of municipal securities to continue to make principal and
interest payments is dependent in large part on their ability to raise revenues,
primarily through taxes, and to control spending. Many factors can affect a
state's revenues including the rate of population growth, unemployment rates,
personal income growth, federal aid, and the ability to attract and keep
successful businesses. A number of factors can also affect a state's spending
including current debt levels, and the existence of accumulated budget deficits.
The following provides some information on these and other factors.
ARIZONA. A cost of living below the national average and competitive wage rates
have attracted people and businesses to Arizona, especially from California. As
a result, Arizona's population grew by more than 15% during the first half of
the 1990s. Although population growth is expected to remain strong, the rate of
growth has slowed since 1996 as a result of California's economic recovery and
thus less migration from that state. Employment growth has also been strong, at
5.6% in 1996. Driven recently by gains in the high-tech manufacturing sector,
employment growth is expected to remain solid over the near-term. Unemployment
was 4.7% in May 1997, slightly less than the national average.
Arizona's economy has continued its shift away from agriculture and mining and
towards manufacturing and services. The move away from farming, which generally
consumes about 80% of the water used in the state, may increase the water
available for municipal uses. As of July 1997, manufacturing accounted for
approximately 9.3% of the state's total employment, trade 23%, services 30%,
government 13%, construction 6% and finance, insurance and real estate 8%.
Under its constitution, Arizona is not allowed to issue general obligation debt.
Thus, gross state debt levels have remained moderate. The state has historically
relied on lease obligations, revenue bonds, and pay-as-you-go financing for its
capital needs. A significant portion of the state's debt has been supported by
motor fuel taxes and highway user fees.
Recently, Arizona's strong economic growth has enabled the state to replenish
its general fund, while at the same time cutting taxes. At the end of fiscal
1996, the general fund had a balance of 12.6% of expenditures, up from 6.9% at
the end of fiscal 1995. Due to higher-than-anticipated income tax receipts, the
state expects the general fund balance will remain strong through fiscal 1998.
In addition, the state's budget stabilization fund held $252 million as of July
1997, which may help provide protection in an economic downturn.
Despite periods of financial stress during the 1980s and early 1990s, the
state's financial outlook is generally considered stable.
FLORIDA. Employment and population have grown steadily in Florida since 1991,
and Florida's economic expansion has been among the strongest in the region, as
well as the nation. Florida's population growth has placed increased demands on
government services and the state's infrastructure, but so far the state has
been able to meet these challenges.
Florida's economy has continued to diversify, moving from a relatively narrow
base of agriculture and seasonal tourism towards a service and trade economy.
Job growth has been steady, with an unemployment rate of 4.6% in April 1997,
below the national rate of 4.8%. The state's job growth has been dependent on
growth in the services, construction and trade sectors, with the state's
business services sector accounting for approximately 30% of new non-farm
employment since 1991. Much of this growth has come from growth in the personnel
services sector, however, which typically represents low paying jobs. The
state's tourism industry, which has supported the state's other employment
sectors, has been somewhat erratic since the recession in the early 1990s. A
tourism increase of 3.1% is expected, however, through fiscal 1998.
Due in large part to the state's healthy economy, Florida's population has also
continued to grow. It was recently the fourth most populated state in the U.S.
Its per capita income, while close to the national average, exceeded regional
levels by almost 11% as of April 1997. Because of its substantial retirement age
population, however, its income structure is dependent on property income and
transfer payments, such as social security and pension benefits. As a result, a
change to the consumer price index at the federal level could have a significant
impact on the state.
Florida's tax base has been relatively narrow, with 70% of its revenues derived
from the state's sales and use tax. This reliance on a cyclical revenue source
creates some vulnerability, as does the constitutional amendment approved by
voters in 1994 that limits the rate of growth in state revenues. It should be
noted, however, that this amendment exempts revenues pledged to bonds, so
existing and new debt issues should be unaffected.
Although Florida's debt levels have been steadily rising, in recent years the
state has generated operating surpluses, while maintaining tax levels and
providing funds for the state's growth in government services. Overall, the
state's financial outlook is considered stable.
MASSACHUSETTS. Massachusetts' economy has continued to recover from the national
and regional recessions of the early 1990s. While manufacturing has declined,
the state's services sector has grown and recently accounted for 35% of the
state's employment. Overall, the state's economic growth has been driven by
growth in its high-tech industries, financial services, education and health
care. In fact, high-tech industries recently accounted for 9.2% of total
employment, the highest concentration of any state. The state's unemployment
rate has steadily declined from 4.3% in 1996 to 3.3% in October 1997, below the
national average, and has begun to cause concerns about a tight labor market.
Although the state's economy has improved, its debt levels have remained among
the highest in the nation. Spending disciplines imposed during the state's
severe financial difficulties in the early 1990s have helped and have resulted
in seven consecutive years of balanced financial operations. At the same time,
the state has greatly reduced its reliance on temporary borrowing.
While the state has regained some control over its budget, continuing
expenditure pressures may present fiscal challenges. After a period of
restrained debt issuance, pressure to increase borrowing has been building.
Funding for routine infrastructure needs and a costly tunnel project have been
the focus of this pressure. Spending for education is also expected to increase,
and the state still has a relatively high unfunded pension liability. With the
rate of economic growth expected to slow down in coming years, Massachusetts'
biggest challenge is likely to be the long term management of its capital and
debt plans.
MICHIGAN. Michigan's economy has continued to rely on national economic trends,
especially the demand for durable goods. Its economic base has been dependent on
its manufacturing sector, which recently accounted for 33% of the state's total
personal income. While this sector has been strong since the end of the national
recession in the early 1990s, the state's reliance on manufacturing has made its
economy potentially more volatile than the economies of more diverse states. In
recent years, however, the state has made some improvements in the diversity of
its economy.
Michigan's finances have also improved since the early 1990s when the state's
financial position was weakened by the national recession and imbalances in the
budget. Tighter budget controls and the positive effect on revenues of the
state's relatively strong economy have allowed the state to replenish reserves,
which had been severely depleted during the early 1990s. The state's budget
stabilization fund was estimated at more than $1.2 billion at September 30,
1997. Michigan may need the increased stability these reserve levels provide to
offset higher school funding requirements, which were estimated at $8.6 billion
in fiscal 1997 and represented the largest expense item for the state.
MINNESOTA. Minnesota's economy has been well diversified, with only some
concentration in the manufacturing sector. This diversification has allowed the
state to perform well during economic cycles, compared with the rest of the
nation. The effects of the last national recession were less severe in
Minnesota, and the state was able to recover more quickly than many other
states.
Since late 1994, Minnesota has experienced steady job growth with increases in
computer and business services and in the finance sector. Much of this growth
has occurred in the Minneapolis-St. Paul metropolitan area and has created labor
shortages in some industries. These shortages have in turn resulted in
higher-than-average wage levels. Higher wages, together with a tight labor
market, could limit future job expansion in the state.
Minnesota's debt burden has been moderate and its financial position strong. The
recent strength of its economy and growth in revenues have allowed the state to
restore its general fund and reserve levels, which had been drained during the
recession of the early 1990s. In the coming years, key spending areas for the
state are expected to include corrections, human services, education and
facilities for general government.
OHIO. Ohio's financial performance has been historically strong, aided recently
by the continuing diversification of the state's economy. Although manufacturing
has remained a large part of the economy, the state's overall employment mix has
moved more in line with that of the nation. While benefiting from the recent
strength of its manufacturing sector, growth in financial services, distribution
and trade have improved the state's economic stability. Nonetheless, the state's
reliance on manufacturing creates vulnerability to recession and potential
financial volatility. The state's sizable financial reserves, however, may lend
some stability and help protect the state against future spending pressures and
economic cycles.
In recent years, Ohio's employment growth has slowed to below the national
average. For the year ended August 1997, non-farm job growth was 0.8%, compared
to 2% for the nation. Much of this growth has been concentrated in the services
and trade sectors. Unemployment was 4.2% in October 1997, below the national
rate.
Ohio's direct debt levels have been moderate. As a result, debt service payments
on its general obligation debt and lease obligations have been manageable. The
state enjoyed large operating surpluses in fiscal years 1995 and 1996, and a
somewhat smaller surplus in fiscal 1997.
U.S. TERRITORIES RISKS. Since each fund may invest a portion of its assets in
municipal securities issued by U.S. territories, the ability of U.S. territory
issuers to continue to make principal and interest payments may also affect a
fund's performance. As with state municipal issuers, the ability to make these
payments is dependent on economic, political and other conditions. Below is a
discussion of certain conditions within some of the territories where the funds
may be invested. It is not a complete analysis of every material fact that may
affect the ability of issuers of U.S. territory municipal securities to meet
their debt obligations or the economic or political conditions within the
territories. It is based on the most recent data available to the funds from
Fitch, Moody's and S&P, and other historically reliable sources, but it has not
been independently verified by the funds.
GUAM. Guam's economy has been heavily dependent on its tourism industry, which
accounted for almost 40% of total employment in 1997. It has been especially
dependent on Japanese tourism, which has made Guam vulnerable to fluctuations in
the relationship between the U.S. dollar and the Japanese yen.
In the early to mid-1990s, Guam's financial position deteriorated due to a
series of natural disasters that led to increased spending on top of already
significant budget gaps. As a result, the government introduced a comprehensive
financial plan in June 1995 to help balance the budget and reduce the general
fund deficit by fiscal 1999. As of fiscal 1997, the deficit has improved and the
budget was balanced. It is not yet known, however, whether the goals of the
financial plan will be met.
While Guam's debt burden has been manageable, Guam's ability to maintain current
debt levels may be challenged in the near future. U.S. military downsizing has
reduced the federal presence on the island and may also reduce federal support
for infrastructure projects. At the same time, Guam has faced increasing
pressure to improve its infrastructure to help generate economic development.
Overall, as of October 1997, S&P's outlook for Guam was negative due to Guam's
continued weak financial position and the need for continued political support
towards the goals of the financial plan.
MARIANA ISLANDS. The Mariana Islands became a commonwealth in 1975. At that
time, the U.S. government agreed to exempt the islands from federal minimum wage
and immigration laws in an effort to help stimulate industry and the economy.
The islands' minimum wage has been more than $2 per hour below the U.S. level
and tens of thousands of workers have immigrated from various Asian countries to
provide cheap labor for the islands' industries. Recently, the islands' tourism
and apparel industries combined to help increase gross business receipts from
$224 million in 1985 to $2 billion in 1996. Currently, however, Congress is
considering a bill to raise wages and curtail immigration to the Mariana
Islands. If it passes, it could have an adverse affect on the islands' economy.
PUERTO RICO. Overall, both Moody's and S&P recently considered Puerto Rico's
outlook stable. The economy has continued to grow and diversify. Much of this
growth has come from the construction, trade and service sectors, which have
accounted for more than 50% of the employment base. Manufacturing has
contributed 41% of the island's gross domestic product and has accounted for 16%
of employment. Despite an increasingly skilled workforce, unemployment has
remained high at 12-13%.
Over the past three years, Puerto Rico's financial performance has improved.
Strong revenue growth and more aggressive tax collection procedures have helped.
Fiscal 1997 appeared to be on target, and expectations are that the fiscal 1998
budget will also be balanced.
Puerto Rico's debt levels have been high but manageable at $2,600 per capita or
12% of expenditures. Going forward, these levels may increase as Puerto Rico
attempts to finance significant capital and infrastructure improvements. Puerto
Rico will also need to address its large unfunded pension liability of more than
$5 billion.
Despite Puerto Rico's stable outlook, Puerto Rico may face challenges in the
coming years with the 1996 passage of a bill eliminating section 936 of the
Code. This Code section has given certain U.S. corporations operating in Puerto
Rico significant tax advantages. These incentives have helped considerably with
Puerto Rico's economic growth, especially with the development of its
manufacturing sector. U.S. firms that have benefited from these incentives have
provided a significant portion of Puerto Rico's revenues, employment and
deposits in local financial institutions. The section 936 incentives will be
phased out over a 10-year period ending in 2006. It is hoped that this long
phase-out period will give Puerto Rico sufficient time to lessen the potentially
negative effects of section 936's elimination.
INVESTMENT RESTRICTIONS
Each 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 a fund or (ii) 67% or
more of the shares of a fund present at a shareholder meeting if more than 50%
of the outstanding shares of a fund are represented at the meeting in person or
by proxy, whichever is less. Each fund MAY NOT:
1. Borrow money or mortgage or pledge any of its assets, except that
borrowings (and a pledge of assets therefore) for temporary or emergency
purposes may be made from banks in any amount up to 5% of the total asset
value.
2. Buy any securities on "margin" or sell any securities "short," except that
it may use such short-term credits as are necessary for the clearance of
transactions.
3. Make loans, except through the purchase of readily marketable debt
securities which are either publicly distributed or customarily purchased
by institutional investors. Although such loans are not presently intended,
this prohibition will not preclude the fund from loaning portfolio
securities to broker-dealers or other institutional investors if at least
102% cash collateral is pledged and maintained by the borrower; provided
such portfolio 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, except with respect to
the Arizona and Florida funds, each of which will not purchase a security,
if as a result: i) more than 25% of its total assets would be invested in
the securities of a single issuer or ii) with respect to 50% of its total
assets, more than 5% of its assets would be invested in the securities of a
single issuer.
6. Purchase securities from or sell to the Trust's officers and trustees, or
any firm of which any officer or trustee is a member, as principal, or
retain securities of any issuer if, to the knowledge of the Trust, one or
more of the Trust's officers, trustees, or investment advisor own
beneficially more than 1/2 of 1% of the securities of such issuer and all
such officers and trustees 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 and provided that this
limitation shall not prohibit the purchase of municipal and other debt
securities secured by real estate or interests therein.
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, except that it may purchase,
hold and dispose of "obligations with puts attached" in accordance with its
investment policies.
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 permitted by exemptions which may be granted under the 1940 Act,
which allows the fund to invest in shares of one or more investment
companies, of the type generally referred to as money market funds, managed
by Advisers or its affiliates.
11. In the case of the Arizona and Florida funds, purchase securities, in
private placements or in other transactions, for which there are legal or
contractual restrictions on resale.
12. Invest more than 25% of its assets in securities of any industry; although
for purposes of this limitation, tax-exempt securities and U.S. government
obligations are not considered to be part of any industry.
If a bankruptcy or other extraordinary event occurs concerning a particular
security owned by a 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 TRUSTEES
The Board has the responsibility for the overall management of each fund,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of each 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
each fund under the 1940 Act are indicated by an asterisk (*).
POSITIONS AND OFFICES PRINCIPAL OCCUPATION DURING
NAME, AGE AND ADDRESS WITH THE TRUST THE PAST FIVE YEARS
- --------------------------------------------------------------------------------
Frank H. Abbott, III (77)
1045 Sansome Street
San Francisco, CA 94111
Trustee
President and Director, Abbott Corporation (an investment company); director or
trustee, as the case may be, of 28 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)
191 Clapboard Ridge Road
Greenwich, CT 06830
Trustee
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 50 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).
S. Joseph Fortunato (65)
Park Avenue at Morris County
P.O. Box 1945
Morristown, NJ 07962-1945
Trustee
Member of the law firm of Pitney, Hardin, Kipp & Szuch; director or trustee, as
the case may be, of 52 of the investment companies in the Franklin Templeton
Group of Funds; and formerly, Director, General Host Corporation (nursery and
craft centers).
Edith E. Holiday (46)
3239 38th Street, N.W.
Washington, DC 20016
Trustee
Director, Amerada Hess Corporation and Hercules Incorporated (1993-present);
Director, Beverly Enterprises, Inc. (1995-present) and H.J. Heinz Company
(1994-present); director or trustee, as the case may be, of 25 of the investment
companies in the Franklin Templeton Group of Funds; and FORMERLY, Chairman
(1995-1997) and Trustee (1993-1997) of National Child Research Center, Assistant
to the President of the United States and Secretary of the Cabinet (1990-1993),
General Counsel to the United States Treasury Department (1989-1990), and
Counselor to the Secretary and Assistant Secretary for Public Affairs and Public
Liaison-United States Treasury Department (1988-1989).
*Charles B. Johnson (65)
777 Mariners Island Blvd.
San Mateo, CA 94404
Chairman
of the Board
and Trustee
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 51 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. (57)
777 Mariners Island Blvd.
San Mateo, CA 94404
President
and Trustee
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 54 of
the investment companies in the Franklin Templeton Group of Funds.
Frank W.T. LaHaye (69)
20833 Stevens Creek Blvd.,
Suite 102
Cupertino, CA 95014
Trustee
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 28
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)
8212 Burning Tree Road
Bethesda, MD 20817
Trustee
Chairman, White River Corporation (financial services); Director, Fund American
Enterprises Holdings, Inc., MCI Communications Corporation, CCC Information
Services Group, Inc. (information services), MedImmune, Inc. (biotechnology),
Spacehab, Inc. (aerospace services) and Real 3D (software); director or trustee,
as the case may be, of 50 of the investment companies in the Franklin Templeton
Group of Funds; and FORMERLY, Chairman, Hambrecht and Quist Group, Director, H &
Q Healthcare Investors and Lockheed Martin Corporation, and President, National
Association of Securities Dealers, Inc.
Harmon E. Burns (53)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Executive Vice President and Director, Franklin Resources, Inc.; Executive Vice
President and Director, 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 54 of the investment companies in the Franklin
Templeton Group of Funds.
Martin L. Flanagan (38)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
and Chief
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.; Senior Vice President and Treasurer, Franklin Advisers, Inc.; Treasurer,
Franklin Advisory Services, Inc.; Treasurer and Chief Financial Officer,
Franklin Investment Advisory Services, Inc.; President, Franklin Templeton
Services, Inc.; Senior Vice President, Franklin/Templeton Investor Services,
Inc.; and officer and/or director or trustee, as the case may be, of 54 of the
investment companies in the Franklin Templeton Group of Funds.
Deborah R. Gatzek (49)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
and Secretary
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc.; Vice President, Franklin Advisers, Inc. and Franklin
Advisory Services, Inc.; Vice President, Chief Legal Officer and Chief Operating
Officer, Franklin Investment Advisory Services, Inc.; and officer of 54 of the
investment companies in the Franklin Templeton Group of Funds.
Thomas J. Kenny (35)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President, Franklin Advisers, Inc.; and officer of eight of the
investment companies in the Franklin Templeton Group of Funds.
Diomedes Loo-Tam (59)
777 Mariners Island Blvd.
San Mateo, CA 94404
Treasurer and
Principal
Accounting
Officer
Senior Vice President, Franklin Templeton Services, Inc.; and officer of 33 of
the investment companies in the Franklin Templeton Group of Funds.
Edward V. McVey (60)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 29 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 $1,450 per month plus $1,300 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 members of the Board by the Trust are subject to reductions
resulting from fee caps limiting the amount of fees payable to trustees 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 Trust and by other funds in the Franklin Templeton Group of Funds.
<TABLE>
<CAPTION>
TOTAL FEES NUMBER OF BOARDS
RECEIVED FROM IN THE FRANKLIN
TOTAL FEES THE FRANKLIN TEMPLETON GROUP
RECEIVED FROM TEMPLETON OF FUNDS ON WHICH
NAME THE TRUST*** GROUP OF FUNDS**** EACH SERVES*****
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Frank H. Abbott, III ............... $31,200 $165,937 28
Harris J. Ashton ................... 29,900 344,642 50
S. Joseph Fortunato ................ 29,900 361,562 52
David W. Garbellano* ............... 14,300 91,317 N/A
Frank W.T. LaHaye .................. 29,900 141,433 28
Gordon S. Macklin .................. 29,900 337,292 50
Edith E. Holiday** ................. 2,600 72,875 25
</TABLE>
*Deceased, September 27, 1997.
**Appointed January 15, 1998.
***For the fiscal year ended February 28, 1998, during which time fees at a rate
of $1,300 per month plus $1,300 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 56 registered investment companies, with approximately 169 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 funds 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 April 2, 1998, the officers and Board members, as a group, owned of record
and beneficially the following shares of the funds: approximately 22,985 shares
of the Michigan Fund - Class I and 617 shares of the Insured Fund - Class I, or
less than 1% of the total outstanding shares of each fund's Class I shares. 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. Each fund's investment manager is
Advisers. Advisers provides investment research and portfolio management
services, including the selection of securities for each fund to buy, hold or
sell and the selection of brokers through whom each 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 each fund's investment activities.
Advisers and its officers, directors and employees are covered by fidelity
insurance for the protection of each 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 each fund. Similarly, with
respect to each 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 funds 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 funds' Code of Ethics. Please
see "Miscellaneous Information - Summary of Code of Ethics."
MANAGEMENT FEES. Under its management agreement, each fund pays Advisers 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; and 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 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.
The table below shows the management fees paid by each fund for the fiscal years
ended February 28, 1998, February 28, 1997 and February 29, 1996.
<TABLE>
<CAPTION>
MANAGEMENT FEES PAID
-------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Arizona Fund ............................... $ 53,600* $ 9,209* $ 0*
Florida Fund ............................... 164,237* 126,611* 92,697*
Insured Fund ............................... 7,894,099 7,848,890 7,882,310
Massachusetts Fund ......................... 1,792,766 1,649,833 1,580,640
Michigan Fund .............................. 5,414,427 5,284,581 5,130,941
Minnesota Fund ............................. 2,465,946 2,439,817 2,430,182
Ohio Fund .................................. 3,586,169 3,391,314 3,268,575
</TABLE>
*For the fiscal years ended February 28, 1998, February 28, 1997 and February
29, 1996, management fees, before any advance waiver, totaled $300,020, $238,269
and $190,058, respectively, for the Arizona Fund, and $559,377, $447,534 and
$362,566, respectively, for the Florida Fund. Under an agreement by Advisers to
limit its fees, the Arizona and Florida funds paid the management fees shown.
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 each 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.
The table below shows the administration fees paid to FT Services for the fiscal
years ended February 28, 1998 and 1997. These fees are paid by Advisers. They
are not a separate expense of the funds.
ADMINISTRATION FEES PAID
------------------------
1998 1997*
- ----------------------------------------------------------------
Arizona Fund ...................... $ 70,517 $ 23,726
Florida Fund ...................... 132,554 46,588
Insured Fund ...................... 1,847,411 767,504
Massachusetts Fund ................ 492,589 190,575
Michigan Fund ..................... 1,420,284 584,545
Minnesota Fund .................... 693,528 286,923
Ohio Fund ......................... 1,013,556 410,345
*For the period October 1, 1996 through February 28, 1997.
SHAREHOLDER SERVICING AGENT. Investor Services, a wholly owned subsidiary of
Resources, is the funds' shareholder servicing agent and acts as the funds'
transfer agent and dividend-paying agent. Investor Services is compensated on
the basis of a fixed fee per account. Each 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
each fund. The custodian does not participate in decisions relating to the
purchase and sale of portfolio securities.
AUDITORS. Coopers & Lybrand L.L.P., 333 Market Street, San Francisco, California
94105, are the funds' independent auditors. During the fiscal year ended
February 28, 1998, their auditing services consisted of rendering an opinion on
the financial statements of the Trust included in the Trust's Annual Report to
Shareholders for the fiscal year ended February 28, 1998.
HOW DO THE FUNDS BUY
SECURITIES FOR THEIR PORTFOLIOS?
Since most purchases by the funds are principal transactions at net prices, the
funds incur little or no brokerage costs. The funds deal directly with the
selling or buying principal or market maker without incurring charges for the
services of a broker on their 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
funds do not buy bonds in underwritings where they are given no choice, or only
limited choice, in the designation of dealers to receive the commission. The
funds seek 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 funds'
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 funds' portfolio transactions.
If purchases or sales of securities of the funds 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
funds are concerned. In other cases it is possible that the ability to
participate in volume transactions may improve execution and reduce transaction
costs to the funds.
During the fiscal years ended February 28, 1998, February 28, 1997 and February
29, 1996, the funds paid no brokerage commissions.
As of February 28, 1998, the funds did not own securities of their regular
broker-dealers.
HOW DO I BUY, SELL AND EXCHANGE SHARES?
ADDITIONAL INFORMATION ON BUYING SHARES
The funds continuously offer their 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.
Securities laws of states where the funds offer their shares may differ from
federal law. Banks and financial institutions that sell shares of the funds 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
a 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 funds'
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 funds 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.
ADDITIONAL INFORMATION ON EXCHANGING SHARES
If you request the exchange of the total value of your account, accrued but
unpaid income dividends and capital gain distributions will be reinvested in the
fund at the Net Asset Value on the date of the exchange, and then the entire
share balance will be exchanged into the new fund. 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
each 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 goals 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. Each 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 funds do 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 funds 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 funds nor their
affiliates will be liable for any loss caused by your failure to cash such
checks. The funds are 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 a 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 funds on behalf of numerous beneficial owners
for recordkeeping operations performed with respect to such owners. For each
beneficial owner in the omnibus account, a 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?
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 funds are 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 each 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
funds 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, each 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, each fund in which you are a shareholder 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. For more information, please see
"Appendices - State Tax Treatment."
A 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 a 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, a 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 a fund of market discount income will be
taxable as ordinary income to you. A 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. A 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 a 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 a 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.
Under the Taxpayer Relief Act of 1997 (the "1997 Act"), a fund is required to
report the capital gain distributions paid to you from gains realized on the
sale of portfolio securities using the following categories:
"28% RATE GAINS": gains resulting from securities sold by a fund after July 28,
1997 that were held for more than one year but not more than 18 months, and
securities sold by a fund before May 7, 1997 that were held for more than one
year. These gains will be taxable to individual investors at a maximum rate of
28%.
"20% RATE GAINS": gains resulting from securities sold by a fund after July 28,
1997 that were held for more than 18 months, and under a transitional rule,
securities sold by a fund between May 7 and July 28, 1997 (inclusive) that were
held for more than one year. These gains will be taxable to individual investors
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 investors in the 15%
federal income tax bracket.
The 1997 Act also provides for a new maximum rate of tax on capital gains of 18%
for individuals in the 28% or higher federal income tax brackets and 8% for
individuals in the 15% federal income tax bracket for "qualified 5-year gains."
For individuals in the 15% bracket, qualified 5-year gains are net gains on
securities held for more than five 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 five 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.
Each fund in which you are a shareholder will advise you at the end of each
calendar year of the amount of its capital gain distributions paid during the
calendar year that qualify for these maximum federal tax rates. Additional
information on reporting these distributions on your personal income tax returns
is available in Franklin Templeton's Tax Information Handbook. This handbook has
been revised to include 1997 Act tax law changes. 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. A 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 a fund has made a
distribution to you of taxable ordinary income or capital gain.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS. Each fund in which you are a
shareholder 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. Each 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 a 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, each
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 a 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;
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 net
investment income and net tax-exempt income for each of its fiscal years.
EXCISE TAX DISTRIBUTION REQUIREMENTS. The Code requires a 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. Each 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 a 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
a fund on those shares. The holding periods and categories of capital gain that
apply under the 1997 Act are described above in the "Distributions" section.
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 a 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 each 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 funds 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, is 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 each fund's investment goals, each 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.
The Code also imposes certain limitations and restrictions on the use of
tax-exempt bond financing for non-governmental business activities, such as on
activities financed by certain industrial development or private activity bonds.
Some of these bonds, including bonds for sports arenas, parking facilities, and
pollution control facilities, are generally not tax-exempt because they
generally do not pay tax-exempt interest.
INVESTMENTS IN ORIGINAL ISSUE DISCOUNT (OID) AND MARKET DISCOUNT BONDS. To the
extent a 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. A 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 a 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, a 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 a
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. A 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, a fund may be required
to dispose of 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 FUNDS' UNDERWRITER
Pursuant to an underwriting agreement, Distributors acts as principal
underwriter in a continuous public offering of each 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. Each 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.
The table below shows the aggregate underwriting commissions received by
Distributors in connection with the offering of each fund's shares, the net
underwriting discounts and commissions retained by Distributors after allowances
to dealers, and the amounts received by Distributors in connection with
redemptions or repurchases of shares for the fiscal years ended February 28,
1998, February 28, 1997 and February 29, 1996.
<TABLE>
<CAPTION>
AMOUNT
RECEIVED IN
CONNECTION
TOTAL AMOUNT WITH
COMMISSIONS RETAINED BY REDEMPTIONS OR
RECEIVED DISTRIBUTORS REPURCHASES
- ------------------------------------------------------------------------------------
1998
<S> <C> <C> <C>
Arizona Fund....................... $ 444,372 $ 30,899 $ 0
Florida Fund....................... 643,277 42,185 0
Insured Fund....................... 3,458,998 223,393 9,982
Massachusetts Fund................. 971,661 60,293 4,495
Michigan Fund...................... 2,762,586 167,731 18,468
Minnesota Fund..................... 1,114,812 67,354 1,216
Ohio Fund.......................... 2,325,085 145,477 6,228
1997
<S> <C> <C> <C>
Arizona Fund....................... $ 325,449 $ 20,962 $ 0
Florida Fund ...................... 471,751 30,514 0
Insured Fund ...................... 3,651,499 232,191 6,263
Massachusetts Fund ................ 996,784 64,688 1,328
Michigan Fund ..................... 3,025,658 186,288 7,786
Minnesota Fund .................... 1,061,069 65,580 2,804
Ohio Fund ......................... 2,389,162 144,651 9,688
1996
<S> <C> <C> <C>
Arizona Fund ...................... $ 354,716 $ 23,459 $ 0
Florida Fund ...................... 529,386 35,378 7,440
Insured Fund ...................... 3,860,342 257,256 1,217
Massachusetts Fund ................ 907,321 59,564 0
Michigan Fund ..................... 1,214,412 241,446 2,150
Minnesota Fund .................... 1,213,674 77,132 0
Ohio Fund ......................... 2,230,958 138,652 0
</TABLE>
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 funds for acting as underwriter.
THE RULE 12B-1 PLANS
Each fund and class have separate distribution plans or "Rule 12b-1 plans" that
were adopted pursuant to Rule 12b-1 of the 1940 Act.
ARIZONA AND FLORIDA PLANS. Under their plans, the Arizona and Florida funds may
each pay up to a maximum of 0.15% per year of their average daily net assets,
payable quarterly, for expenses incurred in the promotion and distribution of
their shares.
The Class I Plans. Under the Class I plan of each fund, except the Arizona and
Florida funds, 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 plans, the Board has determined that the annual fees
payable under each 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 0.02% will be paid to Distributors under the plan.
When the fund reaches $4 billion in assets, the amount to be paid to
Distributors will be reduced from 0.02% to 0.01%. 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 0.07% (0.05% plus 0.02%) 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 plans, each
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 plans.
The Class I plans do not permit unreimbursed expenses incurred in a particular
year to be carried over to or reimbursed in later years.
THE CLASS II PLANS. Under the Class II plans, each 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 plans, each fund also pays an additional 0.15% per year of
Class II's average daily net assets, payable quarterly, as a servicing fee.
ALL 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. The Arizona and Florida plans may also be terminated by any
act that constitutes an assignment of the underwriting agreement with
Distributors. 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 February 28, 1998, Distributors' eligible expenditures
for advertising, printing, and payments to underwriters and broker-dealers
pursuant to the plans and the amounts the fund paid Distributors under the plans
were as follows:
<TABLE>
<CAPTION>
DISTRIBUTORS' AMOUNT
ELIGIBLE PAID
EXPENSES BY FUND
- -------------------------------------------------------------------------------------
<S> <C> <C>
Arizona Fund ......................... $ 77,997 $ 45,494
Florida Fund ......................... 123,638 86,539
Insured Fund -
Class I ............................. 1,397,555 1,356,340
Insured Fund -
Class II ............................ 310,486 184,564
Massachusetts Fund -
Class I ............................. 339,617 271,872
Massachusetts Fund -
Class II ............................ 109,453 59,910
Michigan Fund -
Class I ............................. 1,011,866 947,333
Michigan Fund -
Class II............................ 245,508 160,660
Minnesota Fund -
Class I ............................. 439,436 402,795
Minnesota Fund -
Class II ............................ 77,003 44,063
Ohio Fund - Class I .................. 664,537 610,310
Ohio Fund - Class II ................. 212,863 128,927
</TABLE>
HOW DO THE FUNDS 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 a 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 funds 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 funds 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 each class for the indicated periods ended
February 28, 1998, was as follows:
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
--------------------------------------------------------------
INCEPTION FROM
DATE ONE-YEAR FIVE-YEAR TEN-YEAR INCEPTION
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Arizona Fund ............. 04/30/93 4.78% -% -% 5.92%
Florida Fund ............. 04/30/93 5.30 - - 5.22
Insured Fund - Class I ... 04/03/85 3.49 5.02 7.30 8.14
Insured Fund - Class II .. 05/01/95 5.49 - - 6.38
Massachusetts Fund - Class I 04/03/85 3.91 5.15 7.02 7.44
Massachusetts Fund - Class II 05/01/95 5.76 - - 6.46
Michigan Fund - Class I .. 04/03/85 3.79 5.13 7.19 7.79
Michigan Fund - Class II . 05/01/95 5.65 - - 6.55
Minnesota Fund - Class I . 04/03/85 3.05 4.65 6.80 7.73
Minnesota Fund - Class II 05/01/95 4.99 - - 5.83
Ohio Fund - Class I ...... 04/03/85 3.63 5.10 7.24 7.82
Ohio Fund - Class II ..... 05/01/95 5.63 - - 6.61
</TABLE>
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 each class for the
indicated periods ended February 28, 1998, was as follows:
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURN
------------------------------------------------------------
INCEPTION FROM
DATE ONE-YEAR FIVE-YEAR TEN-YEAR INCEPTION
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Arizona Fund ............. 04/30/93 4.78% -% -% 32.02%
Florida Fund ............. 04/30/93 5.30 - - 27.87
Insured Fund - Class I ... 04/03/85 3.49 27.74 102.31 174.48
Insured Fund - Class II .. 05/01/95 5.49 - - 19.15
Massachusetts Fund - Class I 04/03/85 3.91 28.52 97.17 152.36
Massachusetts Fund - Class II 05/01/95 5.76 - - 19.40
Michigan Fund - Class I .. 04/03/85 3.79 28.43 100.25 163.19
Michigan Fund - Class II . 05/01/95 5.65 - - 19.66
Minnesota Fund - Class I . 04/03/85 3.05 25.51 93.00 161.55
Minnesota Fund - Class II 05/01/95 4.99 - - 17.39
Ohio Fund - Class I ...... 04/03/85 3.63 28.25 101.11 164.30
Ohio Fund - Class II ..... 05/01/95 5.63 - - 19.86
</TABLE>
YIELD
CURRENT YIELD. Current yield of each class shows the income per share earned by
a 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 February 28, 1998, was as follows:
YIELD
---------------------
CLASS I CLASS II
- ---------------------------------------------------------------------
Arizona Fund ............................. 4.34% -%
Florida Fund ............................. 4.30 -
Insured Fund ............................. 4.06 3.63
Massachusetts Fund ....................... 4.04 3.63
Michigan Fund ............................ 4.04 3.61
Minnesota Fund ........................... 4.04 3.61
Ohio Fund ................................ 4.06 3.63
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 funds 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 or combined federal and state 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 February 28, 1998, was as follows:
TAXABLE-
EQUIVALENT YIELD
--------------------
CLASS I CLASS I
- --------------------------------------------------------------------
Arizona Fund ....................... 7.58% -%
Florida Fund ....................... 7.12 -
Insured Fund ....................... 6.72 6.01
Massachusetts Fund ................. 7.60 6.83
Michigan Fund ...................... 7.00 6.25
Minnesota Fund ..................... 7.31 6.53
Ohio Fund .......................... 7.24 6.48
As of February 28, 1998, the federal and combined federal and state income tax
rates upon which the taxable-equivalent yield quotations are based were as
follows:
COMBINED RATE*
- -------------------------------------------
Arizona................... 42.7%
Florida .................. 39.6
Insured .................. 39.6
Massachusetts ............ 46.8
Michigan ................. 42.3
Minnesota ................ 44.7
Ohio ..................... 43.9
*Based on the maximum combined state and 39.6% federal tax rate.
From time to time, as any changes to the rates become effective,
taxable-equivalent yield quotations advertised by the funds will be updated to
reflect these changes. The funds expect updates may be necessary as tax rates
are changed by federal and state governments. The advantage of tax-free
investments, like the funds, will be enhanced by any tax rate increases.
Therefore, the details of specific tax increases may be used in sales material
for the funds.
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, such as short-term capital gains, and is
calculated over a different period of time. The current distribution rate for
each class for the 30-day period ended February 28, 1998, was as follows:
CURRENT
DISTRIBUTION RATE
---------------------
CLASS I CLASS II
- -------------------------------------------------------
Arizona Fund .............. 4.69% -%
Florida Fund .............. 4.74 -
Insured Fund .............. 5.13 4.71
Massachusetts Fund ........ 4.79 4.37
Michigan Fund ............. 4.80 4.35
Minnesota Fund ............ 4.91 4.49
Ohio Fund ................. 4.89 4.46
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 and
state tax rates available to the fund. The taxable-equivalent distribution rate
for each class for the 30-day period ended February 28, 1998, was as follows:
TAXABLE-EQUIVALENT
DISTRIBUTION RATE
---------------------
CLASS I CLASS II
- -------------------------------------------------------
Arizona Fund ................ 8.19% -%
Florida Fund ................ 7.85 -
Insured Fund ................ 8.49 7.80
Massachusetts Fund .......... 9.01 8.22
Michigan Fund ............... 8.31 7.53
Minnesota Fund .............. 8.88 8.12
Ohio Fund ................... 8.72 7.96
VOLATILITY
Occasionally statistics may be used to show a fund's volatility or risk.
Measures of volatility or risk are generally used to compare a 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 funds 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 funds may include in their 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 funds may satisfy your
investment goal, advertisements and other materials about the funds 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) Lehman Brothers Municipal Bond Index or its component indices - measures
yield, price and total return for the municipal bond market.
d) Bond Buyer 20 Index - an index of municipal bond yields based upon yields of
20 general obligation bonds maturing in 20 years.
e) 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.
f) Financial publications: The WALL STREET JOURNAL, AND BUSINESS WEEK, FINANCIAL
WORLD, FORBES, FORTUNE, and Money magazines - provide performance statistics
over specified time periods.
g) 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.
h) 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.
i) 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.
j) 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 funds may include a
discussion of certain attributes or benefits to be derived from an investment in
the funds. 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 funds 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 a fund's performance to the
return on CDs or other investments. You should be aware, however, that an
investment in a 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 a 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 a fund's shares can be expected to
increase. CDs are frequently insured by an agency of the U.S. government. An
investment in a 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 funds' portfolios, 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 funds to calculate their figures. In
addition, there can be no assurance that the funds will continue their
performance as compared to these other averages.
MISCELLANEOUS INFORMATION
The funds 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 a fund
cannot guarantee that these goals will be met.
Each 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 $243 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. Each 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
$48 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
a 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 funds 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.
As of April 2, 1998, the principal shareholders of the funds, beneficial or of
record, were as follows:
SHARE PER-
NAME AND ADDRESS AMOUNT CENTAGE
- --------------------------------------------------------------------------------
ARIZONA FUND -
CLASS I
Dean Witter FBO 289,925.143 5.3%
Megan W. Delaney
PO Box 909
P.O. Box 250
Church Street Station
New York, NY 10008-0250
MASSACHUSETTS FUND -
CLASS II
Maurice Samuel Vaughn
TRST 92,182.920 7.3%
Maurice Samuel Vaughn
LIV TR
UA DTD 04/01/97
7971 Park Dr.
Fair Oaks, CA 95628
MINNESOTA FUND -
CLASS II
Industricorp & Co. Inc. 57,925.950 6.5%
A/C 19 2996 00
312 Central Ave. NE
Minneapolis, MN 55414
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.
As a shareholder of a Massachusetts business trust, you could, under certain
circumstances, be held personally liable as a partner for its obligations. The
funds' Agreement and Declaration of Trust, however, contains an express
disclaimer of shareholder liability for acts or obligations of a fund. The
Declaration of Trust also provides for indemnification and reimbursement of
expenses out of a fund's assets if you are held personally liable for
obligations of the fund. The Declaration of Trust provides that a fund shall,
upon request, assume the defense of any claim made against you for any act or
obligation of the fund and satisfy any judgment thereon. All such rights are
limited to the assets of the fund. The Declaration of Trust further provides
that a fund may maintain appropriate insurance (for example, fidelity bonding
and errors and omissions insurance) for the protection of the fund, its
shareholders, trustees, officers, employees and agents to cover possible tort
and other liabilities. Furthermore, the activities of a fund as an investment
company, as distinguished from an operating company, would not likely give rise
to liabilities in excess of the fund's total assets. Thus, the risk of you
incurring financial loss on account of shareholder liability is limited to the
unlikely circumstances in which both inadequate insurance exists and the fund
itself is unable to meet its obligations.
In the event of disputes involving multiple claims of ownership or authority to
control your account, each 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 Trust, for the fiscal year ended February 28, 1998, including the
auditors' report, are incorporated herein by reference.
USEFUL TERMS AND DEFINITIONS
1940 ACT - Investment Company Act of 1940, as amended
ADVISERS - Franklin Advisers, Inc., the funds' investment manager
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS I AND CLASS II - Each fund, except the Arizona and Florida funds, offer
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. Shares of the Arizona and
Florida funds are considered Class I shares for redemption, exchange and other
purposes.
CODE - Internal Revenue Code of 1986, as amended
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the funds' 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 funds' administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the funds'
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.
PROSPECTUS - The prospectus for the funds dated July 1, 1998, as may be amended
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.
APPENDICES
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.
CC: Municipal bonds rated CC are minimally protected. Default in payment of
interest and/or principal seems probable over time.
C: Municipal bonds rated C are in imminent default in the payment of interest or
principal.
DDD, DD AND D: Municipal bonds rated DDD, DD and D are in default on interest
and/or principal payments. Such bonds are extremely speculative and should be
valued on the basis of their ultimate recovery value in liquidation or
reorganization of the obligor. DDD represents the highest potential for recovery
while D represents the lowest potential for recovery.
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, DDD, DD or D categories.
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 each 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.
STATE TAX TREATMENT
The following information on the state income tax treatment of dividends from
the funds is based upon correspondence and sources believed to be reliable.
Except where otherwise noted, the information pertains to individual state
income taxation only. You may be subject to local taxes on dividends or the
value of your shares. Corporations, trusts, estates and other entities may be
subject to other taxes and should consult with their tax advisors or their state
department of revenue. For some investors, a portion of the dividend income may
be subject to the federal and/or state alternative minimum tax.
ARIZONA
Sections 43-1021(4) and 43-1121(3) of the Arizona Income Tax Code state that
interest on obligations of the state of Arizona or its political subdivisions is
exempt from personal and corporate income tax. Sections 43-1022(6) and
43-1122(6) provide similar tax-exempt treatment for interest on obligations of
the U.S. or its territories (including Puerto Rico, Guam and the Virgin
Islands). Pursuant to State Income Tax Ruling Number 84-10-5, Arizona does not
tax dividend income from regulated investment companies, such as the Arizona
Fund, to the extent that such income is derived from such exempt obligations.
Dividends paid from interest earned on indirect U.S. government obligations
(GNMAs, FNMAs, etc.), or obligations from other states and their political
subdivisions are fully taxable. To the extent that such taxable investments are
made by the fund for temporary or defensive purposes, the distributions will be
taxable.
Any distributions of net short-term and net long-term capital gain earned by the
fund are included in each shareholder's Arizona taxable income as dividend
income and long-term capital gain, respectively, and are taxed at ordinary
income tax rates.
FLORIDA
Florida does not have a personal income tax but does have an intangible personal
property tax for residents. According to Florida Statute Section 199.185 and
Technical Assistance Advisement 90(C)2-003, issued by the Florida Department of
Revenue on August 8, 1990 (as later revised), shares in regulated investment
companies organized as business trusts, such as the Florida Fund, will not be
subject to Florida's intangible property tax to the extent that the fund is
invested in exempt obligations of the U.S. government, its agencies,
instrumentalities or territories (including Puerto Rico, Guam and the Virgin
Islands) at the close of business on the last business day of the previous
calendar year.
If the fund invests all of the remaining portion of its Net Asset Value in
exempt obligations of the state of Florida or its municipalities or political
subdivisions on such date, then that remaining portion of the Net Asset Value of
the fund (and corresponding value of fund shares) will also be exempt from
Florida's intangibles tax.
According to Florida Technical Assistance Advisement 94(c)2-025, if the fund
invests, such as for temporary or defensive purposes, any of the remaining
portion of its portfolio in any asset that is taxable under Florida's intangible
tax law, including investments in indirect federal obligations (GNMAs, FNMAs,
etc.) or obligations of any other states, then only the portion of Net Asset
Value, if any, that is made up of direct obligations of the U.S. government, or
territories and possessions of the U.S. government, may be excluded from tax.
The remaining Net Asset Value (and corresponding value of fund shares) of the
fund is subject to tax.
MASSACHUSETTS
Chapter 62, Section 2, of the Massachusetts General Laws states that dividends
received from a regulated investment company, such as the Massachusetts Fund,
are exempt from state personal income tax to the extent that such dividends are
attributable to interest on obligations of the U.S. government or its
territories (including Puerto Rico, Guam and the Virgin Islands). Dividends
received from the fund, which are either exempt-interest dividends or capital
gain dividends, to the extent that the interest or gains are attributable to
obligations of the Commonwealth of Massachusetts, or any political subdivision,
agency or instrumentality within the commonwealth, are also exempt from state
personal income tax. Dividends paid from interest earned on indirect U.S.
government obligations (GNMAs, FNMAs, etc.) or other obligations from other
states and their political subdivisions are fully taxable. To the extent that
such taxable investments are made by the fund for temporary or defensive
purposes, the distributions will be taxable.
Capital gain dividends attributable to obligations other than of the
Commonwealth of Massachusetts, or any political subdivision, agency or
instrumentality thereof will be taxable as follows: Net short-term capital gain
distributions will be taxable as dividend income while net long-term capital
gain distributions will be taxable at reduced rates from zero to five percent
based upon the applicable holding period of the asset as determined under
Massachusetts law.
In determining the Massachusetts excise tax on corporations subject to state
taxation, distributions from the fund will generally be included in a corporate
shareholder's net income, and in the case of corporations that are defined as
"intangible property corporations," shares of the fund will be included in the
computation of net worth.
MICHIGAN
Section 206.30(1) of the Michigan Compiled Laws generally provides that taxable
income, for purposes of the Michigan individual income tax, is determined by
reference to federal adjusted gross income, with certain modifications. Interest
and dividends derived from obligations or securities of states other than
Michigan (less related expenses) must be added back in determining Michigan
taxable income. Interest and dividends derived from obligations or securities of
Michigan (and its political subdivisions) are exempt and are not, therefore,
added back in determining Michigan taxable income. Further, income derived from
obligations of the U.S. government that the state is prohibited by law from
subjecting to a net income tax is subtracted in determining Michigan taxable
income. This includes direct obligations of the U.S. government, its agencies,
instrumentalities, or possessions (including Puerto Rico, Guam and the Virgin
Islands).
Revenue Administrative Bulletin 1986-3, states that a regulated investment
company, such as the Michigan Fund, which invests in tax-free municipal
obligations of the state of Michigan and its political and governmental
subdivisions is permitted to pass-through the exemption of such interest to its
shareholders to the extent that such interest qualifies as an exempt-interest
dividend of a regulated investment company. The exempt nature of interest from
obligations of the U.S. and its territories and possessions may also be passed
through to shareholders. Dividends paid from interest earned on indirect U.S.
government obligations (GNMAs, FNMAs, etc.) or other obligations from other
states and their political subdivisions are fully taxable. To the extent that
such taxable investments are made by the fund for temporary or defensive
purposes, the distributions will be taxable.
Any distributions of net short-term and net long-term capital gains earned by
the fund will generally be included in each shareholder's Michigan taxable
income as dividend income and long-term capital gain, respectively, and taxed at
ordinary income tax rates.
Section 205.133 of the Michigan Compiled Laws exempts from the intangible
personal property tax obligations of the state of Michigan and its political
subdivisions and obligations of the U.S. and its possessions, agencies and
instrumentalities. Pursuant to Revenue Administrative Bulletin 1986-3, an owner
of a share of a regulated investment company, such as the Michigan Fund, will be
considered the owner of a pro-rata share of the assets of such regulated
investment company. It further provides that yield (for intangibles tax
purposes) is determined with respect to shares of the Michigan Fund by excluding
from gross dividends or interest the pro rata share of the interest or dividends
received from such exempt obligations held by the fund. According to Michigan
tax return instructions, capital gains from a regulated investment company that
are reinvested in additional shares of the fund are exempt from intangibles
taxes, whereas capital gains distributed in cash are taxable. In 1995,
legislation was passed repealing this intangible personal property tax effective
January 1, 1998.
MINNESOTA
Section 290.01 of the Code of Minnesota states that individual shareholders will
generally not be subject to state income taxation on the exempt-interest
dividends distributed by a regulated investment company, such as the Minnesota
Fund, provided that at least 95% of the exempt-interest dividends are derived
from obligations of the state of Minnesota, or its political or governmental
subdivisions. However, such dividends are taken into account in computing the
state's alternative minimum tax to the extent they are derived from Minnesota
private activity bonds. Minnesota Rule 8002.0300 generally states that dividends
paid by the fund, to the extent attributable to interest derived from
obligations of the U.S. government, its authorities, commissions,
instrumentalities or territories (including Puerto Rico, Guam and the Virgin
Islands), will also be exempt from Minnesota's personal income tax. As a matter
of policy, the fund will continue to earn at least 95% of its income from
interest on Minnesota obligations and invest less than 5% of its assets in
direct U.S. government, Puerto Rico or other obligations to ensure that the fund
continues to qualify to pay exempt-interest dividends on income from Minnesota
obligations. Dividends paid from interest earned on indirect U.S. government
obligations (GNMAs, FNMAs, etc.) or other obligations from other states and
their political subdivisions are fully taxable. To the extent that such taxable
investments are made by the fund for temporary or defensive purposes, the
distributions will be taxable.
Any distributions of net short-term and net long-term capital gains earned by
the fund are included in each shareholder's Minnesota taxable income as dividend
income and long-term capital gain respectively, and are taxed at ordinary income
tax rates.
OHIO
Section 5747.01(A) of the Ohio Revised Code states generally that interest on
obligations of the state of Ohio and its subdivisions and authorities and of the
U.S. and its territories and possessions (to the extent included in federal
adjusted gross income but exempt from state income taxes under U.S. laws) is
exempt from Ohio state personal income tax. Distributions of such income by
regulated investment companies, such as the Ohio Fund, will also be exempt from
the Ohio personal income tax and the Ohio corporation franchise tax computed on
the net income basis. Shares of the Ohio Fund will, however, be included in a
shareholder's tax base for purposes of computing the Ohio corporation franchise
tax on the net worth basis. Dividends paid from interest earned on indirect U.S.
government obligations (GNMAs, FNMAs, etc.) or other obligations from other
states and their political subdivisions are fully taxable. To the extent that
such taxable investments are made by the fund for temporary or defensive
purposes, the distributions will be taxable on a pro rata basis.
Shareholders who are subject to the Ohio personal income tax or the Ohio
corporation franchise tax computed on the net income basis will not be subject
to such taxes on distributions of "capital gain dividends" to the extent that
such distributions are attributable to profit made on the sale, exchange or
other disposition by the Ohio Fund of exempt obligations of the state of Ohio
and its subdivisions and authorities.
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
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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
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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
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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
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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
FRANKLIN TAX-FREE TRUST
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.
154
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