File No. 333-74895
AS FILED JUNE 24, 1999
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
X Post-Effective Amendment No. 1
(Check appropriate box or boxes)
FRANKLIN FEDERAL TAX-FREE INCOME FUND
(Exact Name of Registrant as Specified in Charter)
(650) 312-2000
(Area Code and Telephone Number)
777 MARINERS ISLAND BLVD.
SAN MATEO, CA 94404
(Address of Principal Executive Offices
Number, Street, City, State, Zip Code)
DEBORAH R. GATZEK
777 MARINERS ISLAND BLVD.
SAN MATEO, CA 94404
(Name and Address of Agent for Service,
Number, Street, City, State, Zip Code)
Copies to:
BRUCE G. LETO, ESQUIRE
STRADLEY, RONON, STEVENS & YOUNG, LLP
2600 ONE COMMERCE SQUARE
PHILADELPHIA, PA 19103
TITLE OF THE SECURITIES BEING REGISTERED: SHARES OF CAPITAL STOCK - NO PAR
VALUE. NO FILING FEE IS DUE BECAUSE REGISTRANT IS RELYING ON SECTION 24(F)
OF THE INVESTMENT COMPANY ACT OF 1940, AS AMENDED.
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE IMMEDIATELY PURSUANT TO
RULE 485(B) UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
PART C. OTHER INFORMATION
Item 15. INDEMNIFICATION
Please see the By-Laws, Management, and Distribution Agreements,
previously filed as exhibits and incorporated herein by reference.
Notwithstanding the provisions contained in the Registrant's By-Laws, in the
absence of authorization by the appropriate court on the merits pursuant to
said By-Laws, any indemnification under said Article shall be made by
Registrant only if authorized in the manner provided by such By-Laws.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions,
or otherwise, the Registrant has been advised that in the opinion of the U.S.
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
Item 16. EXHIBITS (Incorporated by reference to the filings as noted)
The following exhibits are incorporated herein by reference, except
exhibits 4(i), 4(ii), 4(iii), 4(iv), 12(i), and 12(iii) which are attached.
(1) Copies of the charter as now in effect:
(i) Articles of Incorporation dated January 5, 1981
Filing: Post-Effective Amendment No. 18 to
Registration Statement on Form N-1A
File No. 2-75925
Filing Date: July 3, 1995
(ii) Certificate of Amendment to Articles of Incorporation
dated November 1,
1982
Filing: Post-Effective Amendment No. 18 to
Registration Statement on Form N-1A
File No. 2-75925
Filing Date: July 3, 1995
(iii) Certificate of Amendment to Articles of Incorporation
dated June 20, 1983
Filing: Post-Effective Amendment No. 18 to
Registration Statement on Form N-1A
File No. 2-75925
Filing Date: July 3, 1995
(iv) Certificate of Amendment to Articles of Incorporation
dated September 20, 1983
Filing: Post-Effective Amendment No. 18 to
Registration Statement on Form N-1A
File No. 2-75925
Filing Date: July 3, 1995
(v) Certificate of Amendment to Articles of Incorporation
dated April 11, 1995
Filing: Post-Effective Amendment No. 18 to Registration
Statement on Form N-1A
File No. 2-75925
Filing Date: July 3, 1995
(2) Copies of the existing By-laws or instruments corresponding
thereto:
(i) By-laws of Franklin Federal Tax-Free Income Fund
Filing: Post-Effective Amendment No. 18 to
Registration Statement on Form N-1A
File No. 2-75925
Filing Date: July 3, 1995
(ii) Amendment to By-Laws of Franklin Federal Tax-Free Income
Fund
dated November 17, 1987
Filing: Post-Effective Amendment No. 18 to
Registration Statement on Form N-1A
File No. 2-75925
Filing Date: July 3, 1995
(iii) Amendment to By-Laws of Franklin Federal Tax-Free
Income Fund
dated February 28, 1994
Filing: Post-Effective Amendment No. 18 to
Registration Statement on Form N-1A
File No. 2-75925
Filing Date: July 3, 1995
(3) Copies of any voting trust agreement with respect to more than 5
percent of any class of equity securities of the Registrant:
Not Applicable
(4) Copies of the agreement of acquisition, reorganization, merger,
liquidation and any amendments to it:
(i) Agreement and Plan of Reorganization between Franklin Tax-Free
Trust, on behalf of Franklin Indiana Tax-Free Income Fund, and
the Registrant dated April 28, 1999
(ii) Agreement and Plan of Reorganization between Franklin Municipal
Securities Trust, on behalf of Franklin Hawaii Municipal Bond
Fund, and the Registrant dated April 28, 1999
(iii)Agreement and Plan of Reorganization between Franklin Municipal
Securities Trust, on behalf of Franklin Arkansas Municipal Bond
Fund, and the Registrant dated April 28, 1999
(iv) Agreement and Plan of Reorganization between Franklin Municipal
Securities Trust, on behalf of Franklin Washington Municipal
Bond Fund, and the Registrant dated April 28, 1999
(5) Copies of all instruments defining the rights of the holders of
the securities being registered including, where applicable, the
relevant portion of the articles of incorporation or by-laws of
the Registrant:
Not Applicable
(6) Copies of all investment advisory contracts relating to the
management of the assets of the Registrant:
(i) Management Agreement between Registrant and Franklin
Advisers, Inc.
dated May 1, 1994
Filing: Post-Effective Amendment No. 18 to
Registration Statement on Form N-1A
File No. 2-75925
Filing Date: July 3, 1995
(7) Copies of each underwriting or distribution contract between the
Registrant and a principal underwriter, and specimens or copies
of all agreements between principal underwriters and dealers:
(i) Amended and Restated Distribution Agreement between
Registrant and
Franklin/Templeton Distributors, Inc. dated March 29, 1995
Filing: Post-Effective Amendment No. 18 to
Registration Statement on Form N-1A
File No. 2-75925
Filing Date: July 3, 1995
(ii) Forms of Dealer Agreements between Franklin/Templeton
Distributors, Inc. and Securities Dealers dated March 1,
1998
Filing: Post-Effective Amendment No. 22 to
Registration Statement on Form N-1A
File No. 2-75925
Filing Date: December 22, 1998
(iii) Amendment of Amended and Restated Distribution Agreement
between Registrant and Franklin/Templeton Distributors, Inc.
dated January 12, 1999
Filing: Post-Effective Amendment No. 23 to
Registration Statement on Form N-1A
File No. 2-75925
Filing Date: June 22, 1999
(8) Copies of all bonus, profit sharing, pension or other similar
contracts or arrangements wholly or partly for the benefit of
directors or officers of the Registrant in their capacity as
such; any such plan that is not set forth in a formal document,
furnish a reasonably detailed description thereof:
Not Applicable
(9) Copies of all custodian agreements and depository contracts under
Section 17(f) of the 1940 Act, with respect to securities and
similar investments of the Registrant, including the schedule of
remuneration:
(i) Master Custody Agreement between Registrant and Bank of New
York dated February 16, 1996
Filing: Post-Effective Amendment No. 20 to
Registration Statement on Form N-1A
File No. 2-75925
Filing Date: August 21, 1997
(ii) Terminal Link Agreement between Registrant and Bank of New
York dated February 16, 1996
Filing: Post-Effective Amendment No. 20 to
Registration Statement on Form N-1A
File No. 2-75925
Filing Date: August 21, 1997
(iii) Amendment to Master Custody Agreement between Registrant
and Bank of New York dated May 7, 1997
Filing: Post-Effective Amendment No. 21 to
Registration Statement on Form N-1A
File No. 2-75925
Filing Date: June 23, 1998
(iv) Amendment dated February 27, 1998 to Exhibit A of
the Master Custody Agreement between Registrant and Bank of
New York dated February 16, 1996
Filing: Post-Effective Amendment No. 22 to
Registration Statement on Form N-1A
File No. 2-75925
Filing Date: December 22, 1998
(10) Copies of any plan entered into by Registrant pursuant to Rule
12b-1 under the 1940 Act, which describes all material aspects of
the financing of distribution of Registrant's shares, and any
agreements with any person relating to implementation of such
plan and copies of any plan entered into pursuant to Rule 18f-3
under the 1940 Act, any agreements with any person relating to
the implementation of such plan, any amendment and a copy of the
portion of the minutes discussing any action taken to resolve the
plan.
(i) Distribution Plan pursuant to Rule 12b-1 between Registrant
and
Franklin/Templeton Distributors, Inc. dated May 1, 1994
Filing: Post-Effective Amendment No. 18 to Registration
Statement on Form N-1A
File No. 2-75925
Filing Date: July 3, 1995
(ii) Class II Distribution Plan pursuant to Rule 12b-1 dated
March 30, 1995
Filing: Post-Effective Amendment No. 18 to Registration
Statement on Form N-1A
File No. 2-75925
Filing Date: July 3, 1995
(iii) Class B Distribution Plan pursuant to Rule 12b-1 between
Registrant and Franklin/Templeton Distributors, Inc. dated
October 16, 1998
Filing: Post-Effective Amendment No. 23 to
Registration Statement on Form N-1A
File No. 2-75925
Filing Date: June 22, 1999
(iv) Multiple Class Plan on behalf of Franklin Federal
Tax-Free Income Fund dated March 19, 1998
Filing: Post-Effective Amendment No. 23 to
Registration Statement on Form N-1A
File No. 2-75925
Filing Date: June 22, 1999
(11) An opinion and consent of counsel as to the legality of the
securities being registered, indicating whether they will when
sold be legally issued, fully paid and nonassessable:
(i) Opinion and Consent of Counsel dated June 19, 1998
Filing: Post-Effective Amendment No. 21 to
Registration Statement on Form N-1A
File No. 2-75925
Filing Date: June 23, 1998
(12) Form of an opinion, and consent to its use, of counsel,
supporting the tax matters and consequences to shareholders
discussed in the prospectus.
(i) Tax Opinion relating to Franklin Indiana Tax-Free Income Fund
(ii) Form of Tax Opinion relating to Franklin Arkansas
Municipal Bond Fund
Filing: Registration Statement on Form N-14
File No. 333-74895
Filing Date: March 23, 1999
(iii) Tax Opinion relating to Franklin Hawaii Municipal Bond Fund
(iv) Form of Tax Opinion relating to Franklin Washington
Municipal Bond Fund
Filing: Registration Statement on Form N-14
File No. 333-74895
Filing Date: March 23, 1999
(13) Copies of all other material contracts not made in the ordinary
course of business which are to be performed in whole or in part
at or after the date of filing the Registration Statement:
(i) Subcontract for Fund Administrative Services dated
October 1, 1996 and Amendment thereto dated December 1, 1998
between Franklin Advisers, Inc. and Franklin Templeton
Services Inc.
Filing: Post-Effective Amendment No. 23 to
Registration Statement on Form N-1A
File No. 2-75925
Filing Date: June 22, 1999
(14) Copies of any other opinions, appraisals or rulings and consents
to the use thereof relied on in the preparation of this
registration statement and required by Section 7 of the 1933 Act:
Not Applicable
(15) All financial statements omitted from Item 14(a)(1):
Not Applicable
(16) Manually signed copies of any power of attorney pursuant to which
the name of any person has been signed to the Registration
Statement.
(i) Power of Attorney dated January 12, 1999
Filing: Registration Statement on Form N-14
File No. 333-74895
Filing Date: March 23, 1999
(ii) Certificate of Secretary dated February 12, 1999
Filing: Registration Statement on Form N-14
File No. 333-74895
Filing Date: March 23, 1999
Item 17. UNDERTAKINGS
(1) The undersigned Registrant agrees that prior to any public
reoffering of the securities registered through the use of a
prospectus which is a part of this Registration Statement by any
person or party who is deemed to be an underwriter within the
meaning of Rule 145(c) of the Securities Act, the reoffering
prospectus will contain the information called for by the
applicable registration form for reofferings by persons who may
be deemed underwriters, in addition to the information called for
by the other items of the applicable form.
(2) The undersigned Registrant agrees that every prospectus
that is filed under paragraph (1) above will be filed as a part
of an amendment to the registration statement and will not be
used until the amendment is effective, and that, in determining
any liability under the 1933 Act, each post-effective amendment
shall be deemed to be a new Registration Statement for the
securities offered therein, and the offering of the securities at
that time shall be deemed to be the initial bona fide offering of
them.
(3) The undersigned Registrant agrees that it will file with
the Commission a Post-Effective Amendment to this Registration
Statement including the Opinion of Stradley, Ronon, Stevens &
Young, LLP, relating to federal tax matters, within a reasonable
time after the tax opinion that will be delivered in connection
with the Proposed Transaction has been received by the
undersigned Registrant.
SIGNATURES
As required by the Securities Act of 1933, this Registration Statement
has been signed on behalf of the Registrant, in the City of San Mateo, and
the State of California, on the 24th day of June, 1999.
FRANKLIN FEDERAL TAX-FREE INCOME FUND
(Registrant)
By: RUPERT H. JOHNSON, JR.*
Rupert H. Johnson, Jr., President
As required by the Securities Act of 1933, this Registration Statement
has been signed by the following persons in the capacities and on the dates
indicated:
RUPERT H. JOHNSON, JR.* Director and Principal Dated: June 24, 1999
Rupert H. Johnson, Jr. Executive Officer
MARTIN L. FLANAGAN* Principal Financial Dated: June 24, 1999
Martin L. Flanagan Officer
DIOMEDES LOO-TAM* Principal Accounting Dated: June 24, 1999
Diomedes Loo-Tam Officer
FRANK H. ABBOTT, III* Director Dated: June 24, 1999
Frank H. Abbott, III
HARRIS J. ASHTON* Director Dated: June 24, 1999
Harris J. Ashton
HARMON E. BURNS* Director Dated: June 24, 1999
Harmon E. Burns
ROBERT F. CARLSON* Director Dated: June 24, 1999
Robert F. Carlson
S. JOSEPH FORTUNATO* Director Dated: June 24, 1999
S. Joseph Fortunato
CHARLES B. JOHNSON* Director Dated: June 24, 1999
Charles B. Johnson
FRANK WT. LAHAYE* Director Dated: June 24, 1999
Frank W.T.LaHaye
GORDON S. MACKLIN* Director Dated: June 24, 1999
Gordon S. Macklin
By: /s/ Karen L. Skidmore
Attorney-in-Fact
(Pursuant to Power of Attorney previously filed.)
EXHIBIT INDEX
EXHIBIT NO. DOCUMENT LOCATION
1(i) Articles of Incorporation dated January 5, 1981 *
1(ii) Certificate of Amendment to Articles of Incorporation *
dated November 1, 1982
1(iii) Certificate of Amendment to Articles of Incorporation *
dated June 20 1983
1(iv) Certificate of Amendment to Articles of Incorporation *
dated September 20, 1983
1(v) Certificate of Amendment to Articles of Incorporation *
dated April 11, 1995
2(i) By-Laws *
2(ii) Amendment to By-Laws dated November 17, 1987 *
2(iii) Amendment to By-Laws dated February 28, 1994 *
(4)(i) Agreement and Plan of Reorganization between Franklin Attached
Tax-Free Trust, on behalf of Franklin Indiana Tax-Free
Income Fund, and the Registrant dated April 28, 1999
(4)(ii) Agreement and Plan of Reorganization between Franklin Attached
Municipal Securities Trust, on behalf of Franklin
Hawaii Municipal Bond Fund, and the Registrant dated
April 28, 1999
(4)(iii) Agreement and Plan of Reorganization between Franklin Attached
Municipal Securities Trust, on behalf of Franklin
Arkansas Municipal Bond Fund, and the Registrant dated
April 28, 1999
(4)(iv) Agreement and Plan of Reorganization between Franklin Attached
Municipal Securities Trust, on behalf of Franklin
Washington Municipal Bond Fund, and the Registrant
dated April 28, 1999
6(i) Management Agreement between Registrant and Franklin *
Advisers, Inc. dated May 1, 1994
7(i) Amended and Restated Distribution Agreement between *
Registrant and Franklin/Templeton Distributors, Inc.
dated March 29, 1995
7(ii) Forms of Dealer Agreements between Franklin/ *
Templeton Distributors, Inc. and Securities Dealers
dated March 1, 1998
7(iii) Amendment of Amended and Restated Distribution *
Agreement between Registrant and Franklin/Templeton
Distributors, Inc. dated June 12, 1999
9(i) Master Custody Agreement between Registrant and Bank *
of New York dated February 16, 1996
9(ii) Terminal Link Agreement between Registrant and Bank *
of New York dated February 16, 1996
9(iii) Amendment to Master Custody Agreement between *
Registrant and Bank of New York dated May 7, 1997
9(iv) Amendment dated February 27, 1998 to Exhibit A of the *
Master Custody Agreement between Registrant and Bank
of New York dated February 16, 1996
10(i) Distribution Plan between Registrant and *
Franklin/Templeton Distributors, Inc. dated May 1,
1994
10(ii) Class II Distribution Plan pursuant to Rule 12b-1 *
dated March 30, 1995
10(iii) Class B Distribution Plan pursuant to Rule 12b-1 *
between Registrant and Franklin/Templeton Distributions,
Inc. dated October 16, 1998
10(iv) Multiple Class Plan on behalf of Franklin Federal *
Tax-Free Income Fund dated March 19, 1998
11(i) Opinion and Consent of Counsel dated June 19, 1998 *
12(i) Form of Tax Opinion relating to Franklin Indiana Attached
Tax-Free Income Fund
12(ii) Form of Tax Opinion relating to Franklin Arkansas *
Municipal Bond Fund
12(iii) Form of Tax Opinion relating to Franklin Hawaii Attached
Municipal Bond Fund
12(iv) Form of Tax Opinion relating to Franklin Washington *
Municipal Bond Fund
13(i) Subcontract for Fund Administrative Services dated *
October 1, 1996 and Amendment thereto dated April 30,
1998 between Franklin Advisers, Inc. and Franklin
Templeton Services, Inc.
16(i) Power of Attorney dated January 12, 1999 *
16(ii) Certificate of Secretary dated February 12, 1999 *
*Incorporated by reference.
AGREEMENT AND PLAN OF REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement and Plan"), made
as of this 28th day of April, 1999, by and between FRANKLIN FEDERAL TAX-FREE
INCOME FUND ("Federal Fund"), a corporation incorporated under the laws of
the State of California in 1982, with its principal place of business at 777
Mariners Island Boulevard, San Mateo, California 94404, and FRANKLIN TAX-FREE
TRUST (the "Trust"), a business trust created under the laws of the
Commonwealth of Massachusetts in 1984, with its principal place of business
at 777 Mariners Island Boulevard, San Mateo, California 94404, on behalf of
its series Franklin Indiana Tax-Free Income Fund, a series of shares of the
Trust ("Indiana Fund").
PLAN OF REORGANIZATION
The reorganization (hereinafter referred to as the "Plan of
Reorganization") will consist of (i) the acquisition by Federal Fund of
substantially all of the property, assets and goodwill of Indiana Fund in
exchange solely for shares of common stock, no par value, of Federal Fund -
Class A ("Federal Fund Shares"); (ii) the distribution of Federal Fund Shares
to the shareholders of Indiana Fund according to their respective interests;
and (iii) the subsequent dissolution of Indiana Fund as soon as practicable
after the closing (as defined in Section 3, hereinafter called the
"Closing"), all upon and subject to the terms and conditions of this
Agreement and Plan hereinafter set forth.
AGREEMENT
In order to consummate the Plan of Reorganization and in consideration
of the promises and of the covenants and agreements hereinafter set forth,
and intending to be legally bound, the parties hereto covenant and agree as
follows:
1. SALE AND TRANSFER OF ASSETS, LIQUIDATION AND DISSOLUTION OF INDIANA
FUND.
(a) Subject to the terms and conditions of this Agreement and Plan,
and in reliance on the representations and warranties of Federal Fund herein
contained, and in consideration of the delivery by Federal Fund of the number
of its Federal Fund Shares hereinafter provided, the Trust, on behalf of
Indiana Fund, agrees that it will convey, transfer and deliver to Federal
Fund at the Closing all of Indiana Fund's then existing assets, free and
clear of all liens, encumbrances, and claims whatsoever (other than
shareholders' rights of redemption), except for cash, bank deposits, or cash
equivalent securities in an estimated amount necessary to (i) pay the costs
and expenses of carrying out this Agreement and Plan (including, but not
limited to, fees of counsel and accountants, and expenses of its liquidation
and dissolution contemplated hereunder), which costs and expenses shall be
established on Indiana Fund's books as liability reserves; (ii) discharge its
unpaid liabilities on its books at the closing date (as defined in Section 3,
hereinafter called the "Closing Date"), including, but not limited to, its
income dividends and capital gains distributions, if any, payable for the
period prior to, and through, the Closing Date; and (iii) pay such contingent
liabilities as the Board of Trustees shall reasonably deem to exist against
Indiana Fund, if any, at the Closing Date, for which contingent and other
appropriate liabilities reserves shall be established on Indiana Fund's books
(hereinafter "Net Assets"). Indiana Fund shall also retain any and all
rights that it may have over and against any person that may have accrued up
to and including the close of business on the Closing Date.
(b) Subject to the terms and conditions of this Agreement and Plan,
and in reliance on the representations and warranties of the Trust herein
contained, and in consideration of such sale, conveyance, transfer, and
delivery, Federal Fund agrees at the Closing to deliver to the Trust the
number of Federal Fund Shares, determined by dividing the aggregate Net
Assets of Indiana Fund on the Closing Date by the net asset value per share
of Federal Fund Shares, as of 1:00 p.m. Pacific time on the Closing Date.
All such values shall be determined in the manner and as of the time set
forth in Section 2 hereof.
(c) Immediately following the Closing, Indiana Fund shall dissolve
and distribute pro rata to its shareholders of record as of the close of
business on the Closing Date Federal Fund Shares received by Indiana Fund
pursuant to this Section 1. Such liquidation and distribution shall be
accomplished by the establishment of accounts on the share records of Federal
Fund of the type and in the amounts due such shareholders based on their
respective holdings as of the close of business on the Closing Date.
Fractional Federal Fund Shares shall be carried to the third decimal place.
As promptly as practicable after the Closing, each holder of any outstanding
certificate or certificates representing shares of beneficial interest of
Indiana Fund shall be entitled to surrender the same to the transfer agent
for the Federal Fund in exchange for the number of Federal Fund Shares into
which the shares of the Indiana Fund theretofore represented by the
certificate or certificates so surrendered shall have been converted.
Certificates for Federal Fund Shares shall not be issued, unless specifically
requested by the shareholders. Until so surrendered, each outstanding
certificate which, prior to the Closing, represented shares of beneficial
interest of the Indiana Fund shall be deemed for all the Federal Fund's
purposes to evidence ownership of the number of Federal Fund's Shares into
which the shares of beneficial interest of the Indiana Fund (which prior to
the Closing were represented thereby) have been converted.
2. VALUATION.
(a) The value of Indiana Fund's Net Assets to be acquired by Federal
Fund hereunder shall be computed as of 1:00 p.m. Pacific time on the Closing
Date using the valuation procedures set forth in Indiana Fund's currently
effective prospectus.
(b) The net asset value of a share of common stock of Federal Fund
shall be determined to the nearest full cent as of 1:00 p.m. Pacific time on
the Closing Date using the valuation procedures set forth in Federal Fund's
currently effective prospectus.
(c) The net asset value of a share of beneficial interest of Indiana
Fund shall be determined to the fourth decimal place as of 1:00 p.m. Pacific
time on the Closing Date using the valuation procedures set forth in Indiana
Fund's currently effective prospectus.
3. CLOSING AND CLOSING DATE.
The Closing Date shall be June 24, 1999, or such later date as the
parties may mutually agree. The Closing shall take place at the principal
office of Federal Fund at 2:00 p.m. Pacific time on the Closing Date. The
Trust shall have provided for delivery, as of the Closing, of those Net
Assets of Indiana Fund to be transferred to Federal Fund's Custodian, Bank of
New York, Mutual Funds Division, 90 Washington Street, New York, NY 10286.
Also, the Trust shall deliver at the Closing a list of names and addresses of
the shareholders of record of Indiana Fund's shares and the number of shares
of beneficial interest owned by each such shareholder, indicating thereon
which such shares are represented by outstanding certificates and which by
book-entry accounts, all as of 1:00 p.m. Pacific time on the Closing Date,
certified by its transfer agent or by its President to the best of its or his
knowledge and belief. Federal Fund shall issue and deliver a certificate or
certificates evidencing the shares of common stock of Federal Fund to be
delivered to said transfer agent registered in such manner as the Trust may
request, or provide evidence satisfactory to the Trust that such Federal Fund
Shares have been registered in an account on the books of Federal Fund in
such manner as the Trust may request.
4. REPRESENTATIONS AND WARRANTIES BY THE TRUST.
The Trust represents and warrants to Federal Fund that:
(a) The Trust is a business trust created under the laws of the
Commonwealth of Massachusetts on September 18, 1984, and is validly existing
and in good standing under the laws of that commonwealth. The Trust is duly
registered under the Investment Company Act of 1940, as amended (the "1940
Act"), as an open-end, management investment company and all of Indiana
Fund's shares sold were sold pursuant to an effective registration statement
filed under the Securities Act of 1933, as amended (the "1933 Act"), except
for those shares sold pursuant to the private offering exemption for the
purpose of raising the required initial capital.
(b) The Trust is authorized to issue an unlimited number of shares of
beneficial interest, no par value, each outstanding share of which is fully
paid, non-assessable, fully transferable and has full voting rights and
currently issues shares of twenty-eight (28) series including Indiana Fund.
The Trust is authorized to issue an unlimited number of shares of beneficial
interest of each series.
(c) The financial statements appearing in the Trust's Annual Report
to Shareholders for the fiscal year ended February 28, 1998, audited by
Coopers & Lybrand L.L.P., copies of which have been delivered to Federal
Fund, fairly present the financial position of Indiana Fund as of such date
and the results of its operations for the periods indicated in conformity
with generally accepted accounting principles applied on a consistent basis.
(d) The books and records of Indiana Fund made available to Federal
Fund and/or its counsel accurately summarize the accounting data represented
and contain no material omissions with respect to the business and operations
of Indiana Fund.
(e) The Trust has the necessary power and authority to conduct
Indiana Fund's business as such business is now being conducted.
(f) The Trust is not a party to or obligated under any provision of
the Trust's Amended and Restated Agreement and Declaration of Trust or
By-laws, or any contract or any other commitment or obligation, and is not
subject to any order or decree that would be violated by the Trust's
execution of or performance under this Agreement and Plan.
(g) The Trust has elected to treat the Indiana Fund as a regulated
investment company ("RIC") for federal income tax purposes under Part I of
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"),
and Indiana Fund has qualified as a RIC for each taxable year since its
inception and will qualify as a RIC as of the Closing Date.
5. REPRESENTATIONS AND WARRANTIES BY FEDERAL FUND.
Federal Fund represents and warrants to the Trust, on behalf of Indiana
Fund, that:
(a) Federal Fund is a corporation incorporated under the laws of the
State of California on January 7, 1982, and is validly existing and in good
standing under the laws of that state. Federal Fund is duly registered under
the 1940 Act as a diversified, open-end, management investment company and
all its shares sold have been sold pursuant to an effective registration
statement filed under the 1933 Act, except for those shares sold pursuant to
the private offering exemption for the purpose of raising the required
initial capital.
(b) Federal Fund is authorized to issue ten billion (10,000,000,000)
shares of common stock, no par value, all of which is allocated to the
Franklin Federal Tax-Free Income Fund Series of which three billion
(3,000,000,000) shares are further allocated to Class A of that series, and
each outstanding share of which is fully paid, non-assessable, fully
transferable, and has full voting rights. Federal Fund Shares to be issued
pursuant to this Agreement and Plan will be fully paid, non-assessable,
freely transferable and have full voting rights.
(c) At the Closing, Federal Fund Shares will be eligible for offering
to the public in those states of the United States and jurisdictions in which
the shares of Indiana Fund are presently eligible for offering to the public,
and there are a sufficient number of Federal Fund Shares registered under the
1933 Act to permit the transfers contemplated by this Agreement and Plan to
be consummated.
(d) The financial statements appearing in Federal Fund's Annual
Report to Shareholders for the fiscal year ended April 30, 1998, audited by
Coopers & Lybrand L.L.P., copies of which have been delivered to Indiana
Fund, fairly present the financial position of Federal Fund as of such date
and the results of its operations for the periods indicated in conformity
with generally accepted accounting principles applied on a consistent basis.
(e) Federal Fund has the necessary power and authority to conduct its
business as such business is now being conducted.
(f) Federal Fund is not a party to or obligated under any provision
of its Articles of Incorporation or By-laws, or any contract or any other
commitment or obligation, and is not subject to any order or decree, that
would be violated by its execution of or performance under this Agreement and
Plan.
(g) Federal Fund has elected to be treated as a RIC for federal
income tax purposes under Part I of Subchapter M of the Code, has qualified
as a RIC for each taxable year since its inception, and will qualify as a RIC
as of the Closing Date.
6. REPRESENTATIONS AND WARRANTIES BY THE TRUST AND FEDERAL FUND.
The Trust and Federal Fund each represents and warrants to the other
that:
(a) The statement of assets and liabilities to be furnished by it as
of 1:00 p.m. Pacific time on the Closing Date for the purpose of determining
the number of Federal Fund Shares to be issued pursuant to Section 1 of this
Agreement and Plan will accurately reflect its Net Assets in the case of
Indiana Fund and its net assets in the case of Federal Fund, and outstanding
shares of common stock, as of such date, in conformity with generally
accepted accounting principles applied on a consistent basis.
(b) At the Closing, it will have good and marketable title to all of
the securities and other assets shown on the statement of assets and
liabilities referred to in "(a)" above, free and clear of all liens or
encumbrances of any nature whatsoever, except such imperfections of title or
encumbrances as do not materially detract from the value or use of the assets
subject thereto, or materially affect title thereto.
(c) Except as disclosed in its currently effective prospectus, there
is no material suit, judicial action, or legal or administrative proceeding
pending or threatened against it.
(d) There are no known actual or proposed deficiency assessments with
respect to any taxes payable by it.
(e) The execution, delivery, and performance of this Agreement and
Plan have been duly authorized by all necessary action of its Board of
Trustees or Board of Directors, as applicable, and this Agreement and Plan
constitutes a valid and binding obligation enforceable in accordance with its
terms.
(f) It anticipates that consummation of this Agreement and Plan will
not cause it, in the case of Federal Fund, and Indiana Fund, in the case of
the Trust, to fail to conform to the requirements of Subchapter M of the Code
for federal income taxation as a RIC at the end of its fiscal year.
(g) It has the necessary power and authority to conduct its business,
in the case of Federal Fund, and Indiana Fund's business, in the case of
Indiana Fund, as such business is now being conducted.
7. COVENANTS OF THE TRUST AND FEDERAL FUND.
(a) The Trust, on behalf of Indiana Fund, and Federal Fund each
covenant to operate their respective businesses as presently conducted
between the date hereof and the Closing.
(b) The Trust undertakes that it will not acquire the Federal Fund
Shares for the purpose of making distributions thereof to anyone other than
Indiana Fund's shareholders.
(c) The Trust undertakes that, if this Agreement and Plan is
consummated, it will dissolve Indiana Fund and rescind the establishment of
Indiana Fund as a series of the Trust.
(d) The Trust and Federal Fund each agree that, by the Closing, all
of their federal and other tax returns and reports required by law to be
filed by the Trust, on behalf of Indiana Fund, or by Federal Fund on or
before such date shall have been filed, and all federal and other taxes shown
as due on said returns shall have either been paid or adequate liability
reserves shall have been provided for the payment of such taxes.
(e) At the Closing, the Trust will provide Federal Fund with a copy
of the shareholder ledger accounts of Indiana Fund, certified by its transfer
agent or its President to the best of its or his knowledge and belief, for
all the shareholders of record of Indiana Fund's shares as of 1:00 p.m.
Pacific time on the Closing Date who are to become shareholders of Federal
Fund as a result of the transfer of assets that is the subject of this
Agreement and Plan.
(f) The Trust agrees to mail to each shareholder of record entitled
to vote at the meeting of Indiana Fund's shareholders at which action on this
Agreement and Plan is to be considered, in sufficient time to comply with
requirements as to notice thereof, a Combined Prospectus and Proxy Statement
that complies in all material respects with the applicable provisions of
Section 14(a) of the Securities Exchange Act of 1934, as amended, and Section
20(a) of the 1940 Act, and the rules and regulations, respectively,
thereunder.
(g) Federal Fund will file with the U.S. Securities and Exchange
Commission a registration statement on Form N-14 under the 1933 Act relating
to the Federal Fund Shares issuable hereunder ("Registration Statement"), and
will use its best efforts to provide that the Registration Statement becomes
effective as promptly as practicable. At the time it becomes effective, the
Registration Statement will (i) comply in all material respects with the
applicable provisions of the 1933 Act, and the rules and regulations
promulgated thereunder; and (ii) not contain any untrue statement of material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading. At the time the
Registration Statement becomes effective, at the time of Indiana Fund's
shareholders' meeting, and at the Closing Date, the prospectus and statement
of additional information included in the Registration Statement will not
contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
8. CONDITIONS PRECEDENT TO BE FULFILLED BY THE TRUST AND FEDERAL FUND.
The obligations of the Trust and Federal Fund to effectuate this
Agreement and Plan shall be subject to the following respective conditions:
(a) That: (i) all the representations and warranties of the other
party contained herein shall be true and correct as of the Closing with the
same effect as though made as of and at such date; (ii) the other party shall
have performed all obligations required by this Agreement and Plan to be
performed by it prior to the Closing; and (iii) the other party shall have
delivered to such party a certificate signed by the President and by the
Secretary or equivalent officer to the foregoing effect.
(b) That each party shall have delivered to the other party a copy of
the resolutions approving this Agreement and Plan adopted by its Board of
Trustees or Board of Directors, as applicable, certified by its Secretary or
equivalent officer.
(c) That the U.S. Securities and Exchange Commission shall not have
issued an unfavorable management report under Section 25(b) of the 1940 Act
or instituted or threatened to institute any proceeding seeking to enjoin
consummation of the Plan of Reorganization under Section 25(c) of the 1940
Act. And, further, no other legal, administrative or other proceeding shall
have been instituted or threatened that would materially affect the financial
condition of either party or would prohibit the transactions contemplated
hereby.
(d) That this Agreement and Plan and the Plan of Reorganization
contemplated hereby shall have been adopted and approved by the appropriate
action of the shareholders of Indiana Fund at an annual or special meeting or
any adjournment thereof.
(e) That each party shall have declared a distribution or
distributions prior to the Closing Date that, together with all previous
distributions, shall have the effect of distributing to its shareholders (i)
all of its net investment income and all of its net realized capital gains,
if any, for the period from the close of its last fiscal year to 1:00 p.m.
Pacific time on the Closing Date; and (ii) any undistributed net investment
income and net realized capital gains from any period to the extent not
otherwise declared for distribution.
(f) That there shall be delivered to the Trust and Federal Fund an
opinion from Messrs. Stradley, Ronon, Stevens & Young, LLP, counsel to the
Trust and Federal Fund, to the effect that, provided the acquisition
contemplated hereby is carried out in accordance with this Agreement and Plan
and based upon certificates of the officers of the Trust and Federal Fund
with regard to matters of fact:
(1) The acquisition by Federal Fund of substantially all the assets of
Indiana Fund as provided for herein in exchange for Federal Fund Shares will
qualify as a reorganization within the meaning of Section 368(a)(1)(C) of the
Code, and Indiana Fund and Federal Fund will each be a party to the
respective reorganization within the meaning of Section 368(b) of the Code;
(2) No gain or loss will be recognized by Indiana Fund upon the transfer of
substantially all of its assets to Federal Fund in exchange solely for voting
shares of Federal Fund (Sections 361(a) and 357(a)). No opinion, however,
will be expressed as to whether any accrued market discount will be required
to be recognized as ordinary income pursuant to Section 1276 of the Code;
(3) No gain or loss will be recognized by Federal Fund upon the receipt of
substantially all of the assets of Indiana Fund in exchange solely for voting
shares of Federal Fund (Section 1032(a));
(4) The basis of the assets of Indiana Fund received by Federal Fund will
be the same as the basis of such assets to Indiana Fund immediately prior to
the exchange (Section 362(b));
(5) The holding period of the assets of Indiana Fund received by Federal
Fund will include the period during which such assets were held by Indiana
Fund (Section 1223(2));
(6) No gain or loss will be recognized to the shareholders of Indiana Fund
upon the exchange of their shares in Indiana Fund for voting shares of
Federal Fund (Section 354(a));
(7) The basis of the Federal Fund Shares received by Indiana Fund's
shareholders shall be the same as the basis of the shares of Indiana Fund
exchanged therefor (Section 358(a)(1));
(8) The holding period of Federal Fund Shares received by Indiana Fund's
shareholders (including fractional shares to which they may be entitled) will
include the holding period of Indiana Fund's shares surrendered in exchange
therefor, provided that Indiana Fund's shares were held as a capital asset on
the date of the exchange (Section 1223(1)); and
(9) Federal Fund will succeed to and take into account as of the date of
the proposed transfer (as defined in Section 1.381(b)-1(b) of the Income Tax
Regulations) the items of Indiana Fund described in Section 381(c) of the
Code (as defined in Section 1.381(b)-1(b) of the Income Tax Regulations),
subject to the conditions and limitations specified in Sections 381(b) and
(c), 382, 383 and 384 of the Code and the Income Tax Regulations thereunder.
(g) That Federal Fund shall have received an opinion in form and
substance satisfactory to it from Messrs. Stradley, Ronon, Stevens & Young,
LLP, counsel to the Trust, to the effect that, subject in all respects to the
effects of bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance, and other laws now or hereafter affecting generally the
enforcement of creditors' rights:
(1) The Trust was created as a business trust under the laws of the
Commonwealth of Massachusetts on September 18, 1984, and is validly existing
and in good standing under the laws of that commonwealth;
(2) The Trust is authorized to issue an unlimited number of shares of
beneficial interest of Indiana Fund, no par value. Assuming that the initial
shares of beneficial interest were issued in accordance with the 1940 Act and
the Amended and Restated Agreement and Declaration of Trust and By-laws of
the Trust, and that all other outstanding shares of Indiana Fund were sold,
issued and paid for in accordance with the terms of Indiana Fund's prospectus
in effect at the time of such sales, each such outstanding share is fully
paid, non-assessable, fully transferable and has full voting rights;
(3) The Trust is an open-end investment company of the management type
registered as such under the 1940 Act;
(4) Except as disclosed in Indiana Fund's currently effective prospectus,
such counsel does not know of any material suit, action, or legal or
administrative proceeding pending or threatened against the Trust, the
unfavorable outcome of which would materially and adversely affect the Trust
or Indiana Fund;
(5) All actions required to be taken by the Trust to authorize this
Agreement and Plan and to effect the Plan of Reorganization contemplated
hereby have been duly authorized by all necessary action on the part of the
Trust; and
(6) Neither the execution, delivery, nor performance of this Agreement and
Plan by the Trust violates any provision of its Amended and Restated
Agreement and Declaration of Trust or By-laws, or the provisions of any
agreement or other instrument known to such counsel to which the Trust is a
party or by which Indiana Fund is otherwise bound; this Agreement and Plan is
the legal, valid and binding obligation of the Trust and Indiana Fund and is
enforceable against the Trust and/or Indiana Fund in accordance with its
terms.
In giving the opinions set forth above, this counsel may state that it
is relying on certificates of the officers of the Trust with regard to
matters of fact, and certain certifications and written statements of
governmental officials with respect to the good standing of the Trust and
Indiana Fund.
(h) That the Trust shall have received an opinion in form and
substance satisfactory to it from Messrs. Stradley, Ronon, Stevens & Young,
LLP, counsel to Federal Fund, to the effect that, subject in all respects to
the effects of bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance and other laws now or hereafter affecting generally the
enforcement of creditors' rights:
(1) Federal Fund was incorporated under the laws of the State of California
on January 7, 1982, and is validly existing and in good standing under the
laws of that state;
(2) Federal Fund is authorized to issue ten billion (10,000,000,000) shares
of common stock, no par value, all of which is allocated to the Franklin
Federal Tax-Free Income Fund Series of which three billion (3,000,000,000)
shares are further allocated to Class A of that series, and each outstanding
share of which is fully paid, non-assessable, fully transferable, and has
full voting rights. Assuming that the initial capital shares of Federal Fund
were issued in accordance with the 1940 Act, and the Articles of
Incorporation and By-laws of Federal Fund, and that all other outstanding
shares of Federal Fund were sold, issued and paid for in accordance with the
terms of Federal Fund's prospectus in effect at the time of such sales, each
such outstanding share of Federal Fund is fully paid, non-assessable, freely
transferable and has full voting rights;
(3) Federal Fund is an open-end, diversified investment company of the
management type registered as such under the 1940 Act;
(4) Except as disclosed in Federal Fund's currently effective prospectus,
such counsel does not know of any material suit, action, or legal or
administrative proceeding pending or threatened against Federal Fund, the
unfavorable outcome of which would materially and adversely affect Federal
Fund;
(5) Federal Fund Shares to be issued pursuant to the terms of this
Agreement and Plan have been duly authorized and, when issued and delivered
as provided in this Agreement and Plan, will have been validly issued and
fully paid and will be non-assessable by Federal Fund;
(6) All corporate actions required to be taken by Federal Fund to authorize
this Agreement and Plan and to effect the Plan of Reorganization contemplated
hereby have been duly authorized by all necessary corporate action on the
part of Federal Fund;
(7) Neither the execution, delivery, nor performance of this Agreement and
Plan by Federal Fund violates any provision of its Articles of Incorporation,
its By-laws, or the provisions of any agreement or other instrument known to
such counsel to which Federal Fund is a party or by which Federal Fund is
otherwise bound; this Agreement and Plan is the legal, valid and binding
obligation of Federal Fund and is enforceable against Federal Fund in
accordance with its terms; and
(8) The registration statement of which the prospectus, dated September 1,
1998, as amended January 1, 1999, of Federal Fund is a part (the
"Prospectus") is, at the time of the signing of this Agreement and Plan,
effective under the 1933 Act, and, to the best knowledge of such counsel, no
stop order suspending the effectiveness of such registration statement has
been issued, and no proceedings for such purpose have been instituted or are
pending before or threatened by the U.S. Securities and Exchange Commission
under the 1933 Act, and nothing has come to such counsel's attention that
causes it to believe that, at the time the Prospectus became effective, or at
the time of the signing of this Agreement and Plan, or at the Closing, such
Prospectus (except for the financial statements and other financial and
statistical data included therein, as to which counsel need not express an
opinion), contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading; and such counsel knows of no legal or
government proceedings required to be described in the Prospectus, or of any
contract or document of a character required to be described in the
Prospectus that is not described as required.
In giving the opinions set forth above, this counsel may state that it
is relying on certificates of the officers of Federal Fund with regard to
matters of fact, and certain certifications and written statements of
governmental officials with respect to the good standing of Federal Fund.
(i) That the Trust shall have received a certificate from the
President and Secretary of Federal Fund to the effect that the statements
contained in Federal Fund's Prospectus, at the time the Prospectus became
effective, at the date of the signing of this Agreement and Plan, and at the
Closing, did not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading.
(j) That Federal Fund's Registration Statement with respect to the
Federal Fund Shares to be delivered to the Indiana Fund's shareholders in
accordance with this Agreement and Plan shall have become effective, and no
stop order suspending the effectiveness of the Registration Statement or any
amendment or supplement thereto, shall have been issued prior to the Closing
Date or shall be in effect at Closing, and no proceedings for the issuance of
such an order shall be pending or threatened on that date.
(k) That the Federal Fund Shares to be delivered hereunder shall be
eligible for sale by Federal Fund with each state commission or agency with
which such eligibility is required in order to permit the Federal Fund Shares
lawfully to be delivered to each Indiana Fund shareholder.
(l) That, at the Closing, the Trust, on behalf of Indiana Fund,
transfers to Federal Fund aggregate Net Assets of Indiana Fund comprising at
least 90% in fair market value of the total net assets and 70% of the fair
market value of the total gross assets recorded on the books of Indiana Fund
on the Closing Date.
9. BROKERAGE FEES AND EXPENSES.
(a) The Trust and Federal Fund each represents and warrants to the
other that there are no broker or finders' fees payable by it in connection
with the transactions provided for herein.
(b) The expenses of entering into and carrying out the provisions of
this Agreement and Plan shall be borne one-quarter by Indiana Fund,
one-quarter by Federal Fund, and one-half by Franklin Advisers, Inc.
10. TERMINATION; POSTPONEMENT; WAIVER; ORDER.
(a) Anything contained in this Agreement and Plan to the contrary
notwithstanding, this Agreement and Plan may be terminated and the Plan of
Reorganization abandoned at any time (whether before or after approval
thereof by the shareholders of Indiana Fund) prior to the Closing or the
Closing may be postponed as follows:
(1) by mutual consent of the Trust and Federal Fund;
(2) by Federal Fund if any condition of its obligations set forth in
Section 8 has not been fulfilled or waived; or
(3) by the Trust if any condition of its obligations set forth in Section 8
has not been fulfilled or waived.
An election by the Trust, on behalf of Indiana Fund, or Federal Fund to
terminate this Agreement and Plan and to abandon the Plan of Reorganization
shall be exercised, respectively, by the Board of Trustees of the Trust or
Board of Directors of Federal Fund.
(b) If the transactions contemplated by this Agreement and Plan have
not been consummated by December 31, 1999, the Agreement and Plan shall
automatically terminate on that date, unless a later date is agreed to by
both Federal Fund and the Trust.
(c) In the event of termination of this Agreement and Plan pursuant
to the provisions hereof, the same shall become void and have no further
effect, and neither the Trust nor Federal Fund, nor their directors or
trustees, officers, agents or shareholders shall have any liability in
respect of this Agreement and Plan.
(d) At any time prior to the Closing, any of the terms or conditions
of this Agreement and Plan may be waived by the party who is entitled to the
benefit thereof by action taken by that party's Board of Trustees or Board of
Directors, as applicable, if, in the judgment of such Board, such action or
waiver will not have a material adverse effect on the benefits intended under
this Agreement and Plan to its shareholders, on behalf of whom such action is
taken.
(e) The respective representations and warranties contained in
Sections 4 to 6 hereof shall expire with and be terminated by the Plan of
Reorganization, and neither the Trust nor Federal Fund, nor any of their
officers, trustees or directors, agents or shareholders shall have any
liability with respect to such representations or warranties after the
Closing. This provision shall not protect any officer, trustee or director,
agent or shareholder of the Trust or Federal Fund against any liability to
the entity for which that officer, trustee or director, agent or shareholder
so acts or to its shareholders to which that officer, trustee or director,
agent or shareholder would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
in the conduct of such office.
(f) If any order or orders of the U.S. Securities and Exchange
Commission with respect to this Agreement and Plan shall be issued prior to
the Closing and shall impose any terms or conditions that are determined by
action of the Board of Trustees of the Trust or the Board of Directors of the
Federal Fund to be acceptable, such terms and conditions shall be binding as
if a part of this Agreement and Plan without further vote or approval of the
shareholders of Indiana Fund, unless such terms and conditions shall result
in a change in the method of computing the number of Federal Fund Shares to
be issued to Indiana Fund in which event, unless such terms and conditions
shall have been included in the proxy solicitation material furnished to the
shareholders of Indiana Fund prior to the meeting at which the transactions
contemplated by this Agreement and Plan shall have been approved, this
Agreement and Plan shall not be consummated and shall terminate unless
Indiana Fund shall promptly call a special meeting of shareholders at which
such conditions so imposed shall be submitted for approval.
11. ENTIRE AGREEMENT AND AMENDMENTS.
This Agreement and Plan embodies the entire agreement between the
parties and there are no agreements, understandings, restrictions, or
warranties between the parties other than those set forth herein or herein
provided for. This Agreement and Plan may be amended only by mutual consent
of the parties in writing. Neither this Agreement and Plan nor any interest
herein may be assigned without the prior written consent of the other party.
12. COUNTERPARTS.
This Agreement and Plan may be executed in any number of counterparts,
each of which shall be deemed to be an original, but all such counterparts
together shall constitute but one instrument.
13. NOTICES.
Any notice, report, or demand required or permitted by any provision of
this Agreement and Plan shall be in writing and shall be deemed to have been
given if delivered or mailed, first class postage prepaid, addressed to
Franklin Federal Tax-Free Income Fund at 777 Mariners Island Boulevard, P. O.
Box 7777, San Mateo, CA 94403-7777, Attention: Secretary, or Franklin
Tax-Free Trust, at 777 Mariners Island Boulevard, P.O. Box 7777, San Mateo
CA 94403-7777, Attention: Secretary, as the case may be.
14. GOVERNING LAW.
This Agreement shall be governed by and carried out in accordance with
the laws of the Commonwealth of Massachusetts.
IN WITNESS WHEREOF, Franklin Federal Tax-Free Income Fund and Franklin
Tax-Free Trust, on behalf of Franklin Indiana Tax-Free Income Fund, have each
caused this Agreement and Plan to be executed on its behalf by its duly
authorized officers, all as of the date and year first-above written.
FRANKLIN FEDERAL TAX-FREE
INCOME FUND
Attest:
/s/Leiann Nuzum By:/s/Deborah R. Gatzek
Assistant Secretary Deborah R. Gatzek
Vice President and Secretary
FRANKLIN TAX-FREE TRUST, ON BEHALF OF
FRANKLIN INDIANA TAX-FREE INCOME FUND
Attest:
/s/Leiann Nuzum By:/s/Deborah R. Gatzek
Assistant Secretary Deborah R. Gatzek
Vice President and Secretary
AGREEMENT AND PLAN OF REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement and Plan"), made
as of this 28th day of April, 1999, by and between FRANKLIN FEDERAL TAX-FREE
INCOME FUND ("Federal Fund"), a corporation incorporated under the laws of
the State of California in 1982, with its principal place of business at 777
Mariners Island Boulevard, San Mateo, California 94404, and FRANKLIN
MUNICIPAL SECURITIES TRUST (the "Trust"), a business trust created under the
laws of the State of Delaware in 1992, with its principal place of business
at 777 Mariners Island Boulevard, San Mateo, California 94404, on behalf of
its series Franklin Hawaii Municipal Bond Fund, a series of shares of the
Trust ("Municipal Fund").
PLAN OF REORGANIZATION
The reorganization (hereinafter referred to as the "Plan of
Reorganization") will consist of (i) the acquisition by Federal Fund of
substantially all of the property, assets and goodwill of Municipal Fund in
exchange solely for shares of common stock, no par value, of Federal Fund -
Class A ("Federal Fund Shares"); (ii) the distribution of Federal Fund Shares
to the shareholders of Municipal Fund according to their respective
interests; and (iii) the subsequent dissolution of Municipal Fund as soon as
practicable after the closing (as defined in Section 3, hereinafter called
the "Closing"), all upon and subject to the terms and conditions of this
Agreement and Plan hereinafter set forth.
AGREEMENT
In order to consummate the Plan of Reorganization and in consideration
of the promises and of the covenants and agreements hereinafter set forth,
and intending to be legally bound, the parties hereto covenant and agree as
follows:
1. SALE AND TRANSFER OF ASSETS, LIQUIDATION AND DISSOLUTION OF MUNICIPAL
FUND.
(a) Subject to the terms and conditions of this Agreement and Plan,
and in reliance on the representations and warranties of Federal Fund herein
contained, and in consideration of the delivery by Federal Fund of the number
of its Federal Fund Shares hereinafter provided, the Trust, on behalf of
Municipal Fund, agrees that it will convey, transfer and deliver to Federal
Fund at the Closing all of Municipal Fund's then existing assets, free and
clear of all liens, encumbrances, and claims whatsoever (other than
shareholders' rights of redemption), except for cash, bank deposits, or cash
equivalent securities in an estimated amount necessary to (i) pay the costs
and expenses of carrying out this Agreement and Plan (including, but not
limited to, fees of counsel and accountants, and expenses of its liquidation
and dissolution contemplated hereunder), which costs and expenses shall be
established on Municipal 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 Municipal Fund, if any, at the Closing Date, for which
contingent and other appropriate liabilities reserves shall be established on
Municipal Fund's books (hereinafter "Net Assets"). Municipal Fund shall also
retain any and all rights that it may have over and against any person that
may have accrued up to and including the close of business on the Closing
Date.
(b) Subject to the terms and conditions of this Agreement and Plan,
and in reliance on the representations and warranties of the Trust herein
contained, and in consideration of such sale, conveyance, transfer, and
delivery, Federal Fund agrees at the Closing to deliver to the Trust the
number of Federal Fund Shares, determined by dividing the aggregate Net
Assets of Municipal Fund on the Closing Date by the net asset value per share
of Federal Fund Shares, as of 1:00 p.m. Pacific time on the Closing Date.
All such values shall be determined in the manner and as of the time set
forth in Section 2 hereof.
(c) Immediately following the Closing, Municipal Fund shall dissolve
and distribute pro rata to its shareholders of record as of the close of
business on the Closing Date Federal Fund Shares received by Municipal Fund
pursuant to this Section 1. Such liquidation and distribution shall be
accomplished by the establishment of accounts on the share records of Federal
Fund of the type and in the amounts due such shareholders based on their
respective holdings as of the close of business on the Closing Date.
Fractional Federal Fund Shares shall be carried to the third decimal place.
As promptly as practicable after the Closing, each holder of any outstanding
certificate or certificates representing shares of beneficial interest of
Municipal Fund shall be entitled to surrender the same to the transfer agent
for the Federal Fund in exchange for the number of Federal Fund Shares into
which the shares of the Municipal Fund theretofore represented by the
certificate or certificates so surrendered shall have been converted.
Certificates for Federal Fund Shares shall not be issued, unless specifically
requested by the shareholders. Until so surrendered, each outstanding
certificate which, prior to the Closing, represented shares of beneficial
interest of the Municipal Fund shall be deemed for all the Federal Fund's
purposes to evidence ownership of the number of Federal Fund's Shares into
which the shares of beneficial interest of the Municipal Fund (which prior to
the Closing were represented thereby) have been converted.
2. VALUATION.
(a) The value of Municipal Fund's Net Assets to be acquired by
Federal Fund hereunder shall be computed as of 1:00 p.m. Pacific time on the
Closing Date using the valuation procedures set forth in Municipal Fund's
currently effective prospectus.
(b) The net asset value of a share of common stock of Federal Fund
shall be determined to the nearest full cent as of 1:00 p.m. Pacific time on
the Closing Date using the valuation procedures set forth in Federal Fund's
currently effective prospectus.
(c) The net asset value of a share of beneficial interest of
Municipal 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 Municipal Fund's currently effective prospectus.
3. CLOSING AND CLOSING DATE.
The Closing Date shall be June 24, 1999, or such later date as the
parties may mutually agree. The Closing shall take place at the principal
office of Federal Fund at 2:00 p.m. Pacific time on the Closing Date. The
Trust shall have provided for delivery, as of the Closing, of those Net
Assets of Municipal Fund to be transferred to Federal Fund's Custodian, Bank
of New York, Mutual Funds Division, 90 Washington Street, New York, New York
10286. Also, the Trust shall deliver at the Closing a list of names and
addresses of the shareholders of record of Municipal Fund's shares and the
number of shares of beneficial interest owned by each such shareholder,
indicating thereon which such shares are represented by outstanding
certificates and which by book-entry accounts, all as of 1:00 p.m. Pacific
time on the Closing Date, certified by its transfer agent or by its President
to the best of its or his knowledge and belief. Federal Fund shall issue and
deliver a certificate or certificates evidencing the shares of common stock
of Federal Fund to be delivered to said transfer agent registered in such
manner as the Trust may request, or provide evidence satisfactory to the
Trust that such Federal Fund Shares have been registered in an account on the
books of Federal Fund in such manner as the Trust may request.
4. REPRESENTATIONS AND WARRANTIES BY THE TRUST.
The Trust represents and warrants to Federal Fund that:
(a) The Trust is a business trust created under the laws of the State
of Delaware on June 15, 1992, and is validly existing and in good standing
under the laws of that state. 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 of Municipal Fund's shares sold were
sold pursuant to an effective registration statement filed under the
Securities Act of 1933, as amended (the "1933 Act"), except for those shares
sold pursuant to the private offering exemption for the purpose of raising
the required initial capital.
(b) The Trust is authorized to issue an unlimited number of shares of
beneficial interest, $0.01 par value per share, each outstanding share of
which is fully paid, non-assessable, fully transferable and has full voting
rights and currently issues shares of five (5) series including Municipal
Fund. The Trust is authorized to issue an unlimited number of shares of
beneficial interest of each series.
(c) The financial statements appearing in the Trust's Annual Report
to Shareholders for the fiscal year ended May 31, 1998, audited by Coopers &
Lybrand, L.L.P., copies of which have been delivered to Federal Fund, fairly
present the financial position of Municipal Fund as of such date and the
results of its operations for the periods indicated in conformity with
generally accepted accounting principles applied on a consistent basis.
(d) The books and records of Municipal Fund made available to Federal
Fund and/or its counsel accurately summarize the accounting data represented
and contain no material omissions with respect to the business and operations
of Municipal Fund.
(e) The Trust has the necessary power and authority to conduct
Municipal Fund's business as such business is now being conducted.
(f) The Trust is not a party to or obligated under any provision of
the Trust's Agreement and Declaration of Trust or By-laws, or any contract or
any other commitment or obligation, and is not subject to any order or decree
that would be violated by the Trust's execution or performance under this
Agreement and Plan.
(g) The Trust has elected to treat the Municipal 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 Municipal Fund has qualified as a RIC for each taxable year since its
inception and will qualify as a RIC as of the Closing Date.
5. REPRESENTATIONS AND WARRANTIES BY FEDERAL FUND.
Federal Fund represents and warrants to the Trust, on behalf of
Municipal Fund, that:
(a) Federal Fund is a corporation incorporated under the laws of the
State of California on January 7, 1982, and is validly existing and in good
standing under the laws of that state. Federal Fund is duly registered under
the 1940 Act as a diversified, open-end, management investment company and
all its shares sold have been sold pursuant to an effective registration
statement filed under the 1933 Act, except for those shares sold pursuant to
the private offering exemption for the purpose of raising the required
initial capital.
(b) Federal Fund is authorized to issue ten billion (10,000,000,000)
shares of common stock, no par value, all of which is allocated to the
Franklin Federal Tax-Free Income Fund Series of which three billion
(3,000,000,000) shares are further allocated to Class A of that series, and
each outstanding share of which is fully paid, non-assessable, fully
transferable, and has full voting rights. Federal Fund Shares to be issued
pursuant to this Agreement and Plan will be fully paid, non-assessable,
freely transferable and have full voting rights.
(c) At the Closing, Federal Fund Shares will be eligible for offering
to the public in those states of the United States and jurisdictions in which
the shares of Municipal Fund are presently eligible for offering to the
public, and there are a sufficient number of Federal Fund Shares registered
under the 1933 Act to permit the transfers contemplated by this Agreement and
Plan to be consummated.
(d) The financial statements appearing in Federal Fund's Annual
Report to Shareholders for the fiscal year ended April 30, 1998, audited by
Coopers & Lybrand L.L.P., copies of which have been delivered to Municipal
Fund, fairly present the financial position of Federal Fund as of such date
and the results of its operations for the periods indicated in conformity
with generally accepted accounting principles applied on a consistent basis.
(e) Federal Fund has the necessary power and authority to conduct its
business as such business is now being conducted.
(f) Federal Fund is not a party to or obligated under any provision
of its Articles of Incorporation or By-laws, or any contract or any other
commitment or obligation, and is not subject to any order or decree, that
would be violated by its execution of or performance under this Agreement and
Plan.
(g) Federal Fund has elected to be treated as a RIC for federal
income tax purposes under Part I of Subchapter M of the Code, has qualified
as a RIC for each taxable year since its inception, and will qualify as a RIC
as of the Closing Date.
6. REPRESENTATIONS AND WARRANTIES BY THE TRUST AND FEDERAL FUND.
The Trust and Federal Fund each represents and warrants to the other
that:
(a) The statement of assets and liabilities to be furnished by it as
of 1:00 p.m. Pacific time on the Closing Date for the purpose of determining
the number of Federal Fund Shares to be issued pursuant to Section 1 of this
Agreement and Plan will accurately reflect its Net Assets in the case of
Municipal Fund and its net assets in the case of Federal Fund, and
outstanding shares of common stock, as of such date, in conformity with
generally accepted accounting principles applied on a consistent basis.
(b) At the Closing, it will have good and marketable title to all of
the securities and other assets shown on the statement of assets and
liabilities referred to in "(a)" above, free and clear of all liens or
encumbrances of any nature whatsoever, except such imperfections of title or
encumbrances as do not materially detract from the value or use of the assets
subject thereto, or materially affect title thereto.
(c) Except as disclosed in its currently effective prospectus, there
is no material suit, judicial action, or legal or administrative proceeding
pending or threatened against it.
(d) There are no known actual or proposed deficiency assessments with
respect to any taxes payable by it.
(e) The execution, delivery, and performance of this Agreement and
Plan have been duly authorized by all necessary action of its Board of
Trustees or Board of Directors, as applicable, and this Agreement and Plan
constitutes a valid and binding obligation enforceable in accordance with its
terms.
(f) It anticipates that consummation of this Agreement and Plan will
not cause it, in the case of Federal Fund, and Municipal Fund, in the case of
the Trust, to fail to conform to the requirements of Subchapter M of the Code
for federal income taxation as a RIC at the end of its fiscal year.
(g) It has the necessary power and authority to conduct its business,
in the case of Federal Fund, and Municipal Fund's business, in the case of
Municipal Fund, as such business is now being conducted.
7. COVENANTS OF THE TRUST AND FEDERAL FUND.
(a) The Trust, on behalf of Municipal Fund, and Federal Fund each
covenant to operate their respective businesses as presently conducted
between the date hereof and the Closing.
(b) The Trust undertakes that it will not acquire the Federal Fund
Shares for the purpose of making distributions thereof to anyone other than
Municipal Fund's shareholders.
(c) The Trust undertakes that, if this Agreement and Plan is
consummated, it will dissolve Municipal Fund and rescind the establishment of
Municipal Fund as a series of the Trust.
(d) The Trust and Federal Fund each agree that, by the Closing, all
of their federal and other tax returns and reports required by law to be
filed by the Trust, on behalf of Municipal Fund, or by Federal Fund on or
before such date shall have been filed, and all federal and other taxes shown
as due on said returns shall have either been paid or adequate liability
reserves shall have been provided for the payment of such taxes.
(e) At the Closing, the Trust will provide Federal Fund with a copy
of the shareholder ledger accounts of Municipal Fund, certified by its
transfer agent or its President to the best of its or his knowledge and
belief, for all the shareholders of record of Municipal Fund's shares as of
1:00 p.m. Pacific time on the Closing Date who are to become shareholders of
Federal Fund as a result of the transfer of assets that is the subject of
this Agreement and Plan.
(f) The Trust agrees to mail to each shareholder of record entitled
to vote at the meeting of Municipal Fund's shareholders at which action on
this Agreement and Plan is to be considered, in sufficient time to comply
with requirements as to notice thereof, a Joint Prospectus and Proxy
Statement that complies in all material respects with the applicable
provisions of Section 14(a) of the Securities Exchange Act of 1934, as
amended, and Section 20(a) of the 1940 Act, and the rules and regulations,
respectively, thereunder.
(g) Federal Fund will file with the U.S. Securities and Exchange
Commission a registration statement on Form N-14 under the 1933 Act relating
to the Federal Fund Shares issuable hereunder ("Registration Statement"), and
will use its best efforts to provide that the Registration Statement becomes
effective as promptly as practicable. At the time it becomes effective, the
Registration Statement will (i) comply in all material respects with the
applicable provisions of the 1933 Act, and the rules and regulations
promulgated thereunder; and (ii) not contain any untrue statement of material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading. At the time the
Registration Statement becomes effective, at the time of Municipal Fund's
shareholders' meeting, and at the Closing Date, the prospectus and statement
of additional information included in the Registration Statement will not
contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
8. CONDITIONS PRECEDENT TO BE FULFILLED BY THE TRUST AND FEDERAL FUND.
The obligations of the Trust and Federal Fund to effectuate this
Agreement and Plan shall be subject to the following respective conditions:
(a) That: (i) all the representations and warranties of the other
party contained herein shall be true and correct as of the Closing with the
same effect as though made as of and at such date; (ii) the other party shall
have performed all obligations required by this Agreement and Plan to be
performed by it prior to the Closing; and (iii) the other party shall have
delivered to such party a certificate signed by the President and by the
Secretary or equivalent officer to the foregoing effect.
(b) That each party shall have delivered to the other party a copy of
the resolutions approving this Agreement and Plan adopted by its Board of
Trustees or Board of Directors, as applicable, certified by its Secretary or
equivalent officer.
(c) That the U.S. Securities and Exchange Commission shall not have
issued an unfavorable management report under Section 25(b) of the 1940 Act
or instituted or threatened to institute any proceeding seeking to enjoin
consummation of the Plan of Reorganization under Section 25(c) of the 1940
Act. And, further, no other legal, administrative or other proceeding shall
have been instituted or threatened that would materially affect the financial
condition of either party or would prohibit the transactions contemplated
hereby.
(d) That this Agreement and Plan and the Plan of Reorganization
contemplated hereby shall have been adopted and approved by the appropriate
action of the shareholders of Municipal Fund at an annual or special meeting
or any adjournment thereof.
(e) That each party shall have declared a distribution or
distributions prior to the Closing Date that, together with all previous
distributions, shall have the effect of distributing to its shareholders (i)
all of its net investment income and all of its net realized capital gains,
if any, for the period from the close of its last fiscal year to 1:00 p.m.
Pacific time on the Closing Date; and (ii) any undistributed net investment
income and net realized capital gains from any period to the extent not
otherwise declared for distribution.
(f) That there shall be delivered to the Trust and Federal Fund an
opinion from Messrs. Stradley, Ronon, Stevens & Young, LLP, counsel to the
Trust and Federal Fund, to the effect that, provided the acquisition
contemplated hereby is carried out in accordance with this Agreement and Plan
and based upon certificates of the officers of the Trust and Federal Fund
with regard to matters of fact:
(1) The acquisition by Federal Fund of substantially all the
assets of Municipal Fund as provided for herein in exchange for Federal Fund
Shares will qualify as a reorganization within the meaning of Section
368(a)(1)(C) of the Code, and Municipal Fund and Federal Fund will each be a
party to the respective reorganization within the meaning of Section 368(b)
of the Code;
(2) No gain or loss will be recognized by Municipal Fund upon
the transfer of substantially all of its assets to Federal Fund in exchange
solely for voting shares of Federal Fund (Sections 361(a) and 357(a)). No
opinion, however, will be expressed as to whether any accrued market discount
will be required to be recognized as ordinary income pursuant to Section 1276
of the Code;
(3) No gain or loss will be recognized by Federal Fund upon the
receipt of substantially all of the assets of Municipal Fund in exchange
solely for voting shares of Federal Fund (Section 1032(a));
(4) The basis of the assets of Municipal Fund received by
Federal Fund will be the same as the basis of such assets to Municipal Fund
immediately prior to the exchange (Section 362(b));
(5) The holding period of the assets of Municipal Fund received
by Federal Fund will include the period during which such assets were held by
Municipal Fund (Section 1223(2));
(6) No gain or loss will be recognized to the shareholders of
Municipal Fund upon the exchange of their shares in Municipal Fund for voting
shares of Federal Fund (Section 354(a));
(7) The basis of the Federal Fund Shares received by Municipal
Fund's shareholders shall be the same as the basis of the shares of Municipal
Fund exchanged therefor (Section 358(a)(1));
(8) The holding period of Federal Fund Shares received by
Municipal Fund's shareholders (including fractional shares to which they may
be entitled) will include the holding period of Municipal Fund's shares
surrendered in exchange therefor, provided that Municipal Fund's shares were
held as a capital asset on the date of the exchange (Section 1223(1)); and
(9) Federal Fund will succeed to and take into account as of
the date of the proposed transfer (as defined in Section 1.381(b)-1(b) of the
Income Tax Regulations) the items of Municipal Fund described in Section
381(c) of the Code (as defined in Section 1.381(b)-1(b) of the Income Tax
Regulations), subject to the conditions and limitations specified in Sections
381(b) and (c), 382, 383 and 384 of the Code and the Income Tax Regulations
thereunder.
(g) That Federal Fund shall have received an opinion in form and
substance satisfactory to it from Messrs. Stradley, Ronon, Stevens & Young,
LLP, counsel to the Trust, to the effect that, subject in all respects to the
effects of bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance, and other laws now or hereafter affecting generally the
enforcement of creditors' rights:
(1) The Trust was created as a business trust under the laws of
the State of Delaware on June 15, 1992, and is validly existing and in good
standing under the laws of that state;
(2) The Trust is authorized to issue an unlimited number of
shares of beneficial interest of Municipal Fund, $0.01 par value per share.
Assuming that the initial shares of beneficial interest were issued in
accordance with the 1940 Act and the Agreement and Declaration and By-laws of
the Trust, and that all other outstanding shares of Municipal Fund were sold,
issued and paid for in accordance with the terms of Municipal 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 Municipal Fund's currently effective
prospectus, such counsel does not know of any material suit, action, or legal
or administrative proceeding pending or threatened against the Trust, the
unfavorable outcome of which would materially and adversely affect the Trust
or Municipal Fund;
(5) All actions required to be taken by the Trust to authorize
this Agreement and Plan and to effect the Plan of Reorganization contemplated
hereby have been duly authorized by all necessary action on the part of the
Trust; and
(6) Neither the execution, delivery, nor performance of this
Agreement and Trust by the Trust violates any provision of its 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
Municipal Fund is otherwise bound; this Agreement and Plan is the legal,
valid and binding obligation of the Trust and Municipal Fund and is
enforceable against the Trust and/or Municipal Fund in accordance with its
terms.
In giving the opinions set forth above, this counsel may state that it
is relying on certificates of the officers of the Trust with regard to
matters of fact, and certain certifications and written statements of
governmental officials with respect to the good standing of the Trust and
Municipal Fund.
(h) That the Trust shall have received an opinion in form and
substance satisfactory to it from Messrs. Stradley, Ronon, Stevens & Young,
LLP, counsel to Federal Fund, to the effect that, subject in all respects to
the effects of bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance and other laws now or hereafter affecting generally the
enforcement of creditors' rights:
(1) Federal Fund was incorporated under the laws of the State
of California on January 7, 1982, and is validly existing and in good
standing under the laws of that state;
(2) Federal Fund is authorized to issue ten billion
(10,000,000,000) shares of common stock, no par value, all of which is
allocated to the Franklin Federal Tax-Free Income Fund Series of which three
billion (3,000,000,000) shares are further allocated to Class A of that
series, and each outstanding share of which is fully paid, non-assessable,
fully transferable, and has full voting rights. Assuming that the initial
capital shares of Federal Fund were issued in accordance with the 1940 Act,
and the Articles of Incorporation and By-laws of Federal Fund, and that all
other outstanding shares of Federal Fund were sold, issued and paid for in
accordance with the terms of Federal Fund's prospectus in effect at the time
of such sales, each such outstanding share of Federal Fund is fully paid,
non-assessable, freely transferable and has full voting rights;
(3) Federal Fund is an open-end, diversified investment company
of the management type registered as such under the 1940 Act;
(4) Except as disclosed in Federal Fund's currently effective
prospectus, such counsel does not know of any material suit, action, or legal
or administrative proceeding pending or threatened against Federal Fund, the
unfavorable outcome of which would materially and adversely affect Federal
Fund;
(5) Federal Fund Shares to be issued pursuant to the terms of
this Agreement and Plan have been duly authorized and, when issued and
delivered as provided in this Agreement and Plan, will have been validly
issued and fully paid and will be non-assessable by Federal Fund;
(6) All corporate actions required to be taken by Federal Fund
to authorize this Agreement and Plan and to effect the Plan of Reorganization
contemplated hereby have been duly authorized by all necessary corporate
action on the part of Federal Fund;
(7) Neither the execution, delivery, nor performance of this
Agreement and Plan by Federal Fund violates any provision of its Articles of
Incorporation, its By-laws, or the provisions of any agreement or other
instrument known to such counsel to which Federal Fund is a party or by which
Federal Fund is otherwise bound; this Agreement and Plan is the legal, valid
and binding obligation of Federal Fund and is enforceable against Federal
Fund in accordance with its terms; and
(8) The registration statement of which the prospectus, dated
September 1, 1998, as amended January 1, 1999, of Federal Fund is a part (the
"Prospectus") is, at the time of the signing of this Agreement and Plan,
effective under the 1933 Act, and, to the best knowledge of such counsel, no
stop order suspending the effectiveness of such registration statement has
been issued, and no proceedings for such purpose have been instituted or are
pending before or threatened by the U.S. Securities and Exchange Commission
under the 1933 Act, and nothing has come to such counsel's attention that
causes it to believe that, at the time the Prospectus became effective, or at
the time of the signing of this Agreement and Plan, or at the Closing, such
Prospectus (except for the financial statements and other financial and
statistical data included therein, as to which counsel need not express an
opinion), contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading; and such counsel knows of no legal or
government proceedings required to be described in the Prospectus, or of any
contract or document of a character required to be described in the
Prospectus that is not described as required.
In giving the opinions set forth above, this counsel may state that it
is relying on certificates of the officers of Federal Fund with regard to
matters of fact, and certain certifications and written statements of
governmental officials with respect to the good standing of Federal Fund.
(i) That the Trust shall have received a certificate from the
President and Secretary of Federal Fund to the effect that the statements
contained in Federal Fund's Prospectus, at the time the Prospectus became
effective, at the date of the signing of this Agreement and Plan, and at the
Closing, did not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading.
(j) That Federal Fund's Registration Statement with respect to the
Federal Fund Shares to be delivered to the Municipal Fund's shareholders in
accordance with this Agreement and Plan shall have become effective, and no
stop order suspending the effectiveness of the Registration Statement or any
amendment or supplement thereto, shall have been issued prior to the Closing
Date or shall be in effect at Closing, and no proceedings for the issuance of
such an order shall be pending or threatened on that date.
(k) That the Federal Fund Shares to be delivered hereunder shall be
eligible for sale by Federal Fund with each state commission or agency with
which such eligibility is required in order to permit the Federal Fund Shares
lawfully to be delivered to each Municipal Fund shareholder.
(l) That, at the Closing, the Trust, on behalf of Municipal Fund,
transfers to Federal Fund aggregate Net Assets of Municipal 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 Municipal
Fund on the Closing Date.
9. BROKERAGE FEES AND EXPENSES.
(a) The Trust and Federal Fund each represents and warrants to the
other that there are no broker or finders' fees payable by it in connection
with the transactions provided for herein.
(b) The expenses of entering into and carrying out the provisions of
this Agreement and Plan shall be borne one-quarter by Municipal Fund,
one-quarter by Federal Fund, and one-half by Franklin Advisers, Inc.
10. TERMINATION; POSTPONEMENT; WAIVER; ORDER.
(a) Anything contained in this Agreement and Plan to the contrary
notwithstanding, this Agreement and Plan may be terminated and the Plan of
Reorganization abandoned at any time (whether before or after approval
thereof by the shareholders of Municipal Fund) prior to the Closing or the
Closing may be postponed as follows:
(1) by mutual consent of the Trust and Federal Fund;
(2) by Federal Fund if any condition of its obligations set
forth in Section 8 has not been fulfilled or waived; or
(3) by the Trust, if any condition of its obligations set forth
in Section 8 has not been fulfilled or waived.
An election by the Trust, on behalf of Municipal Fund, or Federal Fund
to terminate this Agreement and Plan and to abandon the Plan of
Reorganization shall be exercised, respectively, by the Board of Trustees of
the Trust or Board of Directors of Federal Fund.
(b) If the transactions contemplated by this Agreement and Plan have
not been consummated by December 31, 1999, the Agreement and Plan shall
automatically terminate on that date, unless a later date is agreed to by
both Federal Fund and the Trust.
(c) In the event of termination of this Agreement and Plan pursuant
to the provisions hereof, the same shall become void and have no further
effect, and neither the Trust nor Federal Fund, nor their directors or
trustees, officers, agents or shareholders shall have any liability in
respect of this Agreement and Plan.
(d) At any time prior to the Closing, any of the terms or conditions
of this Agreement and Plan may be waived by the party who is entitled to the
benefit thereof by action taken by that party's Board of Trustees or Board of
Directors, as applicable, if, in the judgment of such Board, such action or
waiver will not have a material adverse effect on the benefits intended under
this Agreement and Plan to its shareholders, on behalf of whom such action is
taken.
(e) The respective representations and warranties contained in
Sections 4 to 6 hereof shall expire with and be terminated by the Plan of
Reorganization, and neither the Trust nor Federal Fund, nor any of their
officers, trustees or directors, agents or shareholders shall have any
liability with respect to such representations or warranties after the
Closing. This provision shall not protect any officer, trustee or director,
agent or shareholder of the Trust or Federal Fund against any liability to
the entity for which that officer, trustee or director, agent or shareholder
so acts or to its shareholders to which that officer, trustee or director,
agent or shareholder would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
in the conduct of such office.
(f) If any order or orders of the U.S. Securities and Exchange
Commission with respect to this Agreement and Plan shall be issued prior to
the Closing and shall impose any terms or conditions that are determined by
action of the Board of Trustees of the Trust or of the Board of Directors of
the Federal Fund to be acceptable, such terms and conditions shall be binding
as if a part of this Agreement and Plan without further vote or approval of
the shareholders of Municipal Fund, unless such terms and conditions shall
result in a change in the method of computing the number of Federal Fund
Shares to be issued to Municipal Fund in which event, unless such terms and
conditions shall have been included in the proxy solicitation material
furnished to the shareholders of Municipal Fund prior to the meeting at which
the transactions contemplated by this Agreement and Plan shall have been
approved, this Agreement and Plan shall not be consummated and shall
terminate unless Municipal Fund shall promptly call a special meeting of
shareholders at which such conditions so imposed shall be submitted for
approval.
11. ENTIRE AGREEMENT AND AMENDMENTS.
This Agreement and Plan embodies the entire agreement between the
parties and there are no agreements, understandings, restrictions, or
warranties between the parties other than those set forth herein or herein
provided for. This Agreement and Plan may be amended only by mutual consent
of the parties in writing. Neither this Agreement and Plan nor any interest
herein may be assigned without the prior written consent of the other party.
12. COUNTERPARTS.
This Agreement and Plan may be executed in any number of counterparts,
each of which shall be deemed to be an original, but all such counterparts
together shall constitute but one instrument.
13. NOTICES.
Any notice, report, or demand required or permitted by any provision of
this Agreement and Plan shall be in writing and shall be deemed to have been
given if delivered or mailed, first class postage prepaid, addressed to
Franklin Federal Tax-Free Income Fund at 777 Mariners Island Boulevard, P. O.
Box 7777, San Mateo, CA 94403-7777, Attention: Secretary, or Franklin
Municipal Securities Trust, at 777 Mariners Island Boulevard, P.O. Box 7777,
San Mateo CA 94403-7777, Attention: Secretary, as the case may be.
14. GOVERNING LAW.
This Agreement shall be governed by and carried out in accordance with
the laws of the State of Delaware.
IN WITNESS WHEREOF, Franklin Federal Tax-Free Income Fund and Franklin
Municipal Securities Trust, on behalf of Franklin Hawaii Municipal Bond Fund,
have each caused this Agreement and Plan to be executed on its behalf by its
duly authorized officers, all as of the date and year first-above written.
FRANKLIN FEDERAL TAX-FREE
INCOME FUND
Attest:
/s/Leiann Nuzum By:/s/Deborah R. Gatzek
Assistant Secretary Deborah R. Gatzek
Vice President and Secretary
FRANKLIN MUNICIPAL SECURITIES TRUST, ON
BEHALF OF FRANKLIN HAWAII MUNICIPAL BOND
FUND
Attest:
/s/Leiann Nuzum By:/s/Deborah R. Gatzek
Assistant Secretary Deborah R. Gatzek
Vice President and Secretary
AGREEMENT AND PLAN OF REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement and Plan"), made
as of this 28th day of April, 1999, by and between FRANKLIN FEDERAL TAX-FREE
INCOME FUND ("Federal Fund"), a corporation incorporated under the laws of
the State of California in 1982, with its principal place of business at 777
Mariners Island Boulevard, San Mateo, California 94404, and FRANKLIN
MUNICIPAL SECURITIES TRUST (the "Trust"), a business trust created under the
laws of the State of Delaware in 1992, with its principal place of business
at 777 Mariners Island Boulevard, San Mateo, California 94404, on behalf of
its series Franklin Arkansas Municipal Bond Fund, a series of shares of the
Trust ("Municipal Fund").
PLAN OF REORGANIZATION
The reorganization (hereinafter referred to as the "Plan of
Reorganization") will consist of (i) the acquisition by Federal Fund of
substantially all of the property, assets and goodwill of Municipal Fund in
exchange solely for shares of common stock, no par value, of Federal Fund -
Class A ("Federal Fund Shares"); (ii) the distribution of Federal Fund Shares
to the shareholders of Municipal Fund according to their respective
interests; and (iii) the subsequent dissolution of Municipal Fund as soon as
practicable after the closing (as defined in Section 3, hereinafter called
the "Closing"), all upon and subject to the terms and conditions of this
Agreement and Plan hereinafter set forth.
AGREEMENT
In order to consummate the Plan of Reorganization and in consideration
of the promises and of the covenants and agreements hereinafter set forth,
and intending to be legally bound, the parties hereto covenant and agree as
follows:
1. SALE AND TRANSFER OF ASSETS, LIQUIDATION AND DISSOLUTION OF MUNICIPAL
FUND.
(a) Subject to the terms and conditions of this Agreement and Plan,
and in reliance on the representations and warranties of Federal Fund herein
contained, and in consideration of the delivery by Federal Fund of the number
of its Federal Fund Shares hereinafter provided, the Trust, on behalf of
Municipal Fund, agrees that it will convey, transfer and deliver to Federal
Fund at the Closing all of Municipal Fund's then existing assets, free and
clear of all liens, encumbrances, and claims whatsoever (other than
shareholders' rights of redemption), except for cash, bank deposits, or cash
equivalent securities in an estimated amount necessary to (i) pay the costs
and expenses of carrying out this Agreement and Plan (including, but not
limited to, fees of counsel and accountants, and expenses of its liquidation
and dissolution contemplated hereunder), which costs and expenses shall be
established on Municipal 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 Municipal Fund, if any, at the Closing Date, for which
contingent and other appropriate liabilities reserves shall be established on
Municipal Fund's books (hereinafter "Net Assets"). Municipal Fund shall also
retain any and all rights that it may have over and against any person that
may have accrued up to and including the close of business on the Closing
Date.
(b) Subject to the terms and conditions of this Agreement and Plan,
and in reliance on the representations and warranties of the Trust herein
contained, and in consideration of such sale, conveyance, transfer, and
delivery, Federal Fund agrees at the Closing to deliver to the Trust the
number of Federal Fund Shares, determined by dividing the aggregate Net
Assets of Municipal Fund on the Closing Date by the net asset value per share
of Federal Fund Shares, as of 1:00 p.m. Pacific time on the Closing Date.
All such values shall be determined in the manner and as of the time set
forth in Section 2 hereof.
(c) Immediately following the Closing, Municipal Fund shall dissolve
and distribute pro rata to its shareholders of record as of the close of
business on the Closing Date Federal Fund Shares received by Municipal Fund
pursuant to this Section 1. Such liquidation and distribution shall be
accomplished by the establishment of accounts on the share records of Federal
Fund of the type and in the amounts due such shareholders based on their
respective holdings as of the close of business on the Closing Date.
Fractional Federal Fund Shares shall be carried to the third decimal place.
As promptly as practicable after the Closing, each holder of any outstanding
certificate or certificates representing shares of beneficial interest of
Municipal Fund shall be entitled to surrender the same to the transfer agent
for the Federal Fund in exchange for the number of Federal Fund Shares into
which the shares of the Municipal Fund theretofore represented by the
certificate or certificates so surrendered shall have been converted.
Certificates for Federal Fund Shares shall not be issued, unless specifically
requested by the shareholders. Until so surrendered, each outstanding
certificate which, prior to the Closing, represented shares of beneficial
interest of the Municipal Fund shall be deemed for all the Federal Fund's
purposes to evidence ownership of the number of Federal Fund's Shares into
which the shares of beneficial interest of the Municipal Fund (which prior to
the Closing were represented thereby) have been converted.
2. VALUATION.
(a) The value of Municipal Fund's Net Assets to be acquired by
Federal Fund hereunder shall be computed as of 1:00 p.m. Pacific time on the
Closing Date using the valuation procedures set forth in Municipal Fund's
currently effective prospectus.
(b) The net asset value of a share of common stock of Federal Fund
shall be determined to the nearest full cent as of 1:00 p.m. Pacific time on
the Closing Date using the valuation procedures set forth in Federal Fund's
currently effective prospectus.
(c) The net asset value of a share of beneficial interest of
Municipal 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 Municipal Fund's currently effective prospectus.
3. CLOSING AND CLOSING DATE.
The Closing Date shall be August 26, 1999, or such later date as the
parties may mutually agree. The Closing shall take place at the principal
office of Federal Fund at 2:00 p.m. Pacific time on the Closing Date. The
Trust shall have provided for delivery, as of the Closing, of those Net
Assets of Municipal Fund to be transferred to Federal Fund's Custodian, Bank
of New York, Mutual Funds Division, 90 Washington Street, New York, New York
10286. Also, the Trust shall deliver at the Closing a list of names and
addresses of the shareholders of record of Municipal Fund's shares and the
number of shares of beneficial interest owned by each such shareholder,
indicating thereon which such shares are represented by outstanding
certificates and which by book-entry accounts, all as of 1:00 p.m. Pacific
time on the Closing Date, certified by its transfer agent or by its President
to the best of its or his knowledge and belief. Federal Fund shall issue and
deliver a certificate or certificates evidencing the shares of common stock
of Federal Fund to be delivered to said transfer agent registered in such
manner as the Trust may request, or provide evidence satisfactory to the
Trust that such Federal Fund Shares have been registered in an account on the
books of Federal Fund in such manner as the Trust may request.
4. REPRESENTATIONS AND WARRANTIES BY THE TRUST.
The Trust represents and warrants to Federal Fund that:
(a) The Trust is a business trust created under the laws of the State
of Delaware on June 15, 1992, and is validly existing and in good standing
under the laws of that state. 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 of Municipal Fund's shares sold were
sold pursuant to an effective registration statement filed under the
Securities Act of 1933, as amended (the "1933 Act"), except for those shares
sold pursuant to the private offering exemption for the purpose of raising
the required initial capital.
(b) The Trust is authorized to issue an unlimited number of shares of
beneficial interest, $0.01 par value per share, each outstanding share of
which is fully paid, non-assessable, fully transferable and has full voting
rights and currently issues shares of five (5) series including Municipal
Fund. The Trust is authorized to issue an unlimited number of shares of
beneficial interest of each series.
(c) The financial statements appearing in the Trust's Annual Report
to Shareholders for the fiscal year ended May 31, 1998, audited by Coopers &
Lybrand, L.L.P., copies of which have been delivered to Federal Fund, fairly
present the financial position of Municipal Fund as of such date and the
results of its operations for the periods indicated in conformity with
generally accepted accounting principles applied on a consistent basis.
(d) The books and records of Municipal Fund made available to Federal
Fund and/or its counsel accurately summarize the accounting data represented
and contain no material omissions with respect to the business and operations
of Municipal Fund.
(e) The Trust has the necessary power and authority to conduct
Municipal Fund's business as such business is now being conducted.
(f) The Trust is not a party to or obligated under any provision of
the Trust's Agreement and Declaration of Trust or By-laws, or any contract or
any other commitment or obligation, and is not subject to any order or decree
that would be violated by the Trust's execution or performance under this
Agreement and Plan.
(g) The Trust has elected to treat the Municipal 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 Municipal Fund has qualified as a RIC for each taxable year since its
inception and will qualify as a RIC as of the Closing Date.
5. REPRESENTATIONS AND WARRANTIES BY FEDERAL FUND.
Federal Fund represents and warrants to the Trust, on behalf of
Municipal Fund, that:
(a) Federal Fund is a corporation incorporated under the laws of the
State of California on January 7, 1982, and is validly existing and in good
standing under the laws of that state. Federal Fund is duly registered under
the 1940 Act as a diversified, open-end, management investment company and
all its shares sold have been sold pursuant to an effective registration
statement filed under the 1933 Act, except for those shares sold pursuant to
the private offering exemption for the purpose of raising the required
initial capital.
(b) Federal Fund is authorized to issue ten billion (10,000,000,000)
shares of common stock, no par value, all of which is allocated to the
Franklin Federal Tax-Free Income Fund Series of which three billion
(3,000,000,000) shares are further allocated to Class A of that series, and
each outstanding share of which is fully paid, non-assessable, fully
transferable, and has full voting rights. Federal Fund Shares to be issued
pursuant to this Agreement and Plan will be fully paid, non-assessable,
freely transferable and have full voting rights.
(c) At the Closing, Federal Fund Shares will be eligible for offering
to the public in those states of the United States and jurisdictions in which
the shares of Municipal Fund are presently eligible for offering to the
public, and there are a sufficient number of Federal Fund Shares registered
under the 1933 Act to permit the transfers contemplated by this Agreement and
Plan to be consummated.
(d) The financial statements appearing in Federal Fund's Annual
Report to Shareholders for the fiscal year ended April 30, 1998, audited by
Coopers & Lybrand L.L.P., copies of which have been delivered to Municipal
Fund, fairly present the financial position of Federal Fund as of such date
and the results of its operations for the periods indicated in conformity
with generally accepted accounting principles applied on a consistent basis.
(e) Federal Fund has the necessary power and authority to conduct its
business as such business is now being conducted.
(f) Federal Fund is not a party to or obligated under any provision
of its Articles of Incorporation or By-laws, or any contract or any other
commitment or obligation, and is not subject to any order or decree, that
would be violated by its execution of or performance under this Agreement and
Plan.
(g) Federal Fund has elected to be treated as a RIC for federal
income tax purposes under Part I of Subchapter M of the Code, has qualified
as a RIC for each taxable year since its inception, and will qualify as a RIC
as of the Closing Date.
6. REPRESENTATIONS AND WARRANTIES BY THE TRUST AND FEDERAL FUND.
The Trust and Federal Fund each represents and warrants to the other
that:
(a) The statement of assets and liabilities to be furnished by it as
of 1:00 p.m. Pacific time on the Closing Date for the purpose of determining
the number of Federal Fund Shares to be issued pursuant to Section 1 of this
Agreement and Plan will accurately reflect its Net Assets in the case of
Municipal Fund and its net assets in the case of Federal Fund, and
outstanding shares of common stock, as of such date, in conformity with
generally accepted accounting principles applied on a consistent basis.
(b) At the Closing, it will have good and marketable title to all of
the securities and other assets shown on the statement of assets and
liabilities referred to in "(a)" above, free and clear of all liens or
encumbrances of any nature whatsoever, except such imperfections of title or
encumbrances as do not materially detract from the value or use of the assets
subject thereto, or materially affect title thereto.
(c) Except as disclosed in its currently effective prospectus, there
is no material suit, judicial action, or legal or administrative proceeding
pending or threatened against it.
(d) There are no known actual or proposed deficiency assessments with
respect to any taxes payable by it.
(e) The execution, delivery, and performance of this Agreement and
Plan have been duly authorized by all necessary action of its Board of
Trustees or Board of Directors, as applicable, and this Agreement and Plan
constitutes a valid and binding obligation enforceable in accordance with its
terms.
(f) It anticipates that consummation of this Agreement and Plan will
not cause it, in the case of Federal Fund, and Municipal Fund, in the case of
the Trust, to fail to conform to the requirements of Subchapter M of the Code
for federal income taxation as a RIC at the end of its fiscal year.
(g) It has the necessary power and authority to conduct its business,
in the case of Federal Fund, and Municipal Fund's business, in the case of
Municipal Fund, as such business is now being conducted.
7. COVENANTS OF THE TRUST AND FEDERAL FUND.
(a) The Trust, on behalf of Municipal Fund, and Federal Fund each
covenant to operate their respective businesses as presently conducted
between the date hereof and the Closing.
(b) The Trust undertakes that it will not acquire the Federal Fund
Shares for the purpose of making distributions thereof to anyone other than
Municipal Fund's shareholders.
(c) The Trust undertakes that, if this Agreement and Plan is
consummated, it will dissolve Municipal Fund and rescind the establishment of
Municipal Fund as a series of the Trust.
(d) The Trust and Federal Fund each agree that, by the Closing, all
of their federal and other tax returns and reports required by law to be
filed by the Trust, on behalf of Municipal Fund, or by Federal Fund on or
before such date shall have been filed, and all federal and other taxes shown
as due on said returns shall have either been paid or adequate liability
reserves shall have been provided for the payment of such taxes.
(e) At the Closing, the Trust will provide Federal Fund with a copy
of the shareholder ledger accounts of Municipal Fund, certified by its
transfer agent or its President to the best of its or his knowledge and
belief, for all the shareholders of record of Municipal Fund's shares as of
1:00 p.m. Pacific time on the Closing Date who are to become shareholders of
Federal Fund as a result of the transfer of assets that is the subject of
this Agreement and Plan.
(f) The Trust agrees to mail to each shareholder of record entitled
to vote at the meeting of Municipal Fund's shareholders at which action on
this Agreement and Plan is to be considered, in sufficient time to comply
with requirements as to notice thereof, a Joint Prospectus and Proxy
Statement that complies in all material respects with the applicable
provisions of Section 14(a) of the Securities Exchange Act of 1934, as
amended, and Section 20(a) of the 1940 Act, and the rules and regulations,
respectively, thereunder.
(g) Federal Fund will file with the U.S. Securities and Exchange
Commission a registration statement on Form N-14 under the 1933 Act relating
to the Federal Fund Shares issuable hereunder ("Registration Statement"), and
will use its best efforts to provide that the Registration Statement becomes
effective as promptly as practicable. At the time it becomes effective, the
Registration Statement will (i) comply in all material respects with the
applicable provisions of the 1933 Act, and the rules and regulations
promulgated thereunder; and (ii) not contain any untrue statement of material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading. At the time the
Registration Statement becomes effective, at the time of Municipal Fund's
shareholders' meeting, and at the Closing Date, the prospectus and statement
of additional information included in the Registration Statement will not
contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
8. CONDITIONS PRECEDENT TO BE FULFILLED BY THE TRUST AND FEDERAL FUND.
The obligations of the Trust and Federal Fund to effectuate this
Agreement and Plan shall be subject to the following respective conditions:
(a) That: (i) all the representations and warranties of the other
party contained herein shall be true and correct as of the Closing with the
same effect as though made as of and at such date; (ii) the other party shall
have performed all obligations required by this Agreement and Plan to be
performed by it prior to the Closing; and (iii) the other party shall have
delivered to such party a certificate signed by the President and by the
Secretary or equivalent officer to the foregoing effect.
(b) That each party shall have delivered to the other party a copy of
the resolutions approving this Agreement and Plan adopted by its Board of
Trustees or Board of Directors, as applicable, certified by its Secretary or
equivalent officer.
(c) That the U.S. Securities and Exchange Commission shall not have
issued an unfavorable management report under Section 25(b) of the 1940 Act
or instituted or threatened to institute any proceeding seeking to enjoin
consummation of the Plan of Reorganization under Section 25(c) of the 1940
Act. And, further, no other legal, administrative or other proceeding shall
have been instituted or threatened that would materially affect the financial
condition of either party or would prohibit the transactions contemplated
hereby.
(d) That this Agreement and Plan and the Plan of Reorganization
contemplated hereby shall have been adopted and approved by the appropriate
action of the shareholders of Municipal Fund at an annual or special meeting
or any adjournment thereof.
(e) That each party shall have declared a distribution or
distributions prior to the Closing Date that, together with all previous
distributions, shall have the effect of distributing to its shareholders (i)
all of its net investment income and all of its net realized capital gains,
if any, for the period from the close of its last fiscal year to 1:00 p.m.
Pacific time on the Closing Date; and (ii) any undistributed net investment
income and net realized capital gains from any period to the extent not
otherwise declared for distribution.
(f) That there shall be delivered to the Trust and Federal Fund an
opinion from Messrs. Stradley, Ronon, Stevens & Young, LLP, counsel to the
Trust and Federal Fund, to the effect that, provided the acquisition
contemplated hereby is carried out in accordance with this Agreement and Plan
and based upon certificates of the officers of the Trust and Federal Fund
with regard to matters of fact:
(1) The acquisition by Federal Fund of substantially all the
assets of Municipal Fund as provided for herein in exchange for Federal Fund
Shares will qualify as a reorganization within the meaning of Section
368(a)(1)(C) of the Code, and Municipal Fund and Federal Fund will each be a
party to the respective reorganization within the meaning of Section 368(b)
of the Code;
(2) No gain or loss will be recognized by Municipal Fund upon
the transfer of substantially all of its assets to Federal Fund in exchange
solely for voting shares of Federal Fund (Sections 361(a) and 357(a)). No
opinion, however, will be expressed as to whether any accrued market discount
will be required to be recognized as ordinary income pursuant to Section 1276
of the Code;
(3) No gain or loss will be recognized by Federal Fund upon the
receipt of substantially all of the assets of Municipal Fund in exchange
solely for voting shares of Federal Fund (Section 1032(a));
(4) The basis of the assets of Municipal Fund received by
Federal Fund will be the same as the basis of such assets to Municipal Fund
immediately prior to the exchange (Section 362(b));
(5) The holding period of the assets of Municipal Fund received
by Federal Fund will include the period during which such assets were held by
Municipal Fund (Section 1223(2));
(6) No gain or loss will be recognized to the shareholders of
Municipal Fund upon the exchange of their shares in Municipal Fund for voting
shares of Federal Fund (Section 354(a));
(7) The basis of the Federal Fund Shares received by Municipal
Fund's shareholders shall be the same as the basis of the shares of Municipal
Fund exchanged therefor (Section 358(a)(1));
(8) The holding period of Federal Fund Shares received by
Municipal Fund's shareholders (including fractional shares to which they may
be entitled) will include the holding period of Municipal Fund's shares
surrendered in exchange therefor, provided that Municipal Fund's shares were
held as a capital asset on the date of the exchange (Section 1223(1)); and
(9) Federal Fund will succeed to and take into account as of
the date of the proposed transfer (as defined in Section 1.381(b)-1(b) of the
Income Tax Regulations) the items of Municipal Fund described in Section
381(c) of the Code (as defined in Section 1.381(b)-1(b) of the Income Tax
Regulations), subject to the conditions and limitations specified in Sections
381(b) and (c), 382, 383 and 384 of the Code and the Income Tax Regulations
thereunder.
(g) That Federal Fund shall have received an opinion in form and
substance satisfactory to it from Messrs. Stradley, Ronon, Stevens & Young,
LLP, counsel to the Trust, to the effect that, subject in all respects to the
effects of bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance, and other laws now or hereafter affecting generally the
enforcement of creditors' rights:
(1) The Trust was created as a business trust under the laws of
the State of Delaware on June 15, 1992, and is validly existing and in good
standing under the laws of that state;
(2) The Trust is authorized to issue an unlimited number of
shares of beneficial interest of Municipal Fund, $0.01 par value per share.
Assuming that the initial shares of beneficial interest were issued in
accordance with the 1940 Act and the Agreement and Declaration and By-laws of
the Trust, and that all other outstanding shares of Municipal Fund were sold,
issued and paid for in accordance with the terms of Municipal 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 Municipal Fund's currently effective
prospectus, such counsel does not know of any material suit, action, or legal
or administrative proceeding pending or threatened against the Trust, the
unfavorable outcome of which would materially and adversely affect the Trust
or Municipal Fund;
(5) All actions required to be taken by the Trust to authorize
this Agreement and Plan and to effect the Plan of Reorganization contemplated
hereby have been duly authorized by all necessary action on the part of the
Trust; and
(6) Neither the execution, delivery, nor performance of this
Agreement and Plan by the Trust violates any provision of its 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
Municipal Fund is otherwise bound; this Agreement and Plan is the legal,
valid and binding obligation of the Trust and Municipal Fund and is
enforceable against the Trust and/or Municipal Fund in accordance with its
terms.
In giving the opinions set forth above, this counsel may state that it
is relying on certificates of the officers of the Trust with regard to
matters of fact, and certain certifications and written statements of
governmental officials with respect to the good standing of the Trust and
Municipal Fund.
(h) That the Trust shall have received an opinion in form and
substance satisfactory to it from Messrs. Stradley, Ronon, Stevens & Young,
LLP, counsel to Federal Fund, to the effect that, subject in all respects to
the effects of bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance and other laws now or hereafter affecting generally the
enforcement of creditors' rights:
(1) Federal Fund was incorporated under the laws of the State
of California on January 7, 1982, and is validly existing and in good
standing under the laws of that state;
(2) Federal Fund is authorized to issue ten billion
(10,000,000,000) shares of common stock, no par value, all of which is
allocated to the Franklin Federal Tax-Free Income Fund Series of which three
billion (3,000,000,000) shares are further allocated to Class A of that
series, and each outstanding share of which is fully paid, non-assessable,
fully transferable, and has full voting rights. Assuming that the initial
capital shares of Federal Fund were issued in accordance with the 1940 Act,
and the Articles of Incorporation and By-laws of Federal Fund, and that all
other outstanding shares of Federal Fund were sold, issued and paid for in
accordance with the terms of Federal Fund's prospectus in effect at the time
of such sales, each such outstanding share of Federal Fund is fully paid,
non-assessable, freely transferable and has full voting rights;
(3) Federal Fund is an open-end, diversified investment company
of the management type registered as such under the 1940 Act;
(4) Except as disclosed in Federal Fund's currently effective
prospectus, such counsel does not know of any material suit, action, or legal
or administrative proceeding pending or threatened against Federal Fund, the
unfavorable outcome of which would materially and adversely affect Federal
Fund;
(5) Federal Fund Shares to be issued pursuant to the terms of
this Agreement and Plan have been duly authorized and, when issued and
delivered as provided in this Agreement and Plan, will have been validly
issued and fully paid and will be non-assessable by Federal Fund;
(6) All corporate actions required to be taken by Federal Fund
to authorize this Agreement and Plan and to effect the Plan of Reorganization
contemplated hereby have been duly authorized by all necessary corporate
action on the part of Federal Fund;
(7) Neither the execution, delivery, nor performance of this
Agreement and Plan by Federal Fund violates any provision of its Articles of
Incorporation, its By-laws, or the provisions of any agreement or other
instrument known to such counsel to which Federal Fund is a party or by which
Federal Fund is otherwise bound; this Agreement and Plan is the legal, valid
and binding obligation of Federal Fund and is enforceable against Federal
Fund in accordance with its terms; and
(8) The registration statement of which the prospectus, dated
September 1, 1998, as amended January 1, 1999, of Federal Fund is a part (the
"Prospectus") is, at the time of the signing of this Agreement and Plan,
effective under the 1933 Act, and, to the best knowledge of such counsel, no
stop order suspending the effectiveness of such registration statement has
been issued, and no proceedings for such purpose have been instituted or are
pending before or threatened by the U.S. Securities and Exchange Commission
under the 1933 Act, and nothing has come to such counsel's attention that
causes it to believe that, at the time the Prospectus became effective, or at
the time of the signing of this Agreement and Plan, or at the Closing, such
Prospectus (except for the financial statements and other financial and
statistical data included therein, as to which counsel need not express an
opinion), contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading; and such counsel knows of no legal or
government proceedings required to be described in the Prospectus, or of any
contract or document of a character required to be described in the
Prospectus that is not described as required.
In giving the opinions set forth above, this counsel may state that it
is relying on certificates of the officers of Federal Fund with regard to
matters of fact, and certain certifications and written statements of
governmental officials with respect to the good standing of Federal Fund.
(i) That the Trust shall have received a certificate from the
President and Secretary of Federal Fund to the effect that the statements
contained in Federal Fund's Prospectus, at the time the Prospectus became
effective, at the date of the signing of this Agreement and Plan, and at the
Closing, did not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading.
(j) That Federal Fund's Registration Statement with respect to the
Federal Fund Shares to be delivered to the Municipal Fund's shareholders in
accordance with this Agreement and Plan shall have become effective, and no
stop order suspending the effectiveness of the Registration Statement or any
amendment or supplement thereto, shall have been issued prior to the Closing
Date or shall be in effect at Closing, and no proceedings for the issuance of
such an order shall be pending or threatened on that date.
(k) That the Federal Fund Shares to be delivered hereunder shall be
eligible for sale by Federal Fund with each state commission or agency with
which such eligibility is required in order to permit the Federal Fund Shares
lawfully to be delivered to each Municipal Fund shareholder.
(l) That, at the Closing, the Trust, on behalf of Municipal Fund,
transfers to Federal Fund aggregate Net Assets of Municipal 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 Municipal
Fund on the Closing Date.
9. BROKERAGE FEES AND EXPENSES.
(a) The Trust and Federal Fund each represents and warrants to the
other that there are no broker or finders' fees payable by it in connection
with the transactions provided for herein.
(b) The expenses of entering into and carrying out the provisions of
this Agreement and Plan shall be borne one-quarter by Municipal Fund,
one-quarter by Federal Fund, and one-half by Franklin Advisers, Inc.
10. TERMINATION; POSTPONEMENT; WAIVER; ORDER.
(a) Anything contained in this Agreement and Plan to the contrary
notwithstanding, this Agreement and Plan may be terminated and the Plan of
Reorganization abandoned at any time (whether before or after approval
thereof by the shareholders of Municipal Fund) prior to the Closing or the
Closing may be postponed as follows:
(1) by mutual consent of the Trust and Federal Fund;
(2) by Federal Fund if any condition of its obligations set
forth in Section 8 has not been fulfilled or waived; or
(3) by the Trust, if any condition of its obligations set forth
in Section 8 has not been fulfilled or waived.
An election by the Trust, on behalf of Municipal Fund, or Federal Fund
to terminate this Agreement and Plan and to abandon the Plan of
Reorganization shall be exercised, respectively, by the Board of Trustees of
the Trust or Board of Directors of Federal Fund.
(b) If the transactions contemplated by this Agreement and Plan have
not been consummated by December 31, 1999, the Agreement and Plan shall
automatically terminate on that date, unless a later date is agreed to by
both Federal Fund and the Trust.
(c) In the event of termination of this Agreement and Plan pursuant
to the provisions hereof, the same shall become void and have no further
effect, and neither the Trust nor Federal Fund, nor their directors or
trustees, officers, agents or shareholders shall have any liability in
respect of this Agreement and Plan.
(d) At any time prior to the Closing, any of the terms or conditions
of this Agreement and Plan may be waived by the party who is entitled to the
benefit thereof by action taken by that party's Board of Trustees or Board of
Directors, as applicable, if, in the judgment of such Board, such action or
waiver will not have a material adverse effect on the benefits intended under
this Agreement and Plan to its shareholders, on behalf of whom such action is
taken.
(e) The respective representations and warranties contained in
Sections 4 to 6 hereof shall expire with and be terminated by the Plan of
Reorganization, and neither the Trust nor Federal Fund, nor any of their
officers, trustees or directors, agents or shareholders shall have any
liability with respect to such representations or warranties after the
Closing. This provision shall not protect any officer, trustee or director,
agent or shareholder of the Trust or Federal Fund against any liability to
the entity for which that officer, trustee or director, agent or shareholder
so acts or to its shareholders to which that officer, trustee or director,
agent or shareholder would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
in the conduct of such office.
(f) If any order or orders of the U.S. Securities and Exchange
Commission with respect to this Agreement and Plan shall be issued prior to
the Closing and shall impose any terms or conditions that are determined by
action of the Board of Trustees of the Trust or of the Board of Directors of
the Federal Fund to be acceptable, such terms and conditions shall be binding
as if a part of this Agreement and Plan without further vote or approval of
the shareholders of Municipal Fund, unless such terms and conditions shall
result in a change in the method of computing the number of Federal Fund
Shares to be issued to Municipal Fund in which event, unless such terms and
conditions shall have been included in the proxy solicitation material
furnished to the shareholders of Municipal Fund prior to the meeting at which
the transactions contemplated by this Agreement and Plan shall have been
approved, this Agreement and Plan shall not be consummated and shall
terminate unless Municipal Fund shall promptly call a special meeting of
shareholders at which such conditions so imposed shall be submitted for
approval.
11. ENTIRE AGREEMENT AND AMENDMENTS.
This Agreement and Plan embodies the entire agreement between the
parties and there are no agreements, understandings, restrictions, or
warranties between the parties other than those set forth herein or herein
provided for. This Agreement and Plan may be amended only by mutual consent
of the parties in writing. Neither this Agreement and Plan nor any interest
herein may be assigned without the prior written consent of the other party.
12. COUNTERPARTS.
This Agreement and Plan may be executed in any number of counterparts,
each of which shall be deemed to be an original, but all such counterparts
together shall constitute but one instrument.
13. NOTICES.
Any notice, report, or demand required or permitted by any provision of
this Agreement and Plan shall be in writing and shall be deemed to have been
given if delivered or mailed, first class postage prepaid, addressed to
Franklin Federal Tax-Free Income Fund at 777 Mariners Island Boulevard, P. O.
Box 7777, San Mateo, CA 94403-7777, Attention: Secretary, or Franklin
Municipal Securities Trust, at 777 Mariners Island Boulevard, P.O. Box 7777,
San Mateo CA 94403-7777, Attention: Secretary, as the case may be.
14. GOVERNING LAW.
This Agreement shall be governed by and carried out in accordance with
the laws of the State of Delaware.
IN WITNESS WHEREOF, Franklin Federal Tax-Free Income Fund and Franklin
Municipal Securities Trust, on behalf of Franklin Arkansas Municipal Bond
Fund, have each caused this Agreement and Plan to be executed on its behalf
by its duly authorized officers, all as of the date and year first-above
written.
FRANKLIN FEDERAL TAX-FREE
INCOME FUND
Attest:
/s/Leiann Nuzum By:/s/Deborah R. Gatzek
Assistant Secretary Deborah R. Gatzek
Vice President and Secretary
FRANKLIN MUNICIPAL SECURITIES TRUST, ON
BEHALF OF FRANKLIN ARKANSAS MUNICIPAL
BOND FUND
Attest:
/s/Leiann Nuzum By:/s/Deborah R. Gatzek
Assistant Secretary Deborah R. Gatzek
Vice President and Secretary
AGREEMENT AND PLAN OF REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement and Plan"), made
as of this 28th day of April, 1999, by and between FRANKLIN FEDERAL TAX-FREE
INCOME FUND ("Federal Fund"), a corporation incorporated under the laws of
the State of California in 1982, with its principal place of business at 777
Mariners Island Boulevard, San Mateo, California 94404, and FRANKLIN
MUNICIPAL SECURITIES TRUST (the "Trust"), a business trust created under the
laws of the State of Delaware in 1992, with its principal place of business
at 777 Mariners Island Boulevard, San Mateo, California 94404, on behalf of
its series Franklin Washington Municipal Bond Fund, a series of shares of the
Trust ("Municipal Fund").
PLAN OF REORGANIZATION
The reorganization (hereinafter referred to as the "Plan of
Reorganization") will consist of (i) the acquisition by Federal Fund of
substantially all of the property, assets and goodwill of Municipal Fund in
exchange solely for shares of common stock, no par value, of Federal Fund -
Class A ("Federal Fund Shares"); (ii) the distribution of Federal Fund Shares
to the shareholders of Municipal Fund according to their respective
interests; and (iii) the subsequent dissolution of Municipal Fund as soon as
practicable after the closing (as defined in Section 3, hereinafter called
the "Closing"), all upon and subject to the terms and conditions of this
Agreement and Plan hereinafter set forth.
AGREEMENT
In order to consummate the Plan of Reorganization and in consideration
of the promises and of the covenants and agreements hereinafter set forth,
and intending to be legally bound, the parties hereto covenant and agree as
follows:
1. SALE AND TRANSFER OF ASSETS, LIQUIDATION AND DISSOLUTION OF MUNICIPAL
FUND.
(a) Subject to the terms and conditions of this Agreement and Plan,
and in reliance on the representations and warranties of Federal Fund herein
contained, and in consideration of the delivery by Federal Fund of the number
of its Federal Fund Shares hereinafter provided, the Trust, on behalf of
Municipal Fund, agrees that it will convey, transfer and deliver to Federal
Fund at the Closing all of Municipal Fund's then existing assets, free and
clear of all liens, encumbrances, and claims whatsoever (other than
shareholders' rights of redemption), except for cash, bank deposits, or cash
equivalent securities in an estimated amount necessary to (i) pay the costs
and expenses of carrying out this Agreement and Plan (including, but not
limited to, fees of counsel and accountants, and expenses of its liquidation
and dissolution contemplated hereunder), which costs and expenses shall be
established on Municipal 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 Municipal Fund, if any, at the Closing Date, for which
contingent and other appropriate liabilities reserves shall be established on
Municipal Fund's books (hereinafter "Net Assets"). Municipal Fund shall also
retain any and all rights that it may have over and against any person that
may have accrued up to and including the close of business on the Closing
Date.
(b) Subject to the terms and conditions of this Agreement and Plan,
and in reliance on the representations and warranties of the Trust herein
contained, and in consideration of such sale, conveyance, transfer, and
delivery, Federal Fund agrees at the Closing to deliver to the Trust the
number of Federal Fund Shares, determined by dividing the aggregate Net
Assets of Municipal Fund on the Closing Date by the net asset value per share
of Federal Fund Shares, as of 1:00 p.m. Pacific time on the Closing Date.
All such values shall be determined in the manner and as of the time set
forth in Section 2 hereof.
(c) Immediately following the Closing, Municipal Fund shall dissolve
and distribute pro rata to its shareholders of record as of the close of
business on the Closing Date Federal Fund Shares received by Municipal Fund
pursuant to this Section 1. Such liquidation and distribution shall be
accomplished by the establishment of accounts on the share records of Federal
Fund of the type and in the amounts due such shareholders based on their
respective holdings as of the close of business on the Closing Date.
Fractional Federal Fund Shares shall be carried to the third decimal place.
As promptly as practicable after the Closing, each holder of any outstanding
certificate or certificates representing shares of beneficial interest of
Municipal Fund shall be entitled to surrender the same to the transfer agent
for the Federal Fund in exchange for the number of Federal Fund Shares into
which the shares of the Municipal Fund theretofore represented by the
certificate or certificates so surrendered shall have been converted.
Certificates for Federal Fund Shares shall not be issued, unless specifically
requested by the shareholders. Until so surrendered, each outstanding
certificate which, prior to the Closing, represented shares of beneficial
interest of the Municipal Fund shall be deemed for all the Federal Fund's
purposes to evidence ownership of the number of Federal Fund's Shares into
which the shares of beneficial interest of the Municipal Fund (which prior to
the Closing were represented thereby) have been converted.
2. VALUATION.
(a) The value of Municipal Fund's Net Assets to be acquired by
Federal Fund hereunder shall be computed as of 1:00 p.m. Pacific time on the
Closing Date using the valuation procedures set forth in Municipal Fund's
currently effective prospectus.
(b) The net asset value of a share of common stock of Federal Fund
shall be determined to the nearest full cent as of 1:00 p.m. Pacific time on
the Closing Date using the valuation procedures set forth in Federal Fund's
currently effective prospectus.
(c) The net asset value of a share of beneficial interest of
Municipal 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 Municipal Fund's currently effective prospectus.
3. CLOSING AND CLOSING DATE.
The Closing Date shall be August 26, 1999, or such later date as the
parties may mutually agree. The Closing shall take place at the principal
office of Federal Fund at 2:00 p.m. Pacific time on the Closing Date. The
Trust shall have provided for delivery, as of the Closing, of those Net
Assets of Municipal Fund to be transferred to Federal Fund's Custodian, Bank
of New York, Mutual Funds Division, 90 Washington Street, New York, New York
10286. Also, the Trust shall deliver at the Closing a list of names and
addresses of the shareholders of record of Municipal Fund's shares and the
number of shares of beneficial interest owned by each such shareholder,
indicating thereon which such shares are represented by outstanding
certificates and which by book-entry accounts, all as of 1:00 p.m. Pacific
time on the Closing Date, certified by its transfer agent or by its President
to the best of its or his knowledge and belief. Federal Fund shall issue and
deliver a certificate or certificates evidencing the shares of common stock
of Federal Fund to be delivered to said transfer agent registered in such
manner as the Trust may request, or provide evidence satisfactory to the
Trust that such Federal Fund Shares have been registered in an account on the
books of Federal Fund in such manner as the Trust may request.
4. REPRESENTATIONS AND WARRANTIES BY THE TRUST.
The Trust represents and warrants to Federal Fund that:
(a) The Trust is a business trust created under the laws of the State
of Delaware on June 15, 1992, and is validly existing and in good standing
under the laws of that state. 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 of Municipal Fund's shares sold were
sold pursuant to an effective registration statement filed under the
Securities Act of 1933, as amended (the "1933 Act"), except for those shares
sold pursuant to the private offering exemption for the purpose of raising
the required initial capital.
(b) The Trust is authorized to issue an unlimited number of shares of
beneficial interest, $0.01 par value per share, each outstanding share of
which is fully paid, non-assessable, fully transferable and has full voting
rights and currently issues shares of five (5) series including Municipal
Fund. The Trust is authorized to issue an unlimited number of shares of
beneficial interest of each series.
(c) The financial statements appearing in the Trust's Annual Report
to Shareholders for the fiscal year ended May 31, 1998, audited by Coopers &
Lybrand, L.L.P., copies of which have been delivered to Federal Fund, fairly
present the financial position of Municipal Fund as of such date and the
results of its operations for the periods indicated in conformity with
generally accepted accounting principles applied on a consistent basis.
(d) The books and records of Municipal Fund made available to Federal
Fund and/or its counsel accurately summarize the accounting data represented
and contain no material omissions with respect to the business and operations
of Municipal Fund.
(e) The Trust has the necessary power and authority to conduct
Municipal Fund's business as such business is now being conducted.
(f) The Trust is not a party to or obligated under any provision of
the Trust's Agreement and Declaration of Trust or By-laws, or any contract or
any other commitment or obligation, and is not subject to any order or decree
that would be violated by the Trust's execution or performance under this
Agreement and Plan.
(g) The Trust has elected to treat the Municipal 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 Municipal Fund has qualified as a RIC for each taxable year since its
inception and will qualify as a RIC as of the Closing Date.
5. REPRESENTATIONS AND WARRANTIES BY FEDERAL FUND.
Federal Fund represents and warrants to the Trust, on behalf of
Municipal Fund, that:
(a) Federal Fund is a corporation incorporated under the laws of the
State of California on January 7, 1982, and is validly existing and in good
standing under the laws of that state. Federal Fund is duly registered under
the 1940 Act as a diversified, open-end, management investment company and
all its shares sold have been sold pursuant to an effective registration
statement filed under the 1933 Act, except for those shares sold pursuant to
the private offering exemption for the purpose of raising the required
initial capital.
(b) Federal Fund is authorized to issue ten billion (10,000,000,000)
shares of common stock, no par value, all of which is allocated to the
Franklin Federal Tax-Free Income Fund Series of which three billion
(3,000,000,000) shares are further allocated to Class A of that series, and
each outstanding share of which is fully paid, non-assessable, fully
transferable, and has full voting rights. Federal Fund Shares to be issued
pursuant to this Agreement and Plan will be fully paid, non-assessable,
freely transferable and have full voting rights.
(c) At the Closing, Federal Fund Shares will be eligible for offering
to the public in those states of the United States and jurisdictions in which
the shares of Municipal Fund are presently eligible for offering to the
public, and there are a sufficient number of Federal Fund Shares registered
under the 1933 Act to permit the transfers contemplated by this Agreement and
Plan to be consummated.
(d) The financial statements appearing in Federal Fund's Annual
Report to Shareholders for the fiscal year ended April 30, 1998, audited by
Coopers & Lybrand L.L.P., copies of which have been delivered to Municipal
Fund, fairly present the financial position of Federal Fund as of such date
and the results of its operations for the periods indicated in conformity
with generally accepted accounting principles applied on a consistent basis.
(e) Federal Fund has the necessary power and authority to conduct its
business as such business is now being conducted.
(f) Federal Fund is not a party to or obligated under any provision
of its Articles of Incorporation or By-laws, or any contract or any other
commitment or obligation, and is not subject to any order or decree, that
would be violated by its execution of or performance under this Agreement and
Plan.
(g) Federal Fund has elected to be treated as a RIC for federal
income tax purposes under Part I of Subchapter M of the Code, has qualified
as a RIC for each taxable year since its inception, and will qualify as a RIC
as of the Closing Date.
6. REPRESENTATIONS AND WARRANTIES BY THE TRUST AND FEDERAL FUND.
The Trust and Federal Fund each represents and warrants to the other
that:
(a) The statement of assets and liabilities to be furnished by it as
of 1:00 p.m. Pacific time on the Closing Date for the purpose of determining
the number of Federal Fund Shares to be issued pursuant to Section 1 of this
Agreement and Plan will accurately reflect its Net Assets in the case of
Municipal Fund and its net assets in the case of Federal Fund, and
outstanding shares of common stock, as of such date, in conformity with
generally accepted accounting principles applied on a consistent basis.
(b) At the Closing, it will have good and marketable title to all of
the securities and other assets shown on the statement of assets and
liabilities referred to in "(a)" above, free and clear of all liens or
encumbrances of any nature whatsoever, except such imperfections of title or
encumbrances as do not materially detract from the value or use of the assets
subject thereto, or materially affect title thereto.
(c) Except as disclosed in its currently effective prospectus, there
is no material suit, judicial action, or legal or administrative proceeding
pending or threatened against it.
(d) There are no known actual or proposed deficiency assessments with
respect to any taxes payable by it.
(e) The execution, delivery, and performance of this Agreement and
Plan have been duly authorized by all necessary action of its Board of
Trustees or Board of Directors, as applicable, and this Agreement and Plan
constitutes a valid and binding obligation enforceable in accordance with its
terms.
(f) It anticipates that consummation of this Agreement and Plan will
not cause it, in the case of Federal Fund, and Municipal Fund, in the case of
the Trust, to fail to conform to the requirements of Subchapter M of the Code
for federal income taxation as a RIC at the end of its fiscal year.
(g) It has the necessary power and authority to conduct its business,
in the case of Federal Fund, and Municipal Fund's business, in the case of
Municipal Fund, as such business is now being conducted.
7. COVENANTS OF THE TRUST AND FEDERAL FUND.
(a) The Trust, on behalf of Municipal Fund, and Federal Fund each
covenant to operate their respective businesses as presently conducted
between the date hereof and the Closing.
(b) The Trust undertakes that it will not acquire the Federal Fund
Shares for the purpose of making distributions thereof to anyone other than
Municipal Fund's shareholders.
(c) The Trust undertakes that, if this Agreement and Plan is
consummated, it will dissolve Municipal Fund and rescind the establishment of
Municipal Fund as a series of the Trust.
(d) The Trust and Federal Fund each agree that, by the Closing, all
of their federal and other tax returns and reports required by law to be
filed by the Trust, on behalf of Municipal Fund, or by Federal Fund on or
before such date shall have been filed, and all federal and other taxes shown
as due on said returns shall have either been paid or adequate liability
reserves shall have been provided for the payment of such taxes.
(e) At the Closing, the Trust will provide Federal Fund with a copy
of the shareholder ledger accounts of Municipal Fund, certified by its
transfer agent or its President to the best of its or his knowledge and
belief, for all the shareholders of record of Municipal Fund's shares as of
1:00 p.m. Pacific time on the Closing Date who are to become shareholders of
Federal Fund as a result of the transfer of assets that is the subject of
this Agreement and Plan.
(f) The Trust agrees to mail to each shareholder of record entitled
to vote at the meeting of Municipal Fund's shareholders at which action on
this Agreement and Plan is to be considered, in sufficient time to comply
with requirements as to notice thereof, a Joint Prospectus and Proxy
Statement that complies in all material respects with the applicable
provisions of Section 14(a) of the Securities Exchange Act of 1934, as
amended, and Section 20(a) of the 1940 Act, and the rules and regulations,
respectively, thereunder.
(g) Federal Fund will file with the U.S. Securities and Exchange
Commission a registration statement on Form N-14 under the 1933 Act relating
to the Federal Fund Shares issuable hereunder ("Registration Statement"), and
will use its best efforts to provide that the Registration Statement becomes
effective as promptly as practicable. At the time it becomes effective, the
Registration Statement will (i) comply in all material respects with the
applicable provisions of the 1933 Act, and the rules and regulations
promulgated thereunder; and (ii) not contain any untrue statement of material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading. At the time the
Registration Statement becomes effective, at the time of Municipal Fund's
shareholders' meeting, and at the Closing Date, the prospectus and statement
of additional information included in the Registration Statement will not
contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
8. CONDITIONS PRECEDENT TO BE FULFILLED BY THE TRUST AND FEDERAL FUND.
The obligations of the Trust and Federal Fund to effectuate this
Agreement and Plan shall be subject to the following respective conditions:
(a) That: (i) all the representations and warranties of the other
party contained herein shall be true and correct as of the Closing with the
same effect as though made as of and at such date; (ii) the other party shall
have performed all obligations required by this Agreement and Plan to be
performed by it prior to the Closing; and (iii) the other party shall have
delivered to such party a certificate signed by the President and by the
Secretary or equivalent officer to the foregoing effect.
(b) That each party shall have delivered to the other party a copy of
the resolutions approving this Agreement and Plan adopted by its Board of
Trustees or Board of Directors, as applicable, certified by its Secretary or
equivalent officer.
(c) That the U.S. Securities and Exchange Commission shall not have
issued an unfavorable management report under Section 25(b) of the 1940 Act
or instituted or threatened to institute any proceeding seeking to enjoin
consummation of the Plan of Reorganization under Section 25(c) of the 1940
Act. And, further, no other legal, administrative or other proceeding shall
have been instituted or threatened that would materially affect the financial
condition of either party or would prohibit the transactions contemplated
hereby.
(d) That this Agreement and Plan and the Plan of Reorganization
contemplated hereby shall have been adopted and approved by the appropriate
action of the shareholders of Municipal Fund at an annual or special meeting
or any adjournment thereof.
(e) That each party shall have declared a distribution or
distributions prior to the Closing Date that, together with all previous
distributions, shall have the effect of distributing to its shareholders (i)
all of its net investment income and all of its net realized capital gains,
if any, for the period from the close of its last fiscal year to 1:00 p.m.
Pacific time on the Closing Date; and (ii) any undistributed net investment
income and net realized capital gains from any period to the extent not
otherwise declared for distribution.
(f) That there shall be delivered to the Trust and Federal Fund an
opinion from Messrs. Stradley, Ronon, Stevens & Young, LLP, counsel to the
Trust and Federal Fund, to the effect that, provided the acquisition
contemplated hereby is carried out in accordance with this Agreement and Plan
and based upon certificates of the officers of the Trust and Federal Fund
with regard to matters of fact:
(1) The acquisition by Federal Fund of substantially all the
assets of Municipal Fund as provided for herein in exchange for Federal Fund
Shares will qualify as a reorganization within the meaning of Section
368(a)(1)(C) of the Code, and Municipal Fund and Federal Fund will each be a
party to the respective reorganization within the meaning of Section 368(b)
of the Code;
(2) No gain or loss will be recognized by Municipal Fund upon
the transfer of substantially all of its assets to Federal Fund in exchange
solely for voting shares of Federal Fund (Sections 361(a) and 357(a)). No
opinion, however, will be expressed as to whether any accrued market discount
will be required to be recognized as ordinary income pursuant to Section 1276
of the Code;
(3) No gain or loss will be recognized by Federal Fund upon the
receipt of substantially all of the assets of Municipal Fund in exchange
solely for voting shares of Federal Fund (Section 1032(a));
(4) The basis of the assets of Municipal Fund received by
Federal Fund will be the same as the basis of such assets to Municipal Fund
immediately prior to the exchange (Section 362(b));
(5) The holding period of the assets of Municipal Fund received
by Federal Fund will include the period during which such assets were held by
Municipal Fund (Section 1223(2));
(6) No gain or loss will be recognized to the shareholders of
Municipal Fund upon the exchange of their shares in Municipal Fund for voting
shares of Federal Fund (Section 354(a));
(7) The basis of the Federal Fund Shares received by Municipal
Fund's shareholders shall be the same as the basis of the shares of Municipal
Fund exchanged therefor (Section 358(a)(1));
(8) The holding period of Federal Fund Shares received by
Municipal Fund's shareholders (including fractional shares to which they may
be entitled) will include the holding period of Municipal Fund's shares
surrendered in exchange therefor, provided that Municipal Fund's shares were
held as a capital asset on the date of the exchange (Section 1223(1)); and
(9) Federal Fund will succeed to and take into account as of
the date of the proposed transfer (as defined in Section 1.381(b)-1(b) of the
Income Tax Regulations) the items of Municipal Fund described in Section
381(c) of the Code (as defined in Section 1.381(b)-1(b) of the Income Tax
Regulations), subject to the conditions and limitations specified in Sections
381(b) and (c), 382, 383 and 384 of the Code and the Income Tax Regulations
thereunder.
(g) That Federal Fund shall have received an opinion in form and
substance satisfactory to it from Messrs. Stradley Ronon Stevens & Young,
LLP, counsel to the Trust, to the effect that, subject in all respects to the
effects of bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance, and other laws now or hereafter affecting generally the
enforcement of creditors' rights:
(1) The Trust was created as a business trust under the laws of
the State of Delaware on June 15, 1992, and is validly existing and in good
standing under the laws of that state;
(2) The Trust is authorized to issue an unlimited number of
shares of beneficial interest of Municipal Fund, $0.01 par value per share.
Assuming that the initial shares of beneficial interest were issued in
accordance with the 1940 Act and the Agreement and Declaration and By-laws of
the Trust, and that all other outstanding shares of Municipal Fund were sold,
issued and paid for in accordance with the terms of Municipal 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 Municipal Fund's currently effective
prospectus, such counsel does not know of any material suit, action, or legal
or administrative proceeding pending or threatened against the Trust, the
unfavorable outcome of which would materially and adversely affect the Trust
or Municipal Fund;
(5) All actions required to be taken by the Trust to authorize
this Agreement and Plan and to effect the Plan of Reorganization contemplated
hereby have been duly authorized by all necessary action on the part of the
Trust; and
(6) Neither the execution, delivery, nor performance of this
Agreement and Plan by the Trust violates any provision of its 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
Municipal Fund is otherwise bound; this Agreement and Plan is the legal,
valid and binding obligation of the Trust and Municipal Fund and is
enforceable against the Trust and/or Municipal Fund in accordance with its
terms.
In giving the opinions set forth above, this counsel may state that it
is relying on certificates of the officers of the Trust with regard to
matters of fact, and certain certifications and written statements of
governmental officials with respect to the good standing of the Trust and
Municipal Fund.
(h) That the Trust shall have received an opinion in form and
substance satisfactory to it from Messrs. Stradley, Ronon, Stevens & Young,
LLP, counsel to Federal Fund, to the effect that, subject in all respects to
the effects of bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance and other laws now or hereafter affecting generally the
enforcement of creditors' rights:
(1) Federal Fund was incorporated under the laws of the State
of California on January 7, 1982, and is validly existing and in good
standing under the laws of that state;
(2) Federal Fund is authorized to issue ten billion
(10,000,000,000) shares of common stock, no par value, all of which is
allocated to the Franklin Federal Tax-Free Income Fund Series of which three
billion (3,000,000,000) shares are further allocated to Class A of that
series, and each outstanding share of which is fully paid, non-assessable,
fully transferable, and has full voting rights. Assuming that the initial
capital shares of Federal Fund were issued in accordance with the 1940 Act,
and the Articles of Incorporation and By-laws of Federal Fund, and that all
other outstanding shares of Federal Fund were sold, issued and paid for in
accordance with the terms of Federal Fund's prospectus in effect at the time
of such sales, each such outstanding share of Federal Fund is fully paid,
non-assessable, freely transferable and has full voting rights;
(3) Federal Fund is an open-end, diversified investment company
of the management type registered as such under the 1940 Act;
(4) Except as disclosed in Federal Fund's currently effective
prospectus, such counsel does not know of any material suit, action, or legal
or administrative proceeding pending or threatened against Federal Fund, the
unfavorable outcome of which would materially and adversely affect Federal
Fund;
(5) Federal Fund Shares to be issued pursuant to the terms of
this Agreement and Plan have been duly authorized and, when issued and
delivered as provided in this Agreement and Plan, will have been validly
issued and fully paid and will be non-assessable by Federal Fund;
(6) All corporate actions required to be taken by Federal Fund
to authorize this Agreement and Plan and to effect the Plan of Reorganization
contemplated hereby have been duly authorized by all necessary corporate
action on the part of Federal Fund;
(7) Neither the execution, delivery, nor performance of this
Agreement and Plan by Federal Fund violates any provision of its Articles of
Incorporation, its By-laws, or the provisions of any agreement or other
instrument known to such counsel to which Federal Fund is a party or by which
Federal Fund is otherwise bound; this Agreement and Plan is the legal, valid
and binding obligation of Federal Fund and is enforceable against Federal
Fund in accordance with its terms; and
(8) The registration statement of which the prospectus, dated
September 1, 1998, as amended January 1, 1999, of Federal Fund is a part (the
"Prospectus") is, at the time of the signing of this Agreement and Plan,
effective under the 1933 Act, and, to the best knowledge of such counsel, no
stop order suspending the effectiveness of such registration statement has
been issued, and no proceedings for such purpose have been instituted or are
pending before or threatened by the U.S. Securities and Exchange Commission
under the 1933 Act, and nothing has come to such counsel's attention that
causes it to believe that, at the time the Prospectus became effective, or at
the time of the signing of this Agreement and Plan, or at the Closing, such
Prospectus (except for the financial statements and other financial and
statistical data included therein, as to which counsel need not express an
opinion), contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading; and such counsel knows of no legal or
government proceedings required to be described in the Prospectus, or of any
contract or document of a character required to be described in the
Prospectus that is not described as required.
In giving the opinions set forth above, this counsel may state that it
is relying on certificates of the officers of Federal Fund with regard to
matters of fact, and certain certifications and written statements of
governmental officials with respect to the good standing of Federal Fund.
(i) That the Trust shall have received a certificate from the
President and Secretary of Federal Fund to the effect that the statements
contained in Federal Fund's Prospectus, at the time the Prospectus became
effective, at the date of the signing of this Agreement and Plan, and at the
Closing, did not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading.
(j) That Federal Fund's Registration Statement with respect to the
Federal Fund Shares to be delivered to the Municipal Fund's shareholders in
accordance with this Agreement and Plan shall have become effective, and no
stop order suspending the effectiveness of the Registration Statement or any
amendment or supplement thereto, shall have been issued prior to the Closing
Date or shall be in effect at Closing, and no proceedings for the issuance of
such an order shall be pending or threatened on that date.
(k) That the Federal Fund Shares to be delivered hereunder shall be
eligible for sale by Federal Fund with each state commission or agency with
which such eligibility is required in order to permit the Federal Fund Shares
lawfully to be delivered to each Municipal Fund shareholder.
(l) That, at the Closing, the Trust, on behalf of Municipal Fund,
transfers to Federal Fund aggregate Net Assets of Municipal 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 Municipal
Fund on the Closing Date.
9. BROKERAGE FEES AND EXPENSES.
(a) The Trust and Federal Fund each represents and warrants to the
other that there are no broker or finders' fees payable by it in connection
with the transactions provided for herein.
(b) The expenses of entering into and carrying out the provisions of
this Agreement and Plan shall be borne one-quarter by Municipal Fund,
one-quarter by Federal Fund, and one-half by Franklin Advisers, Inc.
10. TERMINATION; POSTPONEMENT; WAIVER; ORDER.
(a) Anything contained in this Agreement and Plan to the contrary
notwithstanding, this Agreement and Plan may be terminated and the Plan of
Reorganization abandoned at any time (whether before or after approval
thereof by the shareholders of Municipal Fund) prior to the Closing or the
Closing may be postponed as follows:
(1) by mutual consent of the Trust and Federal Fund;
(2) by Federal Fund if any condition of its obligations set
forth in Section 8 has not been fulfilled or waived; or
(3) by the Trust, if any condition of its obligations set forth
in Section 8 has not been fulfilled or waived.
An election by the Trust, on behalf of Municipal Fund, or Federal Fund
to terminate this Agreement and Plan and to abandon the Plan of
Reorganization shall be exercised, respectively, by the Board of Trustees of
the Trust or Board of Directors of Federal Fund.
(b) If the transactions contemplated by this Agreement and Plan have
not been consummated by December 31, 1999, the Agreement and Plan shall
automatically terminate on that date, unless a later date is agreed to by
both Federal Fund and the Trust.
(c) In the event of termination of this Agreement and Plan pursuant
to the provisions hereof, the same shall become void and have no further
effect, and neither the Trust nor Federal Fund, nor their directors or
trustees, officers, agents or shareholders shall have any liability in
respect of this Agreement and Plan.
(d) At any time prior to the Closing, any of the terms or conditions
of this Agreement and Plan may be waived by the party who is entitled to the
benefit thereof by action taken by that party's Board of Trustees or Board of
Directors, as applicable, if, in the judgment of such Board, such action or
waiver will not have a material adverse effect on the benefits intended under
this Agreement and Plan to its shareholders, on behalf of whom such action is
taken.
(e) The respective representations and warranties contained in
Sections 4 to 6 hereof shall expire with and be terminated by the Plan of
Reorganization, and neither the Trust nor Federal Fund, nor any of their
officers, trustees or directors, agents or shareholders shall have any
liability with respect to such representations or warranties after the
Closing. This provision shall not protect any officer, trustee or director,
agent or shareholder of the Trust or Federal Fund against any liability to
the entity for which that officer, trustee or director, agent or shareholder
so acts or to its shareholders to which that officer, trustee or director,
agent or shareholder would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
in the conduct of such office.
(f) If any order or orders of the U.S. Securities and Exchange
Commission with respect to this Agreement and Plan shall be issued prior to
the Closing and shall impose any terms or conditions that are determined by
action of the Board of Trustees of the Trust or of the Board of Directors of
the Federal Fund to be acceptable, such terms and conditions shall be binding
as if a part of this Agreement and Plan without further vote or approval of
the shareholders of Municipal Fund, unless such terms and conditions shall
result in a change in the method of computing the number of Federal Fund
Shares to be issued to Municipal Fund in which event, unless such terms and
conditions shall have been included in the proxy solicitation material
furnished to the shareholders of Municipal Fund prior to the meeting at which
the transactions contemplated by this Agreement and Plan shall have been
approved, this Agreement and Plan shall not be consummated and shall
terminate unless Municipal Fund shall promptly call a special meeting of
shareholders at which such conditions so imposed shall be submitted for
approval.
11. ENTIRE AGREEMENT AND AMENDMENTS.
This Agreement and Plan embodies the entire agreement between the
parties and there are no agreements, understandings, restrictions, or
warranties between the parties other than those set forth herein or herein
provided for. This Agreement and Plan may be amended only by mutual consent
of the parties in writing. Neither this Agreement and Plan nor any interest
herein may be assigned without the prior written consent of the other party.
12. COUNTERPARTS.
This Agreement and Plan may be executed in any number of counterparts,
each of which shall be deemed to be an original, but all such counterparts
together shall constitute but one instrument.
13. NOTICES.
Any notice, report, or demand required or permitted by any provision of
this Agreement and Plan shall be in writing and shall be deemed to have been
given if delivered or mailed, first class postage prepaid, addressed to
Franklin Federal Tax-Free Income Fund at 777 Mariners Island Boulevard, P. O.
Box 7777, San Mateo, CA 94403-7777, Attention: Secretary, or Franklin
Municipal Securities Trust, at 777 Mariners Island Boulevard, P.O. Box 7777,
San Mateo CA 94403-7777, Attention: Secretary, as the case may be.
14. GOVERNING LAW.
This Agreement shall be governed by and carried out in accordance with
the laws of the State of Delaware.
IN WITNESS WHEREOF, Franklin Federal Tax-Free Income Fund and Franklin
Municipal Securities Trust, on behalf of Franklin Washington Municipal Bond
Fund, have each caused this Agreement and Plan to be executed on its behalf
by its duly authorized officers, all as of the date and year first-above
written.
FRANKLIN FEDERAL TAX-FREE
INCOME FUND
Attest:
/s/Leiann Nuzum By:/s/Deborah R. Gatzek
Assistant Secretary Deborah R. Gatzek
Vice President and Secretary
FRANKLIN MUNICIPAL SECURITIES TRUST, ON
BEHALF OF FRANKLIN WASHINGTON MUNICIPAL
BOND FUND
Attest:
/s/Leiann Nuzum By:/s/Deborah R. Gatzek
Assistant Secretary Deborah R. Gatzek
Vice President and Secretary
June 24, 1999
Board of Trustees
Franklin Tax-Free Trust
777 Mariners Island Blvd.
San Mateo, CA 94404
Board of Directors
Franklin Federal Tax-Free Income Fund
777 Mariners Island Blvd.
San Mateo, CA 94404
Re: AGREEMENT AND PLAN OF REORGANIZATION, DATED AS OF THE 28TH
DAY OF APRIL, 1999 (THE "AGREEMENT"), BY AND BETWEEN FRANKLIN
TAX-FREE TRUST, A MASSACHUSETTS BUSINESS TRUST, ON BEHALF OF IT
SERIES FRANKLIN INDIANA TAX-FREE INCOME FUND ("ACQUIRED FUND")
AND FRANKLIN FEDERAL TAX-FREE INCOME FUND, A CALIFORNIA
CORPORATION ("ACQUIRING FUND")
Ladies and Gentlemen:
You have requested our opinion as to certain federal income tax
consequences of the reorganization of Acquired Fund which will consist of (i)
the acquisition by the Acquiring Fund of substantially all of the property,
assets and goodwill of the Acquired Fund in exchange solely for shares of
common stock, no par value, of the Acquiring Fund - Class A ("Acquiring Fund
Class A Shares"), (ii) the distribution of Acquiring Fund Class A Shares to
the shareholders of the Acquired Fund according to their respective
interests, and (iii) the subsequent dissolution of the Acquired Fund as soon
as practicable after the closing (the "Reorganization"), all upon and subject
to the terms and conditions of the Agreement.
In rendering our opinion, we have reviewed and relied upon (a)
the Agreement and Plan of Reorganization, dated as of the 28th day of April,
1999, by and between the Acquiring Fund and Franklin Tax-Free Trust, on
behalf of the Acquired Fund ("Agreement"), (b) the proxy materials provided
to stockholders of the Acquired Fund in connection with the Special Meeting
of Stockholders of the Acquired Fund held on the 23rd day of June, 1999, (c)
certain representations concerning the Reorganization made to us by the
Acquiring Fund and Franklin Tax-Free Trust, on behalf of the Acquired Fund in
a letter dated June 24, 1999 (the "Representation Letter"), (d) all other
documents, financial and other reports and corporate minutes which we deemed
relevant or appropriate, and (e) such statutes, regulations, rulings and
decisions as we deemed material to the rendition of this opinion. All terms
used herein, unless otherwise defined, are used as defined in the Agreement.
For purposes of this opinion, we have assumed that the Acquired
Fund on the effective date of the Reorganization satisfies, and following the
Reorganization, the Acquiring Fund will continue to satisfy, the requirements
of subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"), for qualification as a regulated investment company.
Under regulations to be prescribed by the Secretary of Treasury
under Section 1276(d) of the Code, certain transfers of market discount bonds
will be excepted from the requirement that accrued market discount be
recognized on disposition of a market discount bond under Section 1276(a) of
the Code. Such regulations are to provide, in part, that accrued market
discount will not be included in income if no gain is recognized under
Section 361(a) of the Code where a bond is transferred in an exchange
qualifying as a tax-free reorganization. As of the date hereof, the
Secretary has not issued any regulations under Section 1276 of the Code.
Based on the foregoing and provided the Reorganization is carried
out in accordance with the applicable laws of the State of California and the
Commonwealth of Massachusetts, the Agreement and the Representation Letter,
it is our opinion that:
1. The Reorganization will constitute a tax-free
reorganization within the meaning of Section 368(a)(1)(C) of the Code, and
Acquired Fund and Acquiring Fund will each be a party to the reorganization
within the meaning of Section 368(b) of the Code.
2. No gain or loss will be recognized by Acquired Fund upon
the transfer of all of its assets to Acquiring Fund in exchange solely for
Acquiring Fund Class A Shares pursuant to Section 361(a) and Section 357(a)
of the Code. We express no opinion 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 Acquiring Fund upon
the receipt by it of all of the assets of Acquired Fund in exchange solely
for Acquiring Fund Class A Shares pursuant to Section 1032(a) of the Code.
4. The basis of the assets of Acquired Fund received by
Acquiring Fund will be the same as the basis of such assets to Acquired Fund
immediately prior to the exchange pursuant to Section 362(b) of the Code.
5. The holding period of the assets of Acquired Fund received
by Acquiring Fund will include the period during which such assets were held
by Acquired Fund pursuant to Section 1223(2) of the Code.
6. No gain or loss will be recognized by the stockholders of
Acquired Fund upon the exchange of their Acquired Fund Shares for Acquiring
Fund Class A Shares (including fractional shares to which they may be
entitled), pursuant to Section 354(a) of the Code.
7. The basis of the Acquiring Fund Class A Shares received by
the stockholders of Acquired Fund (including fractional shares to which they
may be entitled) will be the same as the basis of the Acquired Fund Shares
exchanged therefor pursuant to Section 358(a)(1) of the Code.
8. The holding period of the Acquiring Fund Class A Shares
received by the stockholders of Acquired Fund (including fractional shares to
which they may be entitled) will include the holding period of the Acquired
Fund Shares surrendered in exchange therefor, provided that the Acquired Fund
Shares were held as a capital asset on the effective date of the
Reorganization, pursuant to Section 1223(1) of the Code.
9. Acquiring 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 Acquired Fund described in Section
381(c) of the Code, subject to the conditions and limitations specified in
Sections 381(b) and (c), 382, 383 and 384 of the Code.
Our opinion is based upon the Code, the applicable Treasury
Regulations promulgated thereunder, the present position of the Internal
Revenue Service as set forth in published revenue rulings and revenue
procedures, present administrative positions of the Internal Revenue Service,
and existing judicial decisions, all of which are subject to change either
prospectively or retroactively. We do not undertake to make any continuing
analysis of the facts or relevant law following the date of this letter.
Our opinion is conditioned upon the performance by Acquiring Fund
and Acquired Fund of their undertakings in the Agreement and the
Representation Letter.
This opinion is being rendered to Acquiring Fund and Franklin
Tax-Free Trust, on behalf of Acquired Fund, and may be relied upon only by
such funds and the stockholders of each.
Very truly yours,
STRADLEY, RONON, STEVENS & YOUNG, LLP
By: /s/William P. Zimmerman
William P. Zimmerman, a Partner
June 24, 1999
Board of Trustees
Franklin Municipal Securities Trust
777 Mariners Island Blvd.
San Mateo, CA 94404
Board of Directors
Franklin Federal Tax-Free Income Fund
777 Mariners Island Blvd.
San Mateo, CA 94404
Re: AGREEMENT AND PLAN OF REORGANIZATION, DATED AS OF THE 28TH
DAY OF APRIL, 1999 (THE "AGREEMENT"), BY AND BETWEEN FRANKLIN
MUNICIPAL SECURITIES TRUST, A DELAWARE BUSINESS TRUST, ON BEHALF
OF ITS SERIES, FRANKLIN HAWAII MUNICIPAL BOND FUND ("ACQUIRED
FUND") AND FRANKLIN FEDERAL TAX-FREE INCOME FUND, A CALIFORNIA
CORPORATION ("ACQUIRING FUND")
Ladies and Gentlemen:
You have requested our opinion as to certain federal income tax
consequences of the reorganization of Acquired Fund which will consist of (i)
the acquisition by the Acquiring Fund of substantially all of the property,
assets and goodwill of the Acquired Fund in exchange solely for shares of
common stock, no par value, of the Acquiring Fund - Class A ("Acquiring Fund
Class A Shares"), (ii) the distribution of Acquiring Fund Class A Shares to
the shareholders of the Acquired Fund according to their respective
interests, and (iii) the subsequent dissolution of the Acquired Fund as soon
as practicable after the closing (the "Reorganization"), all upon and subject
to the terms and conditions of the Agreement.
In rendering our opinion, we have reviewed and relied upon (a)
the Agreement and Plan of Reorganization, dated as of the 28th day of April,
1999, by and between the Acquiring Fund and Franklin Municipal Securities
Trust on behalf of the Acquired Fund ("Agreement"), (b) the proxy materials
provided to stockholders of the Acquired Fund in connection with the Special
Meeting of Stockholders of the Acquired Fund held on the 23rd day of June,
1999, (c) certain representations concerning the Reorganization made to us by
the Acquiring Fund and Franklin Municipal Securities Trust on behalf of the
Acquired Fund in a letter dated June 24, 1999 (the "Representation Letter"),
(d) all other documents, financial and other reports and corporate minutes
which we deemed relevant or appropriate, and (e) such statutes, regulations,
rulings and decisions as we deemed material to the rendition of this
opinion. All terms used herein, unless otherwise defined, are used as
defined in the Agreement.
For purposes of this opinion, we have assumed that the Acquired
Fund on the effective date of the Reorganization satisfies, and following the
Reorganization, the Acquiring Fund will continue to satisfy, the requirements
of subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"), for qualification as a regulated investment company.
Under regulations to be prescribed by the Secretary of Treasury
under Section 1276(d) of the Code, certain transfers of market discount bonds
will be excepted from the requirement that accrued market discount be
recognized on disposition of a market discount bond under Section 1276(a) of
the Code. Such regulations are to provide, in part, that accrued market
discount will not be included in income if no gain is recognized under
Section 361(a) of the Code where a bond is transferred in an exchange
qualifying as a tax-free reorganization. As of the date hereof, the
Secretary has not issued any regulations under Section 1276 of the Code.
Based on the foregoing and provided the Reorganization is carried
out in accordance with the applicable laws of the States of Delaware and
California, the Agreement and the Representation Letter, it is our opinion
that:
1. The Reorganization will constitute a tax-free
reorganization within the meaning of Section 368(a)(1)(C) of the Code, and
Acquired Fund and Acquiring Fund will each be a party to the reorganization
within the meaning of Section 368(b) of the Code.
2. No gain or loss will be recognized by Acquired Fund upon
the transfer of all of its assets to Acquiring Fund in exchange solely for
Acquiring Fund Class A Shares pursuant to Section 361(a) and Section 357(a)
of the Code. We express no opinion 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 Acquiring Fund upon
the receipt by it of all of the assets of Acquired Fund in exchange solely
for Acquiring Fund Class A Shares pursuant to Section 1032(a) of the Code.
4. The basis of the assets of Acquired Fund received by
Acquiring Fund will be the same as the basis of such assets to Acquired Fund
immediately prior to the exchange pursuant to Section 362(b) of the Code.
5. The holding period of the assets of Acquired Fund received
by Acquiring Fund will include the period during which such assets were held
by Acquired Fund pursuant to Section 1223(2) of the Code.
6. No gain or loss will be recognized by the stockholders of
Acquired Fund upon the exchange of their Acquired Fund Shares for Acquiring
Fund Class A Shares (including fractional shares to which they may be
entitled), pursuant to Section 354(a) of the Code.
7. The basis of the Acquiring Fund Class A Shares received by
the stockholders of Acquired Fund (including fractional shares to which they
may be entitled) will be the same as the basis of the Acquired Fund Shares
exchanged therefor pursuant to Section 358(a)(1) of the Code.
8. The holding period of the Acquiring Fund Class A Shares
received by the stockholders of Acquired Fund (including fractional shares to
which they may be entitled) will include the holding period of the Acquired
Fund Shares surrendered in exchange therefor, provided that the Acquired Fund
Shares were held as a capital asset on the effective date of the
Reorganization, pursuant to Section 1223(1) of the Code.
9. Acquiring 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 Acquired Fund described in Section
381(c) of the Code, subject to the conditions and limitations specified in
Sections 381(b) and (c), 382, 383 and 384 of the Code.
Our opinion is based upon the Code, the applicable Treasury
Regulations promulgated thereunder, the present position of the Internal
Revenue Service as set forth in published revenue rulings and revenue
procedures, present administrative positions of the Internal Revenue Service,
and existing judicial decisions, all of which are subject to change either
prospectively or retroactively. We do not undertake to make any continuing
analysis of the facts or relevant law following the date of this letter.
Our opinion is conditioned upon the performance by Acquiring Fund
and Acquired Fund of their undertakings in the Agreement and the
Representation Letter.
This opinion is being rendered to Acquiring Fund and Franklin
Municipal Securities Trust on behalf of Acquired Fund and may be relied upon
only by such funds and the stockholders of each.
Very truly yours,
STRADLEY, RONON, STEVENS & YOUNG, LLP
By:/s/William P. Zimmerman
William P. Zimmerman, a Partner
