FRANKLIN FEDERAL
INTERMEDIATE-TERM
TAX-FREE INCOME FUND
Franklin Tax-Free Trust
PROSPECTUS May 1, 1995
as amended December 5, 1995
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777 1-800/DIAL BEN
The Franklin Federal Intermediate-Term Tax-Free Income Fund (the "Fund"), is a
non-diversified series of the Franklin Tax-Free Trust (the "Trust"), an open-end
management investment company consisting of twenty-seven separate series. The
Fund seeks to provide investors with as high a level of income exempt from
federal income taxes, including the individual alternative minimum tax, as is
consistent with prudent investing and the preservation of shareholders' capital.
The Fund seeks to accomplish its objective by investing primarily in a portfolio
of investment grade obligations with a dollar weighted average portfolio
maturity of more than three years but not more than ten years. There can be no
assurance that the Fund's objective will be achieved.
This Prospectus is intended to set forth in a clear and concise manner
information about the Trust and the Fund that a prospective investor should know
before investing. After reading the Prospectus, it should be retained for future
reference; it contains information about the purchase and sale of shares and
other items which a prospective investor will find useful to have.
Shares of the Fund are not deposits or obligations of, or guaranteed or endorsed
by, any bank; further, such shares are not federally insured by the Federal
Deposit Insurance Corporation, the Federal Reserve Board, or any other agency.
Shares of the Fund involve investment risks, including the possible loss of
principal.
A Statement of Additional Information ("SAI") concerning the Fund, dated May 1,
1995, as may be amended from time to time, provides a further discussion of
certain areas in this Prospectus and other matters which may be of interest to
some investors. It has been filed with the Securities and Exchange Commission
("SEC") and is incorporated herein by reference. A copy is available without
charge from the Fund or from the Fund's principal underwriter,
Franklin/Templeton Distributors, Inc. ("Distributors"), at the address or
telephone number shown above.
This Prospectus is not an offering of the securities herein described in any
state in which the offering is not authorized. No sales representative, dealer,
or other person is authorized to give any information or make any
representations other than those contained in this Prospectus. Further
information may be obtained from the underwriter.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Contents Page
Expense Table.................... 2
Financial Highlights............. 4
About the Trust.................. 4
Investment Objective
and Policies of the Fund........ 5
Management of the Fund........... 9
Distributions to Shareholders.... 11
Taxation of the Fund
and Its Shareholders............ 12
How to Buy Shares of the Fund.... 14
Other Programs and Privileges
Available to Fund Shareholders.. 19
Exchange Privilege............... 20
How to Sell Shares of the Fund... 22
Telephone Transactions........... 26
Valuation of Fund Shares......... 27
How to Get Information Regarding
an Investment in the Fund....... 27
Performance...................... 28
General Information.............. 29
Account Registrations............ 30
Important Notice Regarding
Taxpayer IRS Certifications..... 31
Portfolio Operations............. 31
Expense Table
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder will bear directly or indirectly in
connection with an investment in the Fund. These figures are based on aggregate
operating expenses of the Fund, before fee waivers and expense reductions, for
the fiscal year ended February 28, 1995.
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)................................ 2.25%
Deferred Sales Charge............................................... NONE*
*Investments of $1 million or more are not subject to a front-end sales charge;
however, a contingent deferred sales charge of 1% is generally imposed on
certain redemptions within a "contingency period" of 12 months of the calendar
month of such investments. See "How to Sell Shares of the Fund - Contingent
Deferred Sales Charge."
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees..................................................... 0.63%**
12b-1 Fees.......................................................... 0.05%***
Other Expenses:
Registration and Filing Fees.............................. 0.06%
Reports to Shareholders................................... 0.03%
Other..................................................... 0.07%
------
Total Other Expenses................................................ 0.16%
Total Fund Operating Expenses....................................... 0.84%**
=========
**Represents the management fee before any fee waiver by the investment manager.
The investment manager has agreed in advance, however, to waive a portion of its
management fees and to make certain payments to reduce expenses. With this
waiver and expense reduction, management fees and total operating expenses
represented 0.35% and 0.56%, respectively, of the average net assets of the
Fund.
***Consistent with National Association of Securities Dealers, Inc.'s rules, it
is possible that the combination of front-end sales charges and Rule 12b-1 fees
could cause long-term shareholders to pay more than the economic equivalent of
the maximum front-end sales charges permitted under those same rules.
Investors should be aware that the above table is not intended to reflect in
precise detail the fees and expenses associated with an individual's own
investment in the Fund. Rather, the table has been provided only to assist
investors in gaining a more complete understanding of fees, charges and
expenses. For a more detailed discussion of these matters, investors should
refer to the appropriate sections of this Prospectus.
Example
As required by SEC regulations, the following example illustrates the expenses,
including the maximum front-end sales charge, that apply to a $1,000 investment
in the Fund over various time periods assuming (1) a 5% annual rate of return
and (2) redemption at the end of each time period.
One year Three years Five years Ten years
$31* $49 $68 $124
*Assumes that a contingent deferred sales charge will not apply.
THIS EXAMPLE IS BASED ON THE AGGREGATE ANNUAL OPERATING EXPENSES, BEFORE FEE
WAIVERS AND EXPENSE REDUCTIONS, SHOWN ABOVE AND SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES, WHICH MAY BE MORE OR LESS THAN THOSE
SHOWN. The operating expenses are borne by the Fund and only indirectly by
shareholders as a result of their investment in the Fund. (See "Management of
the Fund" for a description of the Fund's expenses.) In addition, federal
securities regulations require the example to assume an annual return of 5%, but
the Fund's actual return may be more or less than 5%.
Financial Highlights
Set forth below is a table containing the financial highlights for a share of
the Fund outstanding throughout the period September 21, 1992 (effective date of
registration) to February 28, 1993 and for the two fiscal years ended February
28, 1995. The information for the period ended February 28, 1993 and for the two
fiscal years in the period ended February 28, 1995 has been audited by Coopers &
Lybrand L.L.P., independent auditors, whose audit report appears in the Trust's
Annual Report to Shareholders dated February 28, 1995. See the discussion
"Reports to Shareholders" under "General Information."
<TABLE>
<CAPTION>
Per Share Operating Performance Ratios/Supplemental Data
- ----------------------------------------------------------------- ----------------------------------------------------------
Ratio of Net
Net Asset Net Realized Distributions Net Asset Net Assets Ratio of Investment
Year Values at Net & Unrealized Total From From Net Values at End Expenses Income Portfolio
Ended Beginning Investment Gain (Loss) Investment Investment Total at End Total of Year to Average to Average Turnover
Feb.28 of Year Income on Securities Operations Income Distributions of Year Return+ (in 000's) Net Assets++ Net Assets Rate
- ------------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1993* $10.00 $.14 $.499 $.639$ (.099) $(.099) $10.54 14.77%** $ 9,192 - 5.49% 22.54%
1994 10.54 .52 .289 .809 (.549) (.549) 10.80 7.82 67,603 .30% 4.93 28.76
1995 10.80 .54 (.331) .209 (.529) (.529) 10.48 (.20) 73,977 .565 .25 38.46
*For the period September 21, 1992 (effective date of registration) to February
28, 1993.
**Annualized.
+Total return measures the change in value of an investment over the periods
indicated. It is not annualized. It does not include the maximum front-end sales
charge, and assumes reinvestment of dividends and capital gains, if any, at net
asset value.
++During the periods indicated, the investment manager agreed in advance to
waive its management fees and to assume responsibility for making payments to
offset certain operating expenses otherwise payable by the Fund. Had such action
not been taken, the ratio of operating expenses to average net assets for the
periods ended February 28, 1993, 1994 and 1995 would have been: 1.60%, .89% and
.84%.
</TABLE>
About the Trust
The Trust is an open-end management investment company, or mutual fund,
organized as a Massachusetts business trust in September 1984 and registered
with the SEC under the Investment Company Act of 1940 (the "1940 Act"). The
Trust currently consists of twenty-seven series, each of which issues a separate
series of the Trust's shares and maintains a totally separate investment
portfolio. This Prospectus relates only to the Franklin Federal
Intermediate-Term Tax-Free Income Fund.
The Board of Trustees of the Trust may determine, at a future date, to offer
shares of the Fund in one or more "classes" to permit the Fund to take advantage
of alternative methods of selling Fund shares. "Classes" of shares represent
proportionate interests in the same portfolio of investment securities but with
different rights, privileges and attributes, as determined by the trustees.
Certain funds in the Franklin Templeton Funds, as that term is defined under
"How to Buy Shares of the Fund," currently offer their shares in two classes,
designated "Class I" and "Class II." Because the Fund's sales charge structure
and plan of distribution are similar to those of Class I shares, shares of the
Fund may be considered Class I shares for redemption, exchange and other
purposes.
Shares of the Fund may be purchased (minimum investment of $100 initially and
$25 thereafter) at the current public offering price, which is equal to the
Fund's net asset value (see "Valuation of Fund Shares") plus a sales charge not
exceeding 2.25% of the offering price. See "How to Buy Shares of the Fund."
Investment Objective
and Policies of the Fund
The Fund seeks to provide investors with as high a level of income exempt from
federal income taxes, including the individual alternative minimum tax, as is
consistent with prudent investing and the preservation of shareholders' capital.
The objective is a fundamental policy of the Fund and may not be changed without
shareholder approval. The Fund intends to invest primarily in a portfolio of
investment grade obligations with a dollar weighted average portfolio maturity
of more than three years but not more than ten years. As with any investment,
there is no assurance that the Fund's objective will be achieved.
Under normal market conditions, the Fund attempts to invest 100% and, as a
matter of fundamental policy, will invest at least 80% of its total assets in
debt obligations issued by or on behalf of any state, territory or possession of
the United States, the District of Columbia and their respective authorities,
agencies, instrumentalities and political subdivisions, the interest on which is
exempt from federal income tax. It is possible, although not anticipated, that
up to 20% of the Fund's net assets could be in municipal securities subject to
the alternative minimum tax and/or in taxable obligations.
The Fund may invest, without percentage limitations, in securities having, at
the time of purchase, one of the four highest ratings of Moody's Investors
Service ("Moody's") (Aaa, Aa, A, Baa), Standard & Poor's Corporation ("S&P")
(AAA, AA, A, BBB), or Fitch Investors Service, Inc. ("Fitch") (AAA, AA, A, BBB),
or in securities which are not rated, provided that, in the opinion of the
Fund's investment manager, such securities are comparable in quality to those
within the four highest ratings. These are considered to be "investment grade"
securities, although bonds rated in the fourth highest ratings level (Baa by
Moody's) are regarded as having an adequate capacity to pay principal and
interest but with greater vulnerability to adverse economic conditions and as
having some speculative characteristics. In the event the rating of an issue
held in the Fund's portfolio is lowered by the rating services, such change will
be considered by the Fund in its evaluation of the overall investment merits of
that security, but such change will not necessarily result in an automatic sale
of the security. For a description of municipal securities ratings, see
"Appendix - Description of Municipal Securities Ratings" in the SAI.
The investment manager considers the terms of the offering and various other
factors in order to determine whether the securities are consistent with the
Fund's investment objective and policies and thereafter to determine the
issuer's comparative credit rating. In making such determinations, the
investment manager typically (i) interviews representatives of the issuer at its
offices, tours and inspects the physical facilities of the issuer in an effort
to evaluate the issuer and its operations, (ii) performs analysis of the
issuer's financial and credit position, including comparisons of all appropriate
ratios, and (iii) compares other similar securities offerings to the issuer's
proposed offering.
For temporary defensive purposes only, when the investment manager believes that
market conditions, such as rising interest rates or other adverse factors, would
cause serious erosion of the portfolio's value, the Fund may invest more than
20% of its assets (which could be up to 100%) in fixed-income obligations, the
interest on which is subject to regular federal income tax. Any such temporary
taxable investments will be limited to obligations issued or guaranteed by the
full faith and credit of the U.S. government or commercial paper rated A-1 by
S&P or P-1 by Moody's.
The Fund may borrow from banks for temporary or emergency purposes and pledge up
to 5% of its total assets therefore. Consistent with procedures approved by the
Board of Trustees, the Fund may lend its portfolio securities to qualified
securities dealers or other institutional investors, provided that such loans do
not exceed 10% of the value of the Fund's total assets at the time of the most
recent loan, although the Fund currently intends to limit its lending of
securities to no more than 5% of its total assets.
The Fund may purchase or sell securities without regard to the length of time
the security has been held, and the frequency of portfolio transactions (the
turnover rate) will vary from year to year, depending on market conditions.
It is the policy of the Fund that illiquid securities (securities that cannot be
disposed of within seven days in the normal course of business at approximately
the amount at which the Fund has valued the securities) may not constitute, at
the time of purchase, more than 10% of the value of the total net assets of the
Fund.
Municipal Securities
The term "municipal securities," as used in this Prospectus, means obligations
issued by or on behalf of states, territories and possessions of the U.S. and
the District of Columbia, and their political subdivisions, agencies and
instrumentalities, the interest on which is exempt from federal income tax. An
opinion as to the tax-exempt status of a municipal security is generally
rendered to the issuer by the issuer's bond counsel at the time of issuance of
the security.
Municipal securities are used to raise money for various public purposes, such
as constructing public facilities and making loans to public institutions.
Certain types of municipal bonds are issued to obtain funding for privately
operated facilities. Further information on the maturity and funding
classifications of municipal securities is included in the SAI.
It is possible, from time to time, that the Fund will invest more than 25% of
its assets in a particular segment of the municipal securities market,
including, but not limited to, hospital revenue bonds, housing agency bonds,
tax-exempt industrial development revenue bonds, transportation bonds, or
pollution control revenue bonds. In such circumstances, economic, business,
political or other changes affecting one bond (such as proposed legislation
affecting the financing of a project; shortages or price increases of needed
materials; or declining markets or need for the projects) might also affect
other bonds in the same segment, thereby potentially increasing market risk.
Yields on municipal securities vary, depending on a variety of factors,
including the general condition of the financial markets and of the municipal
securities market, the size of a particular offering, the maturity of the
obligation and the credit rating of the issuer. Generally, municipal securities
of longer maturities produce higher current yields than municipal securities
with shorter maturities, but are subject to greater price fluctuation due to
changes in interest rates, tax laws and other general market factors.
Lower-rated municipal securities generally produce a higher yield than
higher-rated municipal securities due to the perception of a greater degree of
risk as to the ability of the issuer to pay principal and interest obligations.
The interest on bonds issued to finance public purpose state and local
government operations is generally tax-exempt for regular federal income tax
purposes. Interest on certain private activity bonds (including those for
housing and student loans) issued after August 7, 1986, while still tax-exempt,
constitutes a preference item for taxpayers in determining the federal
alternative minimum tax under the Internal Revenue Code of 1986, as amended (the
"Code"), and under the income tax provisions of some states. This interest could
subject a shareholder to, or increase liability under, the federal and state
alternative minimum tax, depending on the shareholder's tax situation. In
addition, all distributions derived from interest exempt from regular federal
income tax may subject corporate shareholders to, or increase liability under,
the federal alternative minimum tax, because such distributions are included in
the corporation's adjusted current earnings. In states with a corporate
franchise tax, distributions of the Fund may also be fully taxable to corporate
shareholders under their state franchise tax systems.
Consistent with the Fund's investment objective, the Fund may acquire private
activity bonds if, in the investment manager's opinion, such bonds represent the
most attractive investment opportunity then available to the Fund. As of
February 28, 1995, the Fund derived 13.68% of its income from bonds, the
interest on which constitutes a preference item subject to the federal
alternative minimum tax for certain investors.
The Fund may purchase floating rate and variable rate obligations. These
obligations bear interest at rates that are not fixed, but that vary with
changes in prevailing market rates on predesignated dates. The Fund may also
invest in variable or floating rate demand notes ("VRDNs"), which carry a demand
feature that permits the Fund to tender the obligation back to the issuer or a
third party at par value plus accrued interest prior to maturity, according to
the terms of the obligations, which amount may be more or less than the amount
the Fund paid for such obligation. Frequently, VRDNs are secured by letters of
credit or other credit support arrangements. Because of the demand feature, the
prices of VRDNs may be higher and the yields lower than they otherwise would be
for obligations without a demand feature. The Fund will limit its purchase of
municipal securities that are floating rate and variable rate obligations to
those meeting the quality standards set forth in this Prospectus.
The Fund may purchase and sell municipal securities on a "when-issued" and
"delayed delivery" basis. These transactions are subject to market fluctuation,
and the value at delivery may be more or less than the purchase price. Although
the Fund will generally purchase municipal securities on a when-issued basis
with the intention of acquiring such securities, it may sell such securities
before the settlement date if it is deemed advisable. When the Fund is the buyer
in such a transaction, it will maintain, in a segregated account with its
custodian, cash or high-grade marketable securities having an aggregate value
equal to the amount of such purchase commitments, until payment is made. To the
extent the Fund engages in when-issued and delayed delivery transactions, it
will do so for the purpose of acquiring securities for the Fund's portfolio
consistent with its investment objective and policies and not for the purpose of
investment leverage.
The Fund may also invest in municipal lease obligations, primarily through
Certificates of Participation ("COPs"). COPs, which are widely used by state and
local governments to finance the purchase of property, function much like
installment purchase agreements. For example, COPs may be created when long-term
lease revenue bonds are issued by a governmental corporation to pay for the
acquisition of property or facilities which are then leased to a municipality.
The payments made by the municipality under the lease are used to repay interest
and principal on the bonds issued to purchase the property. Once these lease
payments are completed, the municipality gains ownership of the property for a
nominal sum. This lease format is generally not subject to constitutional
limitations on the issuance of state debt, and COPs may enable a governmental
issuer to increase government liabilities beyond constitutional debt limits.
A feature which distinguishes COPs from municipal debt is that the lease which
is the subject of the transaction must contain a "nonappropriation" or
"abatement" clause. A nonappropriation clause provides that, while the
municipality will use its best efforts to make lease payments, the municipality
may terminate the lease without penalty if the municipality's appropriating body
does not allocate the necessary funds. Local administrations, being faced with
increasingly tight budgets, therefore have more discretion to curtail payments
under COPs than they do to curtail payments on traditionally funded debt
obligations. If the government lessee does not appropriate sufficient monies to
make lease payments, the lessor or its agent is typically entitled to repossess
the property. In most cases, however, the private sector value of the property
may be less than the amount the government lessee was paying.
While the risk of nonappropriation is inherent to COPs financing, the Fund
believes that this risk is mitigated by its policy of investing only in COPs
rated within the four highest rating categories of Moody's, S&P or Fitch, or in
unrated COPs believed to be of comparable quality. Criteria considered by the
rating agencies and the investment manager in assessing such risk include the
issuing municipality's credit rating, evaluation of how essential the leased
property is to the municipality and the term of the lease compared to the useful
life of the leased property. The Board of Trustees reviews the COPs held in the
Fund's portfolio to assure that they constitute liquid investments based on
various factors reviewed by the investment manager and monitored by the Board of
Trustees. Such factors include (a) the credit quality of such securities and the
extent to which they are rated or, if unrated, comply with existing criteria and
procedures followed to ensure that they are of comparable quality to the rating
required for Fund investment, including an assessment of the likelihood that the
leases will not be canceled; (b) the size of the municipal securities market,
both in general and with respect to COPs; and (c) the extent to which the type
of COPs held by the Fund trade on the same basis and with the same degree of
dealer participation as other municipal bonds of comparable credit rating or
quality. While there is no limit as to the amount of assets which the Fund may
invest in COPs, as of February 28, 1995, the Fund held 14.02% of the total face
amount of the securities in its portfolio in COPs and other municipal leases.
The Fund may purchase and hold callable municipal bonds which contain a
provision in the indenture permitting the issuer to redeem the bonds prior to
their maturity dates at a specified price which typically reflects a premium
over the bonds' original issue price. These bonds generally have call protection
(that is, a period of time during which the bonds may not be called) which
usually lasts for five to ten years, after which time such bonds may be called
away. An issuer may generally be expected to call its bonds, or a portion of
them, during periods of relatively declining interest rates, when borrowings may
be replaced at lower rates than those obtained in prior years. If the proceeds
of a bond called under such circumstances are reinvested, the result may be a
lower overall yield due to lower current interest rates. If the purchase price
of such bonds included a premium related to the appreciated value of the bonds,
some or all of that premium may not be recovered by bondholders, such as the
Fund, depending on the price at which such bonds were redeemed. Notwithstanding
the call feature, any such investment would still be subject to the policy
whereby the Fund is required to maintain a dollar weighted average portfolio
maturity between three and ten years.
Investment Risk Considerations
While an investment in the Fund is not without risk, certain policies are
followed in managing the Fund which may help to reduce the investor's risk.
There are two categories of risks to which a Fund is subject: credit risk and
market risk. Credit risk is a function of the ability of an issuer of a
municipal security to maintain timely interest payments and to pay the principal
of a security upon maturity. It is generally reflected in a security's
underlying credit rating and its stated interest rate (normally the coupon
rate). A change in the credit risk associated with a municipal security may
cause a corresponding change in the security's price. Market risk is the risk of
price fluctuation of a municipal security caused by changes in economic and
interest rate conditions generally affecting the market as a whole. A municipal
security's maturity length also affects its price. As with other debt
instruments, the price of the securities in which the Fund invests are likely to
decrease in times of rising interest rates. Conversely, when rates fall, the
value of the Fund's debt instruments may rise. Price changes of securities held
by the Fund have a direct impact on the net asset value per share of the Fund.
As a non-diversified investment company, the Fund is not subject to any
statutory restriction under the 1940 Act with respect to the concentration of
its investments in the assets of one or more issuers. This concentration may
present greater risks than in the case of a diversified company. (See the SAI
for the diversification requirements the Fund intends to meet in order to
qualify as a regulated investment company under the Code.)
The Fund is subject to a number of additional investment restrictions, some of
which may be changed only with the approval of shareholders, which limit its
activities to some extent. For a list of these restrictions and more information
concerning the policies discussed herein, please see the SAI.
How Shareholders Participate in
the Results of the Fund's Activities
The assets of the Fund are invested in portfolio securities. If the securities
owned by the Fund increase in value, the value of the shares of the Fund which
the shareholder owns will increase. If the securities owned by the Fund decrease
in value, the value of the shareholder's shares will also decline. In this way,
shareholders participate in any change in the value of the securities owned by
the Fund.
In addition to the factors which affect the value of individual securities, as
described in the preceding sections, a shareholder may anticipate that the value
of Fund shares will fluctuate with movements in the broader bond markets as
well. In particular, changes in interest rates will affect the value of the
Fund's portfolio and thus its share price. Increased interest rates, which
frequently accompany higher inflation and/or a growing economy, are likely to
have a negative effect on the value of Fund shares. History reflects both
increases and decreases in the prevailing rate of interest and these may reoccur
unpredictably in the future.
Management of the Fund
The Board of Trustees has the primary responsibility for the overall management
of the Trust and for electing the officers of the Trust who are responsible for
administering its day-to-day operations.
Franklin Advisers, Inc. ("Advisers" or "Manager") serves as the Fund's
investment manager. Advisers is a wholly-owned subsidiary of Franklin Resources,
Inc. ("Resources"), a publicly owned holding company, the principal shareholders
of which are Charles B. Johnson and Rupert H. Johnson, Jr., who own
approximately 20% and 16%, respectively, of Resources' outstanding shares.
Resources is engaged in various aspects of the financial services industry
through its various subsidiaries (the "Franklin Templeton Group"). Advisers acts
as investment manager or administrator to 34 U.S. registered investment
companies (116 separate series) with aggregate assets of over $77 billion,
approximately $41.4 billion of which are in the municipal securities market.
Pursuant to a management agreement, the Manager supervises and implements the
Fund's investment activities and provides certain administrative services and
facilities which are necessary to conduct the Fund's business.
During the fiscal year ended February 28, 1995, management fees, before any
advance waiver, totaled 0.63% of the average net assets of the Fund. Total
operating expenses, including management fees before any advance waiver, totaled
0.84% of the average net assets of the Fund. Pursuant to an agreement by
Advisers to limit its fees, the Fund paid management fees totaling 0.35% of the
average net assets of the Fund and operating expenses totaling 0.56%. This
arrangement may be terminated by Advisers upon notice to the Board of Trustees.
It is not anticipated that the Fund will incur a significant amount of brokerage
expenses because municipal securities are generally traded in principal
transactions that involve the receipt by the broker of a spread between the bid
and ask prices for the securities and not the receipt of commissions. In the
event that the Fund does participate in transactions involving brokerage
commissions, it is the Manager's responsibility to select brokers through whom
such transactions will be effected. The Manager will try to obtain the best
execution on all such transactions. If it is felt that more than one broker is
able to provide the best execution, the Manager will consider the furnishing of
quotations and of other market services, research, statistical and other data
for the Manager and its affiliates, as well as the sale of shares of the Fund,
as factors in selecting a broker. Further information is included under "The
Fund's Policies Regarding Brokers Used on Portfolio Transactions" in the SAI.
Shareholder accounting and many of the clerical functions for the Fund are
performed by Franklin/Templeton Investor Services, Inc. ("Investor Services" or
"Shareholder Services Agent"), in its capacity as transfer agent and
dividend-paying agent. Investor Services is a wholly-owned subsidiary of
Resources.
Plan of Distribution
A plan of distribution has been approved and adopted for the Fund (the "Plan")
pursuant to Rule 12b-1 under the 1940 Act. Under the Plan, the Fund may
reimburse Distributors or others for all expenses incurred by Distributors or
others in the promotion and distribution of the Fund's shares. Such expenses may
include, but are not limited to, the printing of prospectuses and reports used
for sales purposes, expenses of preparing and distributing sales literature and
related expenses, advertisements, and other distribution-related expenses,
including a prorated portion of Distributors' overhead expenses attributable to
the distribution of Fund shares, as well as any distribution or service fees
paid to securities dealers or their firms or others who have executed a
servicing agreement with the Fund, Distributors or its affiliates.
The maximum amount which the Fund may reimburse to Distributors or others for
such distribution expenses is 0.10% per annum of the average daily net assets of
the Fund, payable on a quarterly basis. All expenses of distribution in excess
of 0.10% per annum will be borne by Distributors or others who have incurred
them, without reimbursement from the Fund.
The Plan also covers any payments to or by the Fund, Advisers, Distributors, or
other parties on behalf of the Fund, Advisers or Distributors, to the extent
such payments are deemed to be for the financing of any activity primarily
intended to result in the sale of shares issued by the Fund within the context
of Rule 12b-1. The payments under the Plan are included in the maximum operating
expenses which may be borne by the Fund. For more information, please see the
SAI.
Distributions to Shareholders
There are two types of distributions which the Fund may make to its
shareholders:
1. Income dividends. The Fund receives income in the form of interest and other
income derived from its investments. This income, less the expenses incurred in
the Fund's operations, is its net investment income from which income dividends
may be distributed. Thus, the amount of dividends paid per share may vary with
each distribution.
2. Capital gain distributions. The Fund may derive capital gains or losses in
connection with sales or other dispositions of its portfolio securities.
Distributions by the Fund derived from net short-term and net long-term capital
gains (after taking into account any net capital loss carryovers) may generally
be made twice each year. One distribution may be made in December to reflect any
net short-term and net long-term capital gains realized by the Fund as of
October 31 of such year. Any net short-term and net long-term capital gains
realized by the Fund during the remainder of the fiscal year may be distributed
following the end of the fiscal year. These distributions, when made, will
generally be fully taxable to the Fund's shareholders. The Fund may make more
than one distribution derived from net short-term and net long-term capital
gains in any year or adjust the timing of its distributions for operational or
other reasons.
Distribution Date
Although subject to change by the Board of Trustees without prior notice to or
approval by shareholders, the Fund's current policy is to declare income
dividends daily and pay them monthly on or about the last business day of that
month. The amount of income dividend payments by the Fund is dependent upon the
amount of net income received by the Fund from its portfolio holdings, is not
guaranteed and is subject to the discretion of the Board of Trustees. The Fund
does not pay "interest" or guarantee any fixed rate of return on an investment
in its shares.
Dividend Reinvestment
Unless otherwise requested, income dividends and capital gain distributions, if
any, will be automatically reinvested in the shareholder's account in the form
of additional shares, valued at the closing net asset value (without a sales
charge) on the dividend reinvestment date. Dividend and capital gain
distributions are only eligible for reinvestment at net asset value in the Fund
or Class I shares of other Franklin Templeton Funds. Shareholders have the right
to change their election with respect to the receipt of distributions by
notifying the Fund, but any such change will be effective only as to
distributions for which the reinvestment date is seven or more business days
after the Fund has been notified. See the SAI for more information.
Many of the Fund's shareholders receive their distributions in the form of
additional shares. This is a convenient way to accumulate additional shares and
maintain or increase the shareholder's earnings base. Of course, any shares so
acquired remain at market risk.
Distributions in Cash
A shareholder may elect to receive income dividends, or both income dividends
and capital gain distributions, in cash. By completing the "Special Payment
Instructions for Distributions" section of the Shareholder Application included
with this Prospectus, a shareholder may direct the selected distributions to
Class I shares of another Franklin Templeton Fund, to another person, or
directly to a checking account. If the bank at which the account is maintained
is a member of the Automated Clearing House, the payments may be made
automatically by electronic funds transfer. If this last option is requested,
the shareholder should allow at least 15 days for initial processing. Dividends
which may be paid in the interim will be sent to the address of record.
Additional information regarding automated fund transfers may be obtained from
Franklin's Shareholder Services Department.
Taxation of the Fund and Its Shareholders
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. Additional information on tax matters
relating to the Fund and its shareholders is included in the section entitled
"Additional Information Regarding Taxation" in the SAI.
Each series of the Trust is treated as a separate entity for federal income tax
purposes. The Fund intends to continue to qualify for treatment as a regulated
investment company under Subchapter M of the Code. By distributing all of its
income and meeting certain other requirements relating to the sources of its
income and diversification of its assets, the Fund will not be liable for
federal income or excise taxes.
By meeting certain requirements of the Code, the Fund will continue to qualify
to pay exempt-interest dividends to its shareholders. Such exempt-interest
dividends are derived from interest income exempt from regular federal income
tax, and are not subject to regular federal income tax for Fund shareholders. In
addition, to the extent that exempt-interest dividends are derived from interest
on obligations of the state of residence of the shareholder or such state's
political subdivisions, from interest on direct obligations of the federal
government, or from interest on U.S. territorial obligations (including Puerto
Rico, the U.S. Virgin Islands or Guam), they may be exempt from personal income
tax in such state.
To the extent dividends are derived from taxable income from temporary
investments (including the discount from certain stripped obligations or their
coupons or income from securities loans or other taxable transactions), from the
excess of net short-term capital gain over net long-term capital loss, or from
ordinary income derived from the sale or disposition of bonds purchased with
market discount after April 30, 1993, they are treated as ordinary income
whether the shareholder has elected to receive them in cash or in additional
shares.
From time to time, the Fund may purchase a tax-exempt obligation with market
discount; that is, for a price that is less than the principal amount of the
bond, or for a price that is less than the principal amount of the bond where
the bond was issued with original issue discount, and such market discount
exceeds a de minimis amount. For such obligations purchased after April 30,
1993, a portion of the gain (not to exceed the accrued portion of market
discount as of the time of sale or disposition) is treated as ordinary income
rather than capital gain. Any distribution by the Fund of such ordinary income
to its shareholders will be subject to regular income tax in the hands of Fund
shareholders. In any fiscal year, the Fund may elect not to distribute to its
shareholders its taxable ordinary income and, instead, to pay federal income or
excise taxes on this income at the Fund level. The amount of such distributions,
if any, is expected to be small.
Pursuant to the Code, certain distributions which are declared in October,
November or December but which, for operational reasons, may not be paid to the
shareholder until the following January will be treated, for tax purposes, as if
paid by the Fund and received by the shareholder on December 31 of the calendar
year in which they are declared.
Distributions derived from the excess of net long-term capital gain over net
short-term capital loss are treated as long-term capital gain regardless of the
length of time a shareholder has owned Fund shares and regardless of whether
such distributions are received in cash or in additional shares.
Redemptions and exchanges of Fund shares are taxable events on which a
shareholder may realize a gain or loss. Any loss incurred on the sale or
exchange of Fund shares, held for six months or less, will be treated as a
long-term capital loss to the extent of capital gain dividends received with
respect to such shares.
Since the Fund's income is derived from interest income and gain on the sale of
portfolio securities rather than dividend income, no portion of the Fund's
distributions will generally be eligible for the corporate dividends-received
deduction. None of the distributions paid by the Fund for the fiscal year ended
February 28, 1995 qualified for this deduction and it is not anticipated that
any of the current year's dividends will so qualify.
The Fund will inform shareholders of the source of their dividends and
distributions at the time they are paid and will, promptly after the close of
each calendar year, advise them of the tax status for federal income tax
purposes of such dividends and distributions, including the portion of the
dividends on an average basis which constitutes taxable income or interest
income that is a tax preference item under the alternative minimum tax.
Shareholders who have not held shares of the Fund for a full calendar year may
have designated as tax-exempt or as tax preference income a percentage of income
which is not equal to the actual amount of tax-exempt or tax preference income
earned during the period of their investment in the Fund.
Exempt-interest dividends of the Fund, although exempt from regular federal
income tax in the hands of a shareholder, are includible in the tax base for
determining the extent to which a shareholder's social security or railroad
retirement benefits will be subject to federal income tax. Shareholders are
required to disclose the receipt of tax-exempt interest on their federal income
tax returns.
Interest on indebtedness incurred (directly or indirectly) by shareholders to
purchase or carry Fund shares will not be deductible for federal income tax
purposes.
Shareholders should consult their tax advisors with respect to the applicability
of state and local intangible property or income taxes to their shares in the
Fund and to distributions and redemption proceeds received from the Fund. For
example, distributions attributable to interest received from, or capital gain
derived from the disposition of, obligations of a given state or its political
subdivisions may be exempt from income taxes in that state.
Shareholders who are not U.S. persons for purposes of federal income taxation
should consult with their financial or tax advisors regarding the applicability
of U.S. withholding or other taxes on distributions received by them from the
Fund and the application of foreign tax laws to these distributions.
How to Buy Shares of the Fund
Shares of the Fund are continuously offered through securities dealers which
execute an agreement with Distributors, the principal underwriter of the Fund's
shares. The use of the term "securities dealer" shall include other financial
institutions which, either directly or through affiliates, have an agreement
with Distributors to handle customer orders and accounts with the Fund. Such
reference, however, is for convenience only and does not indicate a legal
conclusion of capacity. The minimum initial investment is $100 and subsequent
investments must be $25 or more. These minimums may be waived when the shares
are purchased through plans established by the Franklin Templeton Group. The
Fund and Distributors reserve the right to refuse any order for the purchase of
shares. The Fund currently does not permit investment by market timing or
allocation services ("Timing Accounts"), which generally include accounts
administered so as to redeem or purchase shares based upon certain predetermined
market indicators.
Purchase Price of Fund Shares
Shares of the Fund are offered at the public offering price, which is determined
by adding the net asset value per share plus a front-end sales charge, next
computed (1) after the shareholder's securities dealer receives the order which
is promptly transmitted to the Fund or (2) after receipt of an order by mail
from the shareholder directly in proper form (which generally means a completed
Shareholder Application accompanied by a negotiable check). The sales charge is
a variable percentage of the offering price depending upon the amount of the
sale. The offering price will be calculated to two decimal places using standard
rounding criteria. A description of the method of calculating net asset value
per share is included under "Valuation of Fund Shares."
Set forth below is a table showing front-end sales charges and dealer
concessions.
<TABLE>
<CAPTION>
Total Sales Charge
----------------------
As a Percentage Dealer Concession
Size of Transaction As a Percentage of Net Amount As a Percentage
at Offering Price of Offering Price Invested of Offering Price*
-------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000 2.25% 2.30% 2.00%
$100,000 but less than $250,000 1.75% 1.78% 1.50%
$250,000 but less than $500,000 1.25% 1.26% 1.00%
$500,000 but less than $1,000,000 1.00% 1.01% 0.85%
$1,000,000 or more none none (see below)**
*Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages indicated. At the discretion of Distributors,
all sales charges may at times be allowed to the securities dealer. If 90% or
more of the sales commission is allowed, such securities dealer may be deemed to
be an underwriter as that term is defined in the Securities Act of 1933, as
amended.
**The following commissions will be paid by Distributors, out of its own
resources, to securities dealers who initiate and are responsible for purchases
of $1 million or more: 0.75% on sales of $1 million but less than $2 million,
plus 0.60% on sales of $2 million but less than $3 million, plus 0.50% on sales
of $3 million but less than $50 million, plus 0.25% on sales of $50 million but
less than $100 million, plus 0.15% on sales of $100 million or more. Dealer
concession breakpoints are reset every 12 months for purposes of additional
purchases.
</TABLE>
No front-end sales charge applies on investments of $1 million or more, but a
contingent deferred sales charge of 1% is imposed on certain redemptions of all
or a portion of investments of $1 million or more within 12 months of the
calendar month following such investment. See "How to Sell Shares of the Fund -
Contingent Deferred Sales Charge."
The size of a transaction which determines the applicable sales charge on the
purchase of Fund shares is determined by adding the amount of the shareholder's
current purchase plus the cost or current value (whichever is higher) of a
shareholder's existing investment in one or more of the funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds. Included for these
aggregation purposes are (a) the mutual funds in the Franklin Group of Funds
except Franklin Valuemark Funds and Franklin Government Securities Trust (the
"Franklin Funds"), (b) other investment products underwritten by Distributors or
its affiliates, and (c) the U.S. registered mutual funds in the Templeton Group
of Funds except Templeton Capital Accumulator Fund, Inc., Templeton Variable
Annuity Fund, and Templeton Variable Products Series Fund (the "Templeton
Funds"). (Franklin Funds and Templeton Funds are collectively referred to as the
"Franklin Templeton Funds.") Sales charge reductions based upon aggregate
holdings of (a), (b) and (c) above ("Franklin Templeton Investments") may be
effective only after notification to Distributors that the investment qualifies
for a discount.
Other Payments to Securities Dealers. Distributors, or one of its affiliates,
may make payments, out of its own resources, of up to 1% of the amount purchased
to securities dealers who initiate and are responsible for purchases made at net
asset value by certain trust companies and trust departments of banks. See
"Description of Special Net Asset Value Purchases" and the SAI.
Distributors or one of its affiliates, out of its own resources, may also
provide additional compensation to securities dealers in connection with sales
of shares of the Franklin Templeton Funds. Compensation may include financial
assistance to securities dealers and payments made in connection with
conferences, sales or training programs for their employees, seminars for the
public, advertising, sales campaigns and/or shareholder services and programs
regarding one or more of the Franklin Templeton Funds and other dealer-sponsored
programs or events. In some instances, this compensation may be made available
only to certain securities dealers whose representatives have sold or are
expected to sell significant amounts of shares of the Franklin Templeton Funds.
Compensation may include payment for travel expenses, including lodging,
incurred in connection with trips taken by invited registered representatives
and members of their families to locations within or outside of the United
States for meetings or seminars of a business nature. Securities dealers may not
use sales of the Fund's shares to qualify for this compensation to the extent
such may be prohibited by the laws of any state or any self-regulatory agency,
such as the National Association of Securities Dealers, Inc. None of the
aforementioned additional compensation is paid for by the Fund or its
shareholders.
Certain officers and trustees of the Trust are also affiliated with
Distributors. A detailed description is included in the SAI.
Quantity Discounts in Sales Charges
Shares may be purchased under a variety of plans which provide for a reduced
sales charge. To be certain to obtain the reduction of the sales charge, the
investor or the securities dealer should notify Distributors at the time of each
purchase of shares which qualifies for the reduction. In determining whether a
purchase qualifies for discount, an investment in any of the Franklin Templeton
Investments may be combined with those of the investor's spouse, children under
the age of 21 and grandchildren under the age of 21. The value of Class II
shares owned by the investor may also be included for this purpose.
In addition, an investment in the Fund may qualify for a reduction in the sales
charge under the following programs:
1. Rights of Accumulation. The cost or current value (whichever is higher) of
existing investments in the Franklin Templeton Investments may be combined with
the amount of the current purchase in determining the sales charge to be paid.
2. Letter of Intent. An investor may immediately qualify for a reduced sales
charge on a purchase of shares of the Fund by completing the Letter of Intent
section of the Shareholder Application (the "Letter of Intent" or "Letter"). By
completing the Letter, the investor expresses an intention to invest during the
next 13 months, a specified amount which, if made at one time, would qualify for
a reduced sales charge and grants to Distributors a security interest in the
reserved shares and irrevocably appoints Distributors as attorney-in-fact with
full power of substitution to surrender for redemption any or all shares for the
purpose of paying any additional sales charge due. Purchases under the Letter
will conform with the requirements of Rule 22d-1 under the 1940 Act. The
investor or the investor's securities dealer must inform Investor Services or
Distributors that this Letter is in effect each time a purchase is made.
An investor acknowledges and agrees to the following provisions by completing
the Letter of Intent section of the Shareholder Application: Five percent (5%)
of the amount of the total intended purchase will be reserved in shares of the
Fund, registered in the investor's name, to assure that the full applicable
sales charge will be paid if the intended purchase is not completed. The
reserved shares will be included in the total shares owned as reflected on
periodic statements; income and capital gain distributions on the reserved
shares will be paid as directed by the investor. The reserved shares will not be
available for disposal by the investor until the Letter of Intent has been
completed or the higher sales charge paid. For more information, see "Additional
Information Regarding Fund Shares" in the SAI.
The value of Class II shares owned by the investor may be included in
determining a reduced sales charge to be paid on Class I shares pursuant to the
Letter of Intent and Rights of Accumulation programs.
Group Purchases
An individual who is a member of a qualified group may also purchase shares of
the Fund at the reduced sales charge applicable to the group as a whole. The
sales charge is based upon the aggregate dollar value of shares previously
purchased and still owned by the members of the group, plus the amount of the
current purchase. For example, if members of the group had previously invested
and still held $80,000 of Fund shares and now were investing $25,000, the sales
charge would be 1.75%. Information concerning the current sales charge
applicable to a group may be obtained by contacting Distributors.
A "qualified group" is one which (i) has been in existence for more than six
months, (ii) has a purpose other than acquiring Fund shares at a discount, and
(iii) satisfies uniform criteria which enable Distributors to realize economies
of scale in its costs of distributing shares. A qualified group must have more
than 10 members, be available to arrange for group meetings between
representatives of the Fund or Distributors and the members, agree to include
sales and other materials related to the Fund in its publications and mailings
to members at reduced or no cost to Distributors, and seek to arrange for
payroll deduction or other bulk transmission of investments to the Fund.
If an investor selects a payroll deduction plan, subsequent investments will be
automatic and will continue until such time as the investor notifies the Fund
and the investor's employer to discontinue further investments. Due to the
varying procedures used to prepare, process and forward the payroll deduction
information to the Fund, there may be a delay between the time of the payroll
deduction and the time the money reaches the Fund. The investment in the Fund
will be made at the offering price per share determined on the day that both the
check and payroll deduction data are received in required form by the Fund.
Purchases at Net Asset Value
Shares of the Fund may be purchased without the imposition of a front-end sales
charge ("net asset value") or a contingent deferred sales charge by (1)
officers, directors, trustees and full-time employees of the Trust, any of the
Franklin Templeton Funds, or of the Franklin Templeton Group, and by their
spouses and family members, including investments made by such parties after
cessation of employment; (2) companies exchanging shares or selling assets
pursuant to a merger, acquisition or exchange offer; (3) accounts managed by the
Franklin Templeton Group; (4) certain unit investment trusts and unit holders of
such trusts reinvesting their distributions from the trusts in the Fund; (5)
registered securities dealers and their affiliates, for their investment account
only; and (6) current employees of securities dealers and their affiliates and
by their family members, in accordance with the internal policies and procedures
of the employing securities dealer and affiliate.
Shares of the Fund may be purchased at net asset value by persons who have
redeemed, within the previous 365 days, their shares of the Fund or another of
the Class I Franklin Templeton Funds which were purchased with a front-end sales
charge or assessed a contingent deferred sales charge on redemption. If a
different class of shares is purchased, the full front-end sales charge must be
paid at the time of purchase of the new shares. An investor may reinvest an
amount not exceeding the redemption proceeds. While credit will be given for any
contingent deferred sales charge paid on the shares redeemed and subsequently
repurchased, a new contingency period will begin. Shares redeemed in connection
with an exchange into another of the Franklin Templeton Funds (see "Exchange
Privilege") are not considered "redeemed" for this privilege. In order to
exercise this privilege, a written order for the purchase of shares of the Fund
must be received by the Fund or the Fund's Shareholder Services Agent within 365
days after the redemption. The 365 days, however, do not begin to run on
redemption proceeds placed immediately after redemption in a Franklin Bank
Certificate of Deposit ("CD") until the CD (including any rollover) matures.
Reinvestment at net asset value may also be handled by a securities dealer or
other financial institution, who may charge the shareholder a fee for this
service. The redemption is a taxable transaction but reinvestment without a
sales charge may affect the amount of gain or loss recognized and the tax basis
of the shares reinvested. If there has been a loss on the redemption, the loss
may be disallowed if a reinvestment in the same fund is made within a 30-day
period. Information regarding the possible tax consequences of such a
reinvestment is included in the tax section of this Prospectus and the SAI.
Shares of the Fund may be purchased at net asset value and without a contingent
deferred sales charge by persons who have received dividends and capital gain
distributions in cash from investments in the Fund or another Franklin Templeton
Fund within 365 days of the payment date of such distribution. To exercise this
privilege, a written request to reinvest the distribution must accompany the
purchase order. Additional information may be obtained from Shareholder Services
at 1-800/632-2301. See "Distributions in Cash" under "Distributions to
Shareholders."
Shares of the Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by investors who have, within
the past 60 days, redeemed an investment in a mutual fund which is not part of
the Franklin Templeton Funds and which was subject to a front-end sales charge
or a contingent deferred sales charge and which has investment objectives
similar to those of the Fund.
Shares of the Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by broker-dealers who have
entered into a supplemental agreement with Distributors, or by registered
investment advisors affiliated with such broker-dealers, on behalf of their
clients who are participating in a comprehensive fee program (sometimes known as
a wrap fee program).
Shares of the Fund may also be purchased at net asset value and without the
imposition of a contingent deferred sales charge by any state, county, or city,
or any instrumentality, department, authority or agency thereof which has
determined that the Fund is a legally permissible investment and which is
prohibited by applicable investment laws from paying a sales charge or
commission in connection with the purchase of shares of any registered
management investment company (an "eligible governmental authority"). SUCH
INVESTORS SHOULD CONSULT THEIR OWN LEGAL ADVISORS TO DETERMINE WHETHER AND TO
WHAT EXTENT THE SHARES OF THE FUND CONSTITUTE LEGAL INVESTMENTS FOR THEM.
Municipal investors considering investment of proceeds of bond offerings into
the Fund should consult with expert counsel to determine the effect, if any, of
various payments made by the Fund or its investment manager on arbitrage rebate
calculations. If an investment by an eligible governmental authority at net
asset value is made through a securities dealer who has executed a dealer
agreement with Distributors, Distributors or one of its affiliates may make a
payment, out of its own resources, to such securities dealer in an amount not to
exceed 0.25% of the amount invested. Contact the Franklin Templeton
Institutional Services Department for additional information.
Description of Special Net Asset Value Purchases
Shares of the Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by trust companies and bank
trust departments for funds over which they exercise exclusive discretionary
investment authority and which are held in a fiduciary, agency, advisory,
custodial or similar capacity. Such purchases are subject to minimum
requirements with respect to amount of purchase, which may be established by
Distributors. Currently, those criteria require that the amount invested or to
be invested during the subsequent 13-month period in this Fund or any of the
Franklin Templeton Investments must total at least $1,000,000. Orders for such
accounts will be accepted by mail accompanied by a check or by telephone or
other means of electronic data transfer directly from the bank or trust company,
with payment by federal funds received by the close of business on the next
business day following such order.
Refer to the SAI for further information.
General
Securities laws of states in which the Fund's shares are offered for sale may
differ from the interpretations of federal law, and banks and financial
institutions selling Fund shares may be required to register as dealers pursuant
to state law.
Other Programs and Privileges
Available to Fund Shareholders
Certain of the programs and privileges described in this section may not be
available directly from the Fund to shareholders whose shares are held, of
record, by a financial institution or in a "street name" account or networked
account through the National Securities Clearing Corporation ("NSCC") (see the
section captioned "Account Registrations" in this Prospectus).
Share Certificates
Shares for an initial investment, as well as subsequent investments, including
the reinvestment of dividends and capital gain distributions, are generally
credited to an account in the name of an investor on the books of the Fund,
without the issuance of a share certificate. Maintaining shares in
uncertificated form (also known as "plan balance") minimizes the risk of loss or
theft of a share certificate. A lost, stolen or destroyed certificate cannot be
replaced without obtaining a sufficient indemnity bond. The cost of such a bond,
which is generally borne by the shareholder, can be 2% or more of the value of
the lost, stolen or destroyed certificate. A certificate will be issued if
requested by the shareholder or by the securities dealer.
Confirmations
A confirmation statement will be sent to each shareholder quarterly to reflect
the dividends reinvested during that period and after each other transaction
which affects the shareholder's account. This statement will also show the total
number of shares owned by the shareholder, including the number of shares in
plan balance for the account of the shareholder.
Automatic Investment Plan
Under the Automatic Investment Plan, a shareholder may be able to arrange to
make additional purchases of shares automatically on a monthly basis by
electronic funds transfer from a checking account, if the bank which maintains
the account is a member of the Automated Clearing House, or by preauthorized
checks drawn on the shareholder's bank account. A shareholder may, of course,
terminate the program at any time. The Automatic Investment Plan Application
included with this Prospectus contains the requirements applicable to this
program. In addition, shareholders may obtain more information concerning this
program from their securities dealers or from Distributors.
The market value of the Fund's shares is subject to fluctuation. Before
undertaking any plan for systematic investment, the investor should keep in mind
that such a program does not assure a profit or protect against a loss.
Systematic Withdrawal Plan
A shareholder may establish a Systematic Withdrawal Plan and receive regular
periodic payments from the account, provided that the net asset value of the
shares held by the shareholder is at least $5,000. There are no service charges
for establishing or maintaining a Systematic Withdrawal Plan. The minimum amount
which the shareholder may withdraw is $50 per withdrawal transaction, although
this is merely the minimum amount allowed under the plan and should not be
mistaken for a recommended amount. The plan may be established on a monthly,
quarterly, semiannual or annual basis. If the shareholder establishes a plan,
any capital gain distributions and income dividends paid by the Fund will be
reinvested for the shareholder's account in additional shares at net asset
value. Payments will then be made from the liquidation of shares at net asset
value on the day of the transaction (which is generally the first business day
of the month in which the payment is scheduled) with payment generally received
by the shareholder three to five days after the date of liquidation. By
completing the "Special Payment Instructions for Distributions" section of the
Shareholder Application included with this Prospectus, a shareholder may direct
the selected withdrawals to the same class of another of the Franklin Templeton
Funds, to another person, or directly to a checking account. If the bank at
which the account is maintained is a member of the Automated Clearing House, the
payments may be made automatically by electronic funds transfer. If this last
option is requested, the shareholder should allow at least 15 days for initial
processing. Withdrawals which may be paid in the interim will be sent to the
address of record. Liquidation of shares may reduce or possibly exhaust the
shares in the shareholder's account, to the extent withdrawals exceed shares
earned through dividends and distributions, particularly in the event of a
market decline. If the withdrawal amount exceeds the total plan balance, the
account will be closed and the remaining balance will be sent to the
shareholder. As with other redemptions, a liquidation to make a withdrawal
payment is a sale for federal income tax purposes. Because the amount withdrawn
under the plan may be more than the shareholder's actual yield or income, part
of the payment may be a return of the shareholder's investment.
The maintenance of a Systematic Withdrawal Plan concurrently with purchases of
additional shares of the Fund would be disadvantageous because of the sales
charge on the additional purchases. Also, redemptions of shares may be subject
to a contingent deferred sales charge if the shares are redeemed within 12
months of the calendar month of the original purchase date. The shareholder
should ordinarily not make additional investments of less than $5,000 or three
times the annual withdrawals under the plan during the time such a plan is in
effect. The applicable contingent deferred sales charge is waived for share
redemptions of up to 1% monthly of an account's net asset value (12% annually,
6% semiannually, 3% quarterly). For example, if an account maintained an annual
balance of $1,000,000, only $120,000 could be withdrawn through a once-yearly
Systematic Withdrawal Plan free of charge; any amount over that $120,000 would
be assessed a 1% (or applicable) contingent deferred sales charge. A Systematic
Withdrawal Plan may be terminated on written notice by the shareholder or the
Fund, and it will terminate automatically if all shares are liquidated or
withdrawn from the account, or upon the Fund's receipt of notification of the
death or incapacity of the shareholder. Shareholders may change the amount (but
not below the specified minimum) and schedule of withdrawal payments, or suspend
one such payment by giving written notice to Investor Services at least seven
business days prior to the end of the month preceding a scheduled payment. Share
certificates may not be issued while a Systematic Withdrawal Plan is in effect.
Institutional Accounts
There may be additional methods of purchasing, redeeming or exchanging shares of
the Fund available to institutional accounts. For further information, contact
the Franklin Templeton Institutional Services Department at 1-800/321-8563.
Exchange Privilege
The Franklin Templeton Funds consist of a number of mutual funds with various
investment objectives and policies. The shares of most of these mutual funds are
offered to the public with a sales charge. If a shareholder's investment
objective or outlook for the securities markets changes, the Fund shares may be
exchanged for shares of other Franklin Templeton Funds Class I shares which are
eligible for sale in the shareholder's state of residence and in conformity with
such fund's stated eligibility requirements and investment minimums. Before
making an exchange, investors should review the prospectus of the fund they wish
to exchange from and the fund they wish to exchange into for all specific
requirements or limitations on exercising the exchange privilege, for example,
limitation on a fund's sale of its shares, minimum holding periods or applicable
sales charges.
No exchanges between different classes of shares are allowed and, therefore,
shares of the Fund may not be exchanged for Class II shares of other Franklin
Templeton Funds. Shareholders of a Class II Franklin Templeton Fund may,
however, elect to direct their dividends and capital gain distributions to the
Fund or another Class I Franklin Templeton Fund. Shareholders may choose to
redeem shares of the Fund and purchase Class II shares of other Franklin
Templeton Funds but such purchase will be subject to that Fund's Class II
front-end and contingent deferred sales charges for the contingency period of 18
months.
Exchanges By Mail
Send written instructions signed by all account owners and accompanied by any
outstanding share certificates properly endorsed. The transaction will be
effective upon receipt of the written instructions together with any outstanding
share certificates.
Exchanges By Telephone
Shareholders, or their investment representative of record, if any, may exchange
shares of the Fund by telephone by calling Investor Services at 1-800/632-2301
or the automated Franklin TeleFACTS(R) system (day or night) at 1-800/247-1753.
If the shareholder does not wish this privilege extended to a particular
account, the Fund or Investor Services should be notified.
The telephone exchange privilege allows a shareholder to effect exchanges from
the Fund into an identically registered account of the same class of shares in
one of the other available Franklin Templeton Funds. The telephone exchange
privilege is available only for uncertificated shares or those which have
previously been deposited in the shareholder's account. The Fund and Investor
Services will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. Please see "Telephone Transactions -
Verification Procedures."
During periods of drastic economic or market changes, it is possible that the
telephone exchange privilege may be difficult to implement and the TeleFACTS
option may not be available. In this event, shareholders should follow the other
exchange procedures discussed in this section, including the procedures for
processing exchanges through securities dealers.
Exchanges Through Securities Dealers
As is the case with all purchases and redemptions of the Fund's shares, Investor
Services will accept exchange orders by telephone or by other means of
electronic transmission from securities dealers who execute a dealer or similar
agreement with Distributors. See also "Exchanges By Telephone" above. Such a
dealer-ordered exchange will be effective only for uncertificated shares on
deposit in the shareholder's account or for which certificates have previously
been deposited. A securities dealer may charge a fee for handling an exchange.
Additional Information Regarding Exchanges
If the account has shares subject to a contingent deferred sales charge, the
shares will be exchanged into the new account on a "first-in, first-out" basis.
The contingency period of 12 months during which a contingent deferred sales
charge may be assessed will be tolled (or stopped) for the period shares are
exchanged into and held in a Franklin or Templeton money market fund. See also
"How To Sell Shares of the Fund - Contingent Deferred Sales Charge."
Exchanges are made on the basis of the net asset values of the funds involved,
except as set forth below. Exchanges of shares of the Fund which were purchased
without a sales charge will be charged a sales charge in accordance with the
terms of the prospectus of the fund being purchased, unless the original
investment in the Franklin Templeton Funds was made pursuant to the privilege
permitting purchases at net asset value, as discussed under "How To Buy Shares
of the Fund." Exchanges of shares of the Fund which were purchased with a lower
sales charge to a fund which has a higher sales charge will be charged the
difference, unless the shares were held in the Fund for at least six months
prior to executing the exchange. When an investor requests the exchange of the
total value of the Fund account, accrued but unpaid income dividends and capital
gain distributions will be reinvested in the Fund at the net asset value on the
date of the exchange, and then the entire share balance will be exchanged into
the new fund in accordance with the procedures set forth above. Because the
exchange is considered a redemption and purchase of shares, the shareholder may
realize a gain or loss for federal income tax purposes. Backup withholding and
information reporting may also apply. Information regarding the possible tax
consequences of such an exchange is included in the tax section in this
Prospectus and in the SAI.
If a substantial portion of the Fund's shareholders should, within a short
period, elect to redeem their shares of the Fund pursuant to the exchange
privilege, the Fund might have to liquidate portfolio securities it might
otherwise hold and incur the additional costs related to such transactions. On
the other hand, increased use of the exchange privilege may result in periodic
large inflows of money. If this should occur, it is the general policy of the
Fund to initially invest this money in short-term, tax-exempt municipal
securities, unless it is felt that attractive investment opportunities
consistent with the Fund's investment objective exist immediately. Subsequently,
this money will be withdrawn from such short-term, tax-exempt municipal
securities and invested in portfolio securities in as orderly a manner as is
possible when attractive investment opportunities arise.
The exchange privilege may be modified or discontinued by the Fund at any time
upon 60 days' written notice to shareholders.
The Fund currently will not accept investments from Timing Accounts.
How to Sell Shares of the Fund
A shareholder may at any time liquidate shares owned and receive from the Fund
the value of the shares. Shares may be redeemed in any of the following ways:
Redemptions By Mail
Send a written request, signed by all registered owners, to Investor Services,
at the address shown on the back cover of this Prospectus, and any share
certificates which have been issued for the shares being redeemed, properly
endorsed and in order for transfer. The shareholder will then receive from the
Fund the value of the shares based upon the net asset value per share (less the
contingent deferred sales charge, if applicable) next computed after the written
request in proper form is received by Investor Services. Redemption requests
received after the time at which the net asset value is calculated (at the
scheduled closing of the New York Stock Exchange (the "Exchange") which is
generally 1:00 p.m. Pacific time) each day that the Exchange is open for
business will receive the price calculated on the following business day.
Shareholders are requested to provide a telephone number(s) where they may be
reached during business hours, or in the evening if preferred. Investor
Services' ability to contact a shareholder promptly when necessary will speed
the processing of the redemption.
To be considered in proper form, signatures must be guaranteed if the redemption
request involves any of the following:
(1) the proceeds of the redemption are over $50,000;
(2) the proceeds (in any amount) are to be paid to someone other than the
registered owner(s) of the account;
(3) the proceeds (in any amount) are to be sent to any address other than the
shareholder's address of record, preauthorized bank account or brokerage
firm account;
(4) share certificates, if the redemption proceeds are in excess of $50,000; or
(5) the Fund or Investor Services believes that a signature guarantee would
protect against potential claims based on the transfer instructions,
including, for example, when (a) the current address of one or more
joint owners of an account cannot be confirmed, (b) multiple owners
have a dispute or give inconsistent instructions to the Fund, (c) the
Fund has been notified of an adverse claim, (d) the instructions received
by the Fund are given by an agent, not the actual registered owner, (e)
the Fund determines that joint owners who are married to each other are
separated or may be the subject of divorce proceedings, or (f) the
authority of a representative of a corporation, partnership, association,
or other entity has not been established to the satisfaction of the Fund.
Signatures must be guaranteed by an "eligible guarantor institution" as defined
under Rule 17Ad-15 under the Securities Exchange Act of 1934. Generally,
eligible guarantor institutions include (1) national or state banks, savings
associations, savings and loan associations, trust companies, savings banks,
industrial loan companies and credit unions; (2) national securities exchanges,
registered securities associations and clearing agencies; (3) securities dealers
which are members of a national securities exchange or a clearing agency or
which have minimum net capital of $100,000; or (4) institutions that participate
in the Securities Transfer Agent Medallion Program ("STAMP") or other recognized
signature guarantee medallion program. A notarized signature will not be
sufficient for the request to be in proper form.
Where shares to be redeemed are represented by share certificates, the request
for redemption must be accompanied by the share certificate and a share
assignment form signed by the registered shareholders exactly as the account is
registered, with the signatures guaranteed as referenced above. Shareholders are
advised, for their own protection, to send the share certificate and assignment
form in separate envelopes if they are being mailed in for redemption.
Liquidation requests of corporate, partnership, trust and custodianship
accounts, and accounts under court jurisdiction require the following
documentation to be in proper form:
Corporation - (1) Signature guaranteed letter of instruction from the authorized
officers of the corporation and (2) a corporate resolution.
Partnership - (1) Signature guaranteed letter of instruction from a general
partner and (2) pertinent pages from the partnership agreement identifying the
general partners or a certification for a partnership agreement.
Trust - (1) Signature guaranteed letter of instruction from the trustees and (2)
a copy of the pertinent pages of the trust document listing the trustees or a
Certification for Trust if the trustees are not listed on the account
registration.
Custodial - Signature guaranteed letter of instruction from the custodian.
Accounts under court jurisdiction - Check court documents and the applicable
state law since these accounts have varying requirements, depending upon the
state of residence.
Payment for redeemed shares will be sent to the shareholder within seven days
after receipt of the request in proper form.
Redemptions By Telephone
Shareholders who complete the Franklin Templeton Telephone Redemption
Authorization Agreement (the "Agreement"), included with this Prospectus, may
redeem shares of the Fund by telephone. Information may be obtained by writing
to the Fund or Investor Services at the address shown on the cover or by calling
1-800/632-2301. The Fund and Investor Services will employ reasonable procedures
to confirm that instructions given by telephone are genuine. Shareholders,
however, bear the risk of loss in certain cases as described under "Telephone
Transactions - Verification Procedures."
For shareholder accounts with a completed Agreement on file, redemptions of
uncertificated shares or shares which have previously been deposited with the
Fund or Investor Services may be made for up to $50,000 per day per Fund
account. Telephone redemption requests received before the scheduled close of
the Exchange (generally 1:00 p.m. Pacific time) on any business day will be
processed that same day. The redemption check will be sent within seven days,
made payable to all the registered owners on the account, and will be sent only
to the address of record. Redemption requests by telephone will not be accepted
within 30 days following an address change by telephone. In that case, a
shareholder should follow the other redemption procedures set forth in this
Prospectus. Institutional accounts (certain corporations, bank trust departments
and government entities which qualify to purchase shares at net asset value
pursuant to the terms of this Prospectus) which wish to execute redemptions in
excess of $50,000 must complete an Institutional Telephone Privileges Agreement
which is available from the Franklin Templeton Institutional Services Department
by telephoning 1-800/321-8563.
Redeeming Shares Through Securities Dealers
The Fund will accept redemption orders from securities dealers who have entered
into an agreement with Distributors. This is known as a repurchase. The only
difference between a normal redemption and a repurchase is that if the
shareholder redeems shares through a dealer, the redemption price will be the
net asset value next calculated after the shareholder's securities dealer
receives the order which is promptly transmitted to the Fund, rather than on the
day the Fund receives the shareholder's written request in proper form. The
documents described under "Redemptions By Mail" above, as well as a signed
letter of instruction, are required regardless of whether the shareholder
redeems shares directly or submits such shares to a securities dealer for
repurchase. A shareholder's letter should reference the Fund, the account
number, the fact that the repurchase was ordered by a securities dealer and the
securities dealer's name. Details of the dealer-ordered trade, such as trade
date, confirmation number, and the amount of shares or dollars, will help speed
processing of the redemption. The seven-day period within which the proceeds of
the shareholder's redemption will be sent will begin when the Fund receives all
documents required to complete ("settle") the repurchase in proper form. The
redemption proceeds will not earn dividends or interest during the time between
receipt of the securities dealer's repurchase order and the date the redemption
is processed upon receipt of all documents necessary to settle the repurchase.
Thus, it is in a shareholder's best interest to have the required documentation
completed and forwarded to the Fund as soon as possible. The shareholder's
securities dealer may charge a fee for handling the order. The SAI contains more
information on the redemption of shares.
Contingent Deferred Sales Charge
In order to recover commissions paid to securities dealers, investments of $1
million or more redeemed within the contingency period of 12 months of the
calendar month of such investment will be assessed a contingent deferred sales
charge, unless one of the exceptions described below applies. The charge is 1%
of the lesser of the value of the shares redeemed (exclusive of reinvested
dividends and capital gain distributions) or the net asset value at the time of
purchase of such shares, and is retained by Distributors. The contingent
deferred sales charge is waived in certain instances.
In determining whether a contingent deferred sales charge applies, shares not
subject to a contingent deferred sales charge are deemed to be redeemed first,
in the following order: (i) a calculated number of shares representing amounts
attributable to capital appreciation of those shares held less than the
contingency period; (ii) shares purchased with reinvested dividends and capital
gain distributions; and (iii) other shares held longer than the contingency
period. Shares subject to a contingent deferred sales charge will then be
redeemed on a "first-in, first-out" basis. For tax purposes, a contingent
deferred sales charge is treated as either a reduction in redemption proceeds or
an adjustment to the cost basis of the shares redeemed.
The contingent deferred sales charge is waived for: exchanges; any account fees;
redemptions through a Systematic Withdrawal Plan set up for shares prior to
February 1, 1995, and for Systematic Withdrawal Plans set up thereafter,
redemptions of up to 1% monthly of an account's net asset value (3% quarterly,
6% semiannually or 12% annually); redemptions initiated by the Fund due to a
shareholder's account falling below the minimum specified account size; and
redemptions following the death of the shareholder or the beneficial owner.
All investments made during a calendar month, regardless of when during the
month the investment occurred, will age one month on the last day of that month
and each subsequent month.
Requests for redemptions of a specified dollar amount, unless otherwise
specified, will result in additional shares being redeemed to cover any
applicable contingent deferred sales charge while requests for redemption of a
specific number of shares will result in the applicable contingent deferred
sales charge being deducted from the total dollar amount redeemed.
Additional Information Regarding Redemptions
The Fund may delay the mailing of the redemption check, or a portion thereof,
until the clearance of the check used to purchase Fund shares, which may take up
to 15 days or more. Although the use of a certified or cashier's check will
generally reduce this delay, shares purchased with these checks will also be
held pending clearance. Shares purchased by federal funds wire are available for
immediate redemption. In addition, the right of redemption may be suspended or
the date of payment postponed if the Exchange is closed (other than customary
closing) or upon the determination of the SEC that trading on the Exchange is
restricted or an emergency exists, or if the SEC permits it, by order, for the
protection of shareholders. Of course, the amount received may be more or less
than the amount invested by the shareholder, depending on fluctuations in the
market value of securities owned by the Fund.
Other Information
Distribution or redemption checks sent to shareholders do not earn interest or
any other income during the time such checks remain uncashed and neither the
Fund nor its affiliates will be liable for any loss to the shareholder caused by
the shareholder's failure to cash such checks.
"Cash" payments to or from the Fund may be made by check, draft or wire. The
Fund has no facility to receive, or pay out, cash in the form of currency.
For any information required about a proposed liquidation, a shareholder may
call Franklin's Shareholder Services Department or the securities dealer may
call Franklin's Dealer Services Department.
Telephone Transactions
Shareholders of the Fund and their investment representative of record, if any,
may be able to execute various transactions by calling Investor Services at
1-800/632-2301.
All shareholders will be able to execute various telephone transactions,
including to: (i) effect a change in address, (ii) change a dividend option,
(iii) transfer Fund shares in one account to another identically registered
account in the Fund, (iv) request the issuance of certificates, to be sent to
the address of record only, and (v) exchange Fund shares as described in this
Prospectus by telephone. In addition, shareholders who complete and file an
Agreement as described under "How Do I Sell Shares? - Redemptions by Telephone"
will be able to redeem shares of the Fund.
Verification Procedures
The Fund and Investor Services will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. These will include:
recording all telephone calls requesting account activity by telephone,
requiring that the caller provide certain personal and/or account information
requested by the telephone service agent at the time of the call for the purpose
of establishing the caller's identification, and sending a confirmation
statement on redemptions to the address of record each time account activity is
initiated by telephone. So long as the Fund and Investor Services follow
instructions communicated by telephone which were reasonably believed to be
genuine at the time of their receipt, neither they nor their affiliates will be
liable for any loss to the shareholder caused by an unauthorized transaction.
The Fund and Investor Services may be liable for any losses due to unauthorized
or fraudulent instructions in the event such reasonable procedures are not
followed. Shareholders are, of course, under no obligation to apply for or
accept telephone transaction privileges. In any instance where the Fund or
Investor Services is not reasonably satisfied that instructions received by
telephone are genuine, the requested transaction will not be executed, and
neither the Fund nor Investor Services will be liable for any losses which may
occur because of a delay in implementing a transaction.
General
During periods of drastic economic or market changes, it is possible that the
telephone transaction privileges will be difficult to execute because of heavy
telephone volume. In such situations, shareholders may wish to contact their
investment representative for assistance or send written instructions to the
Fund as detailed elsewhere in this Prospectus.
Neither the Fund nor Investor Services will be liable for any losses resulting
from the inability of a shareholder to execute a telephone transaction.
Valuation of Fund Shares
The net asset value per share of the Fund is determined as of the scheduled
close of the Exchange (generally 1:00 p.m. Pacific time) each day that the
Exchange is open for trading. Many newspapers carry daily quotations of the
prior trading day's closing "bid" (net asset value) and "ask" (offering price,
which includes the maximum front-end sales charge of the Fund).
The net asset value per share of the Fund is determined in the following manner:
The aggregate of all liabilities, accrued expenses and taxes and any necessary
reserves, is deducted from the aggregate gross value of all assets, and the
difference is divided by the number of shares of the Fund outstanding at the
time. For the purpose of determining the aggregate net assets of the Fund, cash
and receivables are valued at their realizable amounts. Interest is recorded as
accrued. Portfolio securities for which market quotations are readily available
are valued within the range of the most recent bid and ask prices as obtained
from one or more dealers that make markets in the securities. Portfolio
securities which are traded both in the over-the-counter market and on a stock
exchange are valued according to the broadest and most representative market as
determined by the Manager. Municipal securities generally trade in the
over-the-counter market rather than on a securities exchange. Other securities
for which market quotations are readily available are valued at the current
market price, which may be obtained from a pricing service, based on a variety
of factors, including recent trades, institutional size trading in similar types
of securities (considering yield, risk and maturity) and/or developments related
to specific issues. Securities and other assets for which market prices are not
readily available are valued at fair value as determined following procedures
approved by the Board of Trustees. With the approval of trustees, the Fund may
utilize a pricing service, bank or securities dealer to perform any of the above
described functions.
How to Get Information
Regarding an Investment in the Fund
Any questions or communications regarding a shareholder's account should be
directed to Investor Services at the address shown on the back cover of this
Prospectus.
From a touch-tone phone, Franklin and Templeton shareholders may access an
automated system (day or night) which offers the following features:
By calling the Franklin TeleFACTS(R) system at 1-800/247-1753, shareholders may
obtain Class I and Class II account information, current price and, if
available, yield or other performance information specific to the Fund or any
Franklin Templeton Fund. In addition, Franklin Class I shareholders may process
an exchange, within the same class, into an identically registered Franklin
account; and request duplicate confirmation or year-end statements, money fund
checks, if applicable, and deposit slips.
Fund information may be accessed by entering Fund Code 174 followed by the #
sign. The system's automated operator will prompt the caller with easy to follow
step-by-step instructions from the main menu. Other features may be added in the
future.
To assist shareholders and securities dealers wishing to speak directly with a
representative, the following is a list of the various Franklin departments,
telephone numbers and hours of operation to call. The same numbers may be used
when calling from a rotary phone:
Hours of Operation (Pacific time)
Department Name Telephone No. (Monday through Friday)
-----------------------------------------------------------------------------
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
8:30 a.m. to 5:00 p.m. (Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
In order to ensure that the highest quality of service is being provided,
telephone calls placed to or by representatives in Franklin or Templeton service
departments may be accessed, recorded and monitored. These calls can be
determined by the presence of a regular beeping tone.
Performance
Advertisements, sales literature and communications to shareholders may contain
several measures of the Fund's performance, including current yield, tax
equivalent yield, various expressions of total return, current distribution rate
and taxable equivalent distribution rate. They may occasionally cite statistics
to reflect the Fund's volatility or risk.
Average annual total return figures, as prescribed by the SEC, represent the
average annual percentage change in value of $1,000 invested at the maximum
public offering price (offering price includes front-end sales charge) for one-,
five- and ten-year periods, or portion thereof, to the extent applicable,
through the end of the most recent calendar quarter, assuming reinvestment of
all distributions. The Fund may also furnish total return quotations for other
periods or based on investments at various sales charge levels or at net asset
value. For such purposes, total return equals the total of all income and
capital gain paid to shareholders, assuming reinvestment of all distributions,
plus (or minus) the change in the value of the original investment, expressed as
a percentage of the purchase price.
Current yield reflects the income per share earned by the Fund's portfolio
investments. It is calculated by dividing the Fund's net investment income per
share during a recent 30-day period by the maximum public offering price on the
last day of that period and annualizing the result. Tax equivalent yield
demonstrates the yield from a taxable investment necessary to produce an
after-tax yield equivalent to that of a fund which invests in tax-exempt
obligations. It is computed by dividing the tax-exempt portion of a fund's yield
(calculated as indicated) by one minus a stated income tax rate and adding the
product to the taxable portion (if any) of the fund's yield.
Current yield and tax equivalent yield which are calculated according to a
formula prescribed by the SEC (see the SAI) are not indicative of the dividends
or distributions which were or will be paid to the Fund's shareholders.
Dividends or distributions paid to shareholders are reflected in the current
distribution rate or taxable equivalent distribution rate, which may be quoted
to shareholders. The current distribution rate is computed by dividing the total
amount of dividends per share paid by the Fund during the past 12 months by a
current maximum offering price. A taxable equivalent distribution rate
demonstrates the taxable distribution rate necessary to produce an after tax
distribution rate equivalent to the Fund's distribution rate (calculated as
indicated above). Under certain circumstances, such as when there has been a
change in the amount of dividend payout or a fundamental change in investment
policies, it might be appropriate to annualize the dividends paid during the
period such policies were in effect, rather than using the dividends during the
past 12 months. The current distribution rate differs from the current yield
computation because it may include distributions to shareholders from sources
other than dividends and interest, such as short-term capital gain, and is
calculated over a different period of time.
In each case, performance figures are based upon past performance, reflect all
recurring charges against Fund income and will assume the payment of the maximum
sales charge on the purchase of shares. When there has been a change in the
sales charge structure, the historical performance figures will be restated to
reflect the new rate. The investment results of the Fund, like all other
investment companies, will fluctuate over time; thus, performance figures should
not be considered to represent what an investment may earn in the future or what
the Fund's yield, tax equivalent yield, distribution rate, taxable equivalent
distribution rate or total return may be in any future period.
General Information
Reports to Shareholders
The Fund's fiscal year ends February 28. Annual Reports containing audited
financial statements of the Trust, including the auditor's report, and
Semi-Annual Reports containing unaudited financial statements are automatically
sent to shareholders. To reduce the volume of mail sent to one household as well
as to reduce Fund expenses, Investor Services will attempt to identify related
shareholders within a household, and send only one copy of the report.
Additional copies may be obtained, without charge, upon request to the Trust at
the telephone number or address set forth on the cover page of this Prospectus.
Additional information on Fund performance is included in the Trust's Annual
Report to Shareholders and the SAI.
Organization and Voting Rights
The Trust was organized as a Massachusetts business trust on September 18, 1984.
The Agreement and Declaration of Trust permits the trustees to issue an
unlimited number of full and fractional shares of beneficial interest without
par value, which may be issued in any number of series or classes thereof.
Shares issued will be fully paid and non-assessable and will have no preemptive,
conversion, or sinking rights. Shares of each series have equal and exclusive
rights as to dividends and distributions as declared by such series and the net
assets of such series upon liquidation or dissolution. The Board of Trustees may
from time to time issue other series of the Trust, the assets and liabilities of
which will be separate and distinct from any other series.
Shares of each series have equal rights as to voting and vote separately as to
issues affecting that series or the Trust unless otherwise permitted by the 1940
Act. Voting rights are noncumulative, so that in any election of trustees the
holders of more than 50% of the shares voting can elect 100% of the trustees, if
they choose to do so and, in such event, the holders of the remaining shares
voting will not be able to elect any person or persons to the Board of Trustees.
The Trust does not intend to hold annual shareholders' meetings. The Trust may,
however, hold a special shareholders' meeting for such purposes as changing
fundamental investment restrictions, approving a new management agreement or any
other matters which are required to be acted on by shareholders under the 1940
Act. A meeting may also be called by the trustees in their discretion or by
shareholders holding at least ten percent of the outstanding shares entitled to
vote at the meeting. Shareholders may receive assistance in communicating with
other shareholders in connection with the election or removal of trustees, such
as that provided in Section 16(c) of the 1940 Act.
Redemptions by the Fund
The Fund reserves the right to redeem, at net asset value, shares of any
shareholder whose account has a value of less than $50, but only where the value
of such account has been reduced by the shareholder's prior voluntary redemption
of shares and has been inactive (except for the reinvestment of distributions)
for a period of at least six months, provided advance notice is given to the
shareholder. More information is included in the SAI.
Account Registrations
An account registration should reflect the investor's intentions as to
ownership. Where there are two co-owners on the account, the account will be
registered as "Owner 1" and "Owner 2"; the "or" designation is not used except
for money market fund accounts. If co-owners wish to have the ability to redeem
or convert on the signature of only one owner, a limited power of attorney may
be used.
Accounts should not be registered in the name of a minor, either as sole or
co-owner of the account. Transfer or redemption for such an account may require
court action to obtain release of the funds until the minor reaches the legal
age of majority. The account should be registered in the name of one "Adult" as
custodian for the benefit of the "Minor" under the Uniform Transfer or Gifts to
Minors Act.
A trust designation such as "trustee" or "in trust for" should only be used if
the account is being established pursuant to a legal, valid trust document. Use
of such a designation in the absence of a legal trust document may cause
difficulties and require court action for transfer or redemption of the funds.
Shares, whether in certificate form or not, registered as joint tenants or "Jt
Ten" shall mean "as joint tenants with rights of survivorship" and not "as
tenants in common."
Except as indicated, a shareholder may transfer an account in the Fund carried
in "street" or "nominee" name by the shareholder's securities dealer to a
comparably registered Fund account maintained by another securities dealer. Both
the delivering and receiving securities dealers must have executed dealer
agreements on file with Distributors. Unless a dealer agreement has been
executed and is on file with Distributors, the Fund will not process the
transfer and will so inform the shareholder's delivering securities dealer. To
effect the transfer, a shareholder should instruct the securities dealer to
transfer the account to a receiving securities dealer and sign any documents
required by the securities dealers to evidence consent to the transfer. Under
current procedures, the account transfer may be processed by the delivering
securities dealer and the Fund after the Fund receives authorization in proper
form from the shareholder's delivering securities dealer. Account transfers may
be effected electronically through the services of the NSCC.
The Fund may conclusively accept instructions from an owner or the owner's
nominee listed in publicly available nominee lists, regardless of whether the
account was initially registered in the name of or by the owner, the nominee, or
both. If a securities dealer or other representative is of record on an
investor's account, the investor will be deemed to have authorized the use of
electronic instructions on the account, including, without limitation, those
initiated through the services of the NSCC, to have adopted as instruction and
signature any such electronic instructions received by the Fund and the
Shareholder Services Agent, and to have authorized them to execute the
instructions without further inquiry. At the present time, such services which
are available include the NSCC's "Networking," "Fund/SERV," and "ACATS" systems.
Any questions regarding an intended registration should be answered by the
securities dealer handling the investment, or by calling Franklin's Fund
Information Department.
Important Notice Regarding
Taxpayer IRS Certifications
Pursuant to the Code and U.S. Treasury regulations, the Fund may be required to
report to the Internal Revenue Service ("IRS") any taxable dividend, capital
gain distribution, or other reportable payment (including share redemption
proceeds) and withhold 31% of any such payments made to individuals and other
non-exempt shareholders who have not provided a correct taxpayer identification
number ("TIN") and made certain required certifications that appear in the
Shareholder Application. A shareholder may also be subject to backup withholding
if the IRS or a securities dealer notifies the Fund that the number furnished by
the shareholder is incorrect or that the shareholder is subject to backup
withholding for previous under-reporting of interest or dividend income.
The Fund reserves the right to (1) refuse to open an account for any person
failing to provide a TIN along with the required certifications and (2) close an
account by redeeming its shares in full at the then-current net asset value upon
receipt of notice from the IRS that the TIN certified as correct by the
shareholder is in fact incorrect or upon the failure of a shareholder who has
completed an "awaiting TIN" certification to provide the Fund with a certified
TIN within 60 days after opening the account.
Portfolio Operations
The following persons are primarily responsible for the day-to-day management of
the Fund's portfolio: Mr. Kenny since 1994 and Mr. Jennings and Ms. Wong since
1992.
Thomas Kenny
Senior Vice President and Portfolio Manager
Franklin Advisers, Inc.
Mr. Kenny joined Franklin in 1986 and is the director of Franklin's Municipal
Bond Department. He received a Bachelor of Arts degree in Business and Economics
from the University of California at Santa Barbara and a Master of Science
degree in Finance from Golden Gate University. He is a member of several
municipal securities industry-related committees and associations.
Stella Wong
Portfolio Manager
Franklin Advisers, Inc.
Ms. Wong holds a Bachelor of Science degree in Business Administration from San
Francisco State University and a Master's degree in Financial Planning from
Golden Gate University. She is a member of several industry-related committees
and associations. She joined Advisers in 1986.
Andrew Jennings
Senior Vice President and Portfolio Manager
Franklin Advisers, Inc.
Mr. Jennings has been responsible for portfolio recommendations and decisions of
the Fund since its inception. He attended Villanova University in Philadelphia,
has been in the securities industry for over 33 years and is a member of several
municipal securities industry-related committees and associations. From 1985 to
1990, Mr. Jennings was First Vice President and Manager of the Municipal
Institutional Bond Department at Dean Witter Reynolds, Inc.
Franklin
Tax-Free Trust
PROSPECTUS May 1, 1995
as amended December 5, 1995
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777 1-800/DIAL BEN
Franklin Tax-Free Trust (the "Trust") is an open-end management investment
company consisting of 27 separate series, most of which offer two classes of
shares ("multiclass") to their investors. This Prospectus relates to the nine
series listed below, eight of which, as noted, are currently offering two
classes of shares:
Class I
Franklin Arizona Tax-Free Income Fund - Class I
Franklin Colorado Tax-Free Income Fund - Class I
Franklin Connecticut Tax-Free Income Fund - Class I
Franklin High Yield Tax-Free Income Fund - Class I
Franklin Indiana Tax-Free Income Fund - Class I*
Franklin New Jersey Tax-Free Income Fund - Class I
Franklin Oregon Tax-Free Income Fund - Class I
Franklin Pennsylvania Tax-Free Income Fund - Class I
Franklin Puerto Rico Tax-Free Income Fund - Class I
*Class II not available
Class II
Franklin Arizona Tax-Free Income Fund - Class II
Franklin Colorado Tax-Free Income Fund - Class II
Franklin Connecticut Tax-Free Income Fund - Class II
Franklin High Yield Tax-Free Income Fund - Class II
Franklin New Jersey Tax-Free Income Fund - Class II
Franklin Oregon Tax-Free Income Fund - Class II
Franklin Pennsylvania Tax-Free Income Fund - Class II
Franklin Puerto Rico Tax-Free Income Fund - Class II
Each Fund may, separately or collectively, be referred to as the "Fund" or
"Funds," "State Funds" or individually by the state, territory or investment
policy included in its name. Each Fund may also be referred to as Class I or
Class II shares, as required within the context of the discussion. The Indiana
Fund will be included in all discussions pertaining to Class I in this
Prospectus. Investors can choose between Class I shares, if available for the
series, which generally bear a higher front-end sales charge and lower ongoing
Rule 12b-1 distribution fees ("Rule 12b-1 fees"), and Class II shares, which
generally have a lower front-end sales charge and higher ongoing Rule 12b-1
fees. Investors should consider the differences between the two classes,
including the impact of sales charges and distribution fees, in choosing the
more suitable class given their anticipated investment amount and time horizon.
See "How to Buy Shares of the Funds - Alternative Purchase Arrangements."
THE HIGH YIELD FUND MAY INVEST UP TO 100% OF ITS PORTFOLIO IN NON-INVESTMENT
GRADE BONDS, COMMONLY KNOWN AS "JUNK BONDS", WHICH ENTAIL DEFAULT AND OTHER
RISKS GREATER THAN THOSE ASSOCIATED WITH HIGHER RATED SECURITIES. INVESTORS
SHOULD CAREFULLY ASSESS THE RISKS ASSOCIATED WITH AN INVESTMENT IN THE HIGH
YIELD FUND. SEE "INVESTMENT RISK CONSIDERATIONS - RISK FACTORS RELATING TO HIGH
YIELDING, FIXED-INCOME SECURITIES."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Each Fund seeks to provide investors with as high a level of income exempt from
federal income taxes as is consistent with prudent investing, while seeking
preservation of shareholders' capital. Each Fund, other than the High Yield
Fund, also seeks to provide a maximum level of income which is exempt from the
personal income taxes for resident shareholders of the named state or territory.
The High Yield Fund seeks to provide investors with a high current yield exempt
from federal income taxes by investing in municipal securities which have been
rated in the lower-grade categories by one of various "nationally recognized
statistical rating organizations" ("NRSROs") such as Moody's Investors Service
("Moody's"), Standard and Poor's Corporation ("S&P"), or Fitch Investors
Service, Inc.("Fitch"), or in unrated municipal securities deemed to be of
comparable credit quality by the Fund's investment manager. As a secondary
objective, the Fund will seek capital appreciation to the extent this is
possible and is consistent with its principal investment objective. Franklin
Puerto Rico Tax-Free Income Fund seeks to provide a maximum level of income
which is exempt from the personal income taxes of the majority of states.
Residents of Puerto Rico should consult their tax advisers prior to investing in
any of the Funds.
The High Yield Fund invests in a diversified portfolio of municipal securities
from different states. Each State Fund invests primarily in municipal securities
issued by its respective state and its political subdivisions, agencies and
instrumentalities.
This Prospectus is intended to set forth in a clear and concise manner
information about the Trust and each of the nine Funds that a prospective
investor should know before investing. After reading the Prospectus, it should
be retained for future reference; it contains information about the purchase and
sale of shares and other items which a prospective investor will find useful to
have.
A Statement of Additional Information ("SAI"), concerning the Funds, dated May
1, 1995, as may be amended from time to time, provides a further discussion of
certain areas in this Prospectus and other matters which may be of interest to
some investors. It has been filed with the Securities and Exchange Commission
("SEC") and is incorporated herein by reference. A copy is available without
charge from the Trust or the Trust's principal underwriter, Franklin/Templeton
Distributors, Inc. ("Distributors") at the address or telephone number shown on
the cover.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK; FURTHER, SUCH SHARES ARE NOT FEDERALLY INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
AGENCY. SHARES OF THE FUNDS INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED IN ANY
STATE IN WHICH THE OFFERING IS NOT AUTHORIZED. NO SALES REPRESENTATIVE, DEALER,
OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. FURTHER
INFORMATION MAY BE OBTAINED FROM THE UNDERWRITER.
Contents Page
Expense Table.................... 3
Financial Highlights............. 5
About the Trust.................. 8
Investment Objective and
Policies of Each Fund........... 8
Investment Risk Considerations... 12
Management of the Trust.......... 18
Distributions to Shareholders.... 20
Taxation of the Funds
and Their Shareholders.......... 21
How to Buy Shares of the Funds... 23
Other Programs and Privileges
Available to Fund Shareholders.. 30
Exchange Privilege............... 32
How to Sell Shares of the Funds.. 35
Telephone Transactions........... 39
Valuation of Shares of the Funds. 40
How to Get Information Regarding
an Investment in the Fund....... 40
Performance...................... 42
General Information.............. 43
Account Registrations............ 44
Important Notice Regarding
Taxpayer IRS Certifications..... 45
Portfolio Operations............. 46
Appendix A -
Description of State
Tax Treatment ................ 47
Appendix B -
Special Factors Affecting
Each State Fund .............. 51
Appendix C -
Description of Municipal
Securities Ratings ........... 54
Expense Table
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder will bear directly or indirectly in
connection with an investment in a Fund. The figures for both classes of shares
are based on aggregate operating expenses of the Class I shares for the fiscal
year ended February 28,1995, restated for Class II to reflect Rule 12b-1 for the
class as though such had been in effect at the beginning of the fiscal year.
<TABLE>
<CAPTION>
Connec- High New Penn- Puerto
Arizona Colorado ticut Yield Indiana Jersey Oregon sylvania Rico
Fund Fund Fund Fund Fund Fund Fund Fund Fund
Class I Class I Class I Class I Class I Class I Class I Class I Class I
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)... 4.25% 4.25% 4.25% 4.25% 4.25% 4.25% 4.25% 4.25% 4.25%
Deferred Sales Charge.................. NONE* NONE* NONE* NONE* NONE* NONE* NONE* NONE* NONE*
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees........................ 0.48% 0.56% 0.58% 0.46% 0.62% 0.49% 0.52% 0.49% 0.57%
**12b-1 Fees........................... 0.07%+,++ 0.07%+,++ 0.07%+,++ 0.07%+,++ 0.07%+,++ 0.07%+,++ 0.07%+,++ 0.07%+,++ 0.07%+,++
Other Expenses......................... 0.06% 0.08% 0.07% 0.08% 0.13% 0.08% 0.07% 0.08% 0.10%
Total Fund Operating Expenses.......... 0.61% 0.71% 0.72% 0.61% 0.82% 0.64% 0.66% 0.64% 0.74%
Connec- High New Penn- Puerto
Arizona Colorado ticut Yield Jersey Oregon sylvania Rico
Fund Fund Fund Fund Fund Fund Fund Fund
Class II Class II Class II
Class II Class II Class II Class II Class II
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price).............. 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
Deferred Sales Charge............................. 1.00%** 1.00%** 1.00%** 1.00%** 1.00%** 1.00%** 1.00%** 1.00%**
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees................................... 0.48% 0.56% 0.58% 0.46% 0.49% 0.52% 0.49% 0.57%
**12b-1 Fees...................................... 0.65%++ 0.65%++ 0.65%++ 0.65%++ 0.65%++ 0.65%++ 0.65%++ 0.65%++
Other Expenses.................................... 0.06% 0.08% 0.07% 0.08% 0.08% 0.07% 0.08% 0.10%
Total Fund Operating Expenses..................... 1.19% 1.29% 1.30% 1.19% 1.22% 1.24% 1.22% 1.32%
</TABLE>
*Class I investments of $1 million or more are not subject to a front-end sales
charge; however, a contingent deferred sales charge of 1%, which has not been
reflected in the Example below, is generally imposed on certain redemptions
within a "contingency period" of 12 months of the calendar month of such
investments. See "How to Sell Shares of the Fund - Contingent Deferred Sales
Charge."
**Class II shares redeemed within a "contingency period" of 18 months of the
calendar month following such investments are subject to a 1% contingent
deferred sales charge. See "How to Sell Shares of the Fund - Contingent Deferred
Sales Charge."
+Consistent with National Association of Securities Dealers, Inc.'s rules, it is
possible that the combination of front-end sales charges and Rule 12b-1 fees
could cause long-term shareholders to pay more than the economic equivalent of
the maximum front-end sales charges permitted under those same rules.
++Annualized. Actual Rule 12b-1 fees for each of the Class I shares represented
0.06% of average net assets.
Although Class II has a lower front-end sales charge than Class I, over time the
higher Rule 12b-1 fees for Class II may cause shareholders to pay more for Class
II shares than for Class I shares. Given the maximum front-end sales charge and
the rate of Rule 12b-1 fees of each class, it is estimated that this will take
approximately six years for shareholders who maintain total shares valued at
less than $100,000 in the Franklin Templeton Funds. Shareholders with larger
investments in the Franklin Templeton Funds will reach the crossover point more
quickly.
Investors should be aware that the above table is not intended to reflect in
precise detail the fees and expenses associated with an individual's own
investment in a Fund. Rather the table has been provided only to assist
investors in gaining a more complete understanding of fees, charges and
expenses. For a more detailed discussion of these matters, investors should
refer to the appropriate sections of this Prospectus.
Example
As required by regulations of the SEC, the following examples illustrate the
expenses including the maximum front-end sales charge and applicable contingent
deferred sales charge, that apply to a $1,000 investment in a Fund over various
time periods assuming (1) a 5% annual rate of return and (2) redemption at the
end of each time period:
Name of Fund One Year Three Years Five Years Ten Years
- --------------------------- --------- --------- --------- --------
Arizona Fund Class I.......... $48 $61 $75 $115
Arizona Fund Class II......... 32 47 75 153
Colorado Fund Class I ........ 49 64 80 127
Colorado Fund, Class II....... 33 51 80 164
High Yield Fund Class I....... 48 61 75 115
Name of Fund One Year Three Years Five Years Ten Years
- --------------------------- ---------- ---------- ---------- --------
High Yield Fund Class II...... $32 $47 $75 $153
Indiana Fund, Class I......... 51 68 86 140
New Jersey Fund Class I....... 49 62 77 119
New Jersey Fund Class II...... 32 48 76 156
Oregon Fund Class I........... 49 63 78 121
Oregon Fund Class II.......... 32 49 77 158
Pennsylvania Fund Class I..... 49 62 77 119
Pennsylvania Fund Class II.... 32 48 76 156
Puerto Rico Fund Class I...... 50 65 82 130
Puerto Rico Fund Class II..... 33 51 82 167
The above examples are based on the restated aggregate annual operating expenses
above and should not be considered a representation of past or future expenses,
which may be more or less than those shown. The operating expenses are borne by
each Fund and only indirectly by shareholders as a result of their investment in
a Fund. In addition, federal securities regulations require the example to
assume an annual return of 5%, but each Fund's actual return may be more or less
than 5%.
Financial Highlights
Set forth below is a table containing the financial highlights for a share of
Class I of each Fund from its effective date of registration, as indicated
below, through the fiscal year ended February 28, 1995. The information for each
of the five fiscal years in the period ended February 28, 1995, has been audited
by Coopers & Lybrand L.L.P., independent auditors, whose audit report appears in
the financial statements in the Fund's Annual Report to Shareholders dated
February 28, 1995. The remaining figures, which are also audited, are not
covered by the auditors' current report. Information regarding Class II shares
of each Fund will be included in this table after they have been offered to the
public for a reasonable period of time. See the discussion "Reports to
Shareholders" under "General Information."
<TABLE>
<CAPTION>
Per Share Operating Performance Ratios/Supplemental Data
Distri- Distri- Ratio of Net
Net Asset Net Realized butions butions Net Asset Net Assets Ratio of Investment
Year Value at Net & Unrealized Total From From Net From Total Value at End Expenses Income Portfolio
Ended Beginning Investment Gain (Loss) Investment Investment Capital Distri- at End Total of Year to Average to Average Turnover
February 28of Year Incomeon Securities Operations Income Gains butions of Year Return+(in 000's)Net Assets**Net Assets Rate
Franklin Arizona Tax-Free Income Fund:
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
19884 $10.00 $0.42 $0.170 $0.590 $(0.180) - $(0.180) $10.41 9.88%*$ 7,885 - 6.20%* 24.07%
1989 10.41 0.75 (0.040) 0.710 (0.748) $(0.002) (0.750) 10.37 6.86 65,710 0.51% 6.58 26.64
1990 10.37 0.71 0.198 0.908 (0.768) - (0.768) 10.51 8.70 214,606 0.68 6.53 20.82
1991 10.51 0.70 0.128 0.828 (0.768) - (0.768) 10.57 7.92 412,912 0.59 6.58 4.13
1992 10.57 0.67 0.308 0.978 (0.728) - (0.728) 10.82 9.45 585,986 0.56 6.37 1.56
1993 10.82 0.68 0.733 1.413 (0.663) - (0.663) 11.57 13.22 707,702 0.55 6.11 5.67
1994 11.57 0.66 0.020 0.680 (0.670) - (0.670) 11.58 5.76 796,838 0.54 5.65 14.17
1995 11.58 0.65 (0.481) 0.169 (0.639) - (0.639) 11.11 1.63 720,801 0.60 5.86 18.65
Franklin Colorado Tax-Free Income Fund:
19884 $10.00 $0.46 $0.117 $0.577 $(0.177) - $(0.177) $10.40 9.00%*$ 1,969 - 6.91%* 22.46%
1989 10.40 0.79 0.076 0.866 (0.736) - (0.736) 10.53 8.41 11,026 - 7.25 7.83
1990 10.53 0.73 0.196 0.926 (0.756) - (0.756) 10.70 8.76 38,315 0.56% 6.63 0.82
1991 10.70 0.70 0.056 0.756 (0.756) - (0.756) 10.70 7.07 69,715 0.74 6.54 17.72
1992 10.70 0.68 0.361 1.041 (0.741) - (0.741) 11.00 9.93 110,085 0.70 6.44 21.46
1993 11.00 0.70 0.845 1.545 (0.695) - (0.695) 11.85 14.26 159,280 0.67 6.20 5.66
1994 11.85 0.68 0.100 0.780 (0.690) - (0.690) 11.94 6.49 202,158 0.64 5.69 10.85
1995 11.94 0.67 (0.568) 0.102 (0.662) - (0.662) 11.38 1.05 194,564 0.70 5.94 28.83
Franklin Connecticut Tax-Free Income Fund:
19896 10.00 0.20 0.017 0.217 (0.057) - (0.057) 10.16 5.16 5,637 - 4.68 5.21
1990 10.16 0.70 0.184 0.884 (0.684) - (0.684) 10.36 8.65 22,793 0.36 6.37 3.69
1991 10.36 0.64 0.024 0.664 (0.684) - (0.684) 10.34 6.39 48,035 0.71 6.10 8.65
1992 10.34 0.62 0.211 0.831 (0.681) - (0.681) 10.49 8.16 88,184 0.71 6.11 28.28
1993 10.49 0.64 0.664 1.304 (0.634) - (0.634) 11.16 12.60 126,816 0.69 5.97 28.52
1994 11.16 0.62 0.080 0.700 (0.630) - (0.630) 11.23 6.16 163,050 0.65 5.54 5.54
1995 11.23 0.62 (0.597) 0.023 (0.613) - (0.613) 10.64 .37 155,623 0.71 5.83 75.72
Franklin Indiana Tax-Free Income Fund:
19884 10.00 0.45 0.209 0.659 (0.189) - (0.189) 10.47 11.28 1,693 - 6.70 -
1989 10.47 0.79 (0.014) 0.776 (0.756) - (0.756) 10.49 7.47 5,875 - 7.41 10.67
1990 10.49 0.80 0.236 1.036 (0.756) - (0.756) 10.77 9.86 11,310 0.06 7.34 0.06
1991 10.77 0.74 0.096 0.836 (0.776) - (0.776) 10.83 7.78 14,946 0.51 6.91 24.60
1992 10.83 0.69 0.325 1.015 (0.775) - (0.775) 11.07 9.53 23,914 0.50 6.60 0.03
1993 11.07 0.71 0.828 1.538 (0.708) - (0.708) 11.90 14.10 37,367 0.59 6.16 7.98
1994 11.90 0.68 0.108 0.788 (0.678) - (0.678) 12.01 6.53 47,870 0.71 5.62 16.12
1995 12.01 0.66 (0.608) 0.052 (0.662) - (0.662) 11.40 .58 46,583 0.81 5.84 26.49
Franklin New Jersey Tax-Free Income Fund:
19895 10.00 0.58 0.317 0.897 (0.375) $(0.002) (0.377) 10.52 11.20 19,973 0.25 6.09 7.44
1990 10.52 0.71 0.230 0.940 (0.780) - (0.780) 10.68 8.87 99,299 0.73 6.41 10.86
1991 10.68 0.69 0.238 0.928 (0.768) - (0.768) 10.84 8.79 258,514 0.65 6.40 1.84
1992 10.84 0.68 0.348 1.028 (0.708) - (0.708) 11.16 9.65 332,536 0.60 6.30 3.66
1993 11.16 0.69 0.694 1.384 (0.688) (0.006) (0.694) 11.85 12.55 433,702 0.59 6.06 14.12
1994 11.85 0.67 (0.016) 0.654 (0.684) - (0.684) 11.82 5.39 561,130 0.57 5.60 4.16
1995 11.82 0.66 (.55) 0.11 (0.65) - (0.65) 11.28 1.12 533,937 0.63 5.86 31.05
Franklin Oregon Tax-Free Income Fund:
19884 10.00 0.44 0.046 0.486 (0.116) - (0.116) 10.37 6.56 5,436 - 6.16 14.49
1989 10.37 0.72 0.046 0.766 (0.696) - (0.696) 10.44 7.44 24,453 0.45 6.72 15.08
1990 10.44 0.69 0.165 0.855 (0.705) - (0.705) 10.59 8.11 73,798 0.70 6.28 12.58
1991 10.59 0.68 0.148 0.828 (0.708) - (0.708) 10.71 7.87 123,486 0.70 6.40 10.74
1992 10.71 0.63 0.384 1.014 (0.704) - (0.704) 11.02 9.61 208,972 0.65 6.09 4.65
1993 11.02 0.66 0.702 1.362 (0.652) - (0.652) 11.73 12.52 303,719 0.62 5.87 7.78
1994 11.73 0.64 (0.021) 0.619 (0.649) - (0.649) 11.70 5.15 375,684 0.58 5.47 9.42
1995 11.70 0.63 (0.493) 0.137 (0.617) - (0.617) 11.22 1.36 349,458 0.65 5.71 26.44
Franklin Pennsylvania Tax-Free Income Fund:
19873 $10.00 $0.17 $ 0.060 $ 0.230 - - $ 0.000 $10.23 9.20%*$ 1,706 - 3.95%* 3.80%
1988 10.23 0.72 (0.799) (0.079) $(0.660) $(0.001) (0.661) 9.49 (0.53) 20,663 0.24% 7.21 18.69
1989 9.49 0.69 0.060 0.750 (0.720) - (0.720) 9.52 7.97 73,851 0.59 6.97 1.56
1990 9.52 0.66 0.190 0.850 (0.720) - (0.720) 9.65 8.86 180,720 0.73 6.66 6.31
1991 9.65 0.65 (0.090) 0.560 (0.720) - (0.720) 9.49 5.76 305,592 0.62 6.82 5.23
1992 9.49 0.64 0.380 1.020 (0.670) - (0.670) 9.84 10.99 391,301 0.59 6.71 4.44
1993 9.84 0.64 0.703 1.343 (0.633) - (0.633) 10.55 13.84 505,845 0.58 6.34 5.87
1994 10.55 0.63 0.014 0.644 (0.634) - (0.634) 10.56 5.99 615,546 0.56 5.90 4.73
1995 10.56 0.62 (0.406) 0.214 (0.614) - (0.614) 10.16 2.22 587,366 0.63 6.15 12.91
Franklin Puerto Rico Tax-Free Income Fund:
19861 10.00 0.62 0.925 1.545 (0.355) - (0.355) 11.19 16.92 1,638 - 6.55 26.52
1987 11.19 0.85 0.139 0.989 (0.872) (0.017) (0.889) 11.29 8.92 22,913 0.28 5.83 1.68
1988 11.29 0.72 (0.588) 0.132 (0.852) - (0.852) 10.57 1.29 66,598 0.75 6.67 41.98
1989 10.57 0.70 0.042 0.742 (0.772) - (0.772) 10.54 7.06 80,431 0.72 6.76 50.57
1990 10.54 0.71 0.235 0.945 (0.725) - (0.725) 10.76 8.91 82,819 0.70 6.65 14.12
1991 10.76 0.76 0.040 0.800 (0.720) - (0.720) 10.84 7.45 91,601 0.70 7.08 6.09
1992 10.84 0.69 0.301 0.991 (0.711) - (0.711) 11.12 9.31 112,714 0.70 6.45 15.01
1993 11.12 0.70 0.673 1.373 (0.683) - (0.683) 11.81 12.48 144,806 0.69 6.18 10.37
1994 11.81 0.68 0.034 0.714 (0.694) - (0.694) 11.83 5.95 175,036 0.66 5.77 5.10
1995 11.83 0.67 (.504) 0.166 (0.686) - (0.686) 11.31 1.60 176,888 0.73 5.95 18.30
Franklin High Yield Tax-Free Income Fund:
19872 10.00 0.62 0.222 0.842 (0.142) - (0.142) 10.70 8.73 2,604 - 7.10 118.29
1988 10.70 1.00 (0.409) 0.591 (0.951) - (0.951) 10.34 5.70 103,807 0.65 7.79 26.65
1989 10.34 0.79 0.240 1.030 (0.870) - (0.870) 10.50 10.87 746,018 0.61 7.68 2.02
1990 10.50 0.81 0.120 0.930 (0.890) - (0.890) 10.54 8.80 1,575,016 0.54 7.52 23.41
1991 10.54 0.82 (0.210) 0.610 (0.840) - (0.840) 10.31 5.71 1,718,082 0.52 7.90 70.60
1992 10.31 0.78 0.230 1.010 (0.840) - (0.840) 10.48 9.97 2,110,055 0.53 7.73 102.57
1993 10.48 0.79 0.624 1.414 (0.784) (0.010) (0.794) 11.10 13.72 2,742,765 0.54 7.45 33.46
1994 11.10 0.76 0.169 0.929 (0.779) - (0.779) 11.25 8.33 3,372,533 0.53 6.79 16.09
1995 11.25 0.74 (0.509) 0.231 (0.741) - (0.741) 10.74 2.28 3,287,270 0.60 6.92 15.89
</TABLE>
1For the period April 3, 1985 (Effective date of registration) to February 28,
1986.
2For the period March 1, 1986 (Effective date of registration) to February 28,
1987.
3For the period December 1, 1986 (Effective date of registration) to February
28, 1987.
4For the period September 1, 1987 (Effective date of registration) to February
29, 1988.
5For the period April 23, 1988 (Effective date of registration) to February 28,
1989.
6For the period October 3, 1988 (Effective date of registration) to February 28,
1989.
+Total return measures the change in value of an investment over the periods
indicated. It does not include the Funds' maximum 4.0% initial sales charge and
assumes reinvestment of dividends at the offering price and of capital gains, if
any, at net asset value.
*Annualized
**During the periods indicated below, Franklin Advisers, Inc., the investment
manager, agreed in advance to waive a portion of its management fees and made
payments of other expenses incurred by the Funds. Had such action not been
taken, ratios of operating expenses to average net assets would have been as
follows:
Ratio of
expenses
to average
net assets
Franklin Arizona Tax-Free Income Fund:
1989........................... 0.73%
Franklin Colorado Tax-Free Income Fund:
1989........................... 0.74%
1990........................... 0.72%
Franklin Connecticut Tax-Free Income Fund
19896.......................... 0.65%*
1990........................... 0.72%
1991........................... 0.72%
Ratio of
expenses
to average
net assets
Franklin Indiana Tax-Free Income Fund:
1989........................... 0.77%
1990........................... 0.70%
1991........................... 0.74%
1992........................... 0.74%
1993........................... 0.73%
Franklin New Jersey Tax-Free Income Fund:
19895.......................... 0.66%*
Franklin Oregon Tax-Free Income Fund:
1989........................... 0.73%
Franklin Pennsylvania Tax-Free Income Fund:
1989........................... 0.75%
About the Trust
The Trust is an open-end management investment company, or mutual fund,
organized as a Massachusetts business trust in September 1984 and registered
with the SEC under the Investment Company Act of 1940 (the "1940 Act"). The
Trust currently consists of 27 separate series, most of which offer two classes
of shares, as listed under the section "General Information." Each Fund is a
separate series of the Trust's shares and maintains a totally separate
investment portfolio. This Prospectus relates to the nine series shown on the
cover, of which only the Connecticut Fund is non-diversified:
Shares of each Fund may be purchased (minimum investment of $100 initially and
$25 thereafter) at the current public offering price. The current public
offering price of the Class I shares is equal to the net asset value (see
"Valuation of Shares of the Funds"), plus a variable sales charge not exceeding
4.25% of the offering price depending upon the amount invested. The current
public offering price of the Class II shares is equal to the net asset value,
plus a flat sales charge of 1.0% of the amount invested. (See "How to Buy Shares
of the Funds.")
Investment Objective
and Policies of Each Fund
Each State Fund will attempt to invest 100% and, as a matter of fundamental
policy, will invest at least 80% of the value of its net assets in securities,
the interest on which is exempt from federal income taxes, including the
individual alternative minimum tax, and from the personal income taxes, if any,
for resident shareholders of the named state. Each Fund's objective is a
fundamental policy and may not be changed without shareholder approval. There
is, of course, no assurance that a Fund's objective will be achieved.
Although not anticipated, it is possible that up to 20% of a State Fund's net
assets could be in municipal securities from another state and each Fund could
be invested in taxable obligations and municipal obligations, including "private
activity bonds," the interest on which may be subject to the alternative minimum
tax. A Fund would only make such investments on a temporary basis, when
necessary, pending the investment or reinvestment in municipal obligations, in
order to avoid the necessity of liquidating portfolio securities to satisfy
redemptions or pay expenses. Any such investments in taxable obligations would
be in U.S. government securities, commercial paper rated in the highest grade
(Prime-1, A-1, or F-1+) by Moody's, S&P, or Fitch,or in obligations of banks
with assets of $1 billion or more. It is also possible that a Fund may generate
short-term capital gain (taxable as ordinary income when distributed to
shareholders) as a result of market transactions. See "Taxation of the Funds and
Their Shareholders." To the extent that a state requires that a Fund consist of
a specified amount of obligations of that state or its political subdivisions
and obligations of the U.S. and its possessions in order for any portion of its
distributions to be exempt from income taxation, the respective Fund will
endeavor to invest its net assets in such securities. This, however, is not a
fundamental policy and in the event the investment manager believes that
investments in other permissible securities are necessary to protect the value
of such Fund's shares, or if a shareholder's net return would be increased by
investment in such respective state obligations that pay taxable income,
investments in other permissible obligations may be made.
As a fundamental policy, the Pennsylvania Fund will invest in securities for
income earnings rather than trading for profit. This Fund will not vary its
investments, except to 1) eliminate unsafe investments and investments not
consistent with the preservation of the capital or the tax status of such Fund;
2) honor redemption orders, meet anticipated redemption requirements and negate
gains from discount purchases; 3) reinvest the earnings from securities in like
securities; or 4)
defray normal administrative expenses.
Each State Fund may invest, without percentage limitation, in securities having,
at the time of purchase, one of the four highest ratings of Moody's (Aaa, Aa, A,
Baa), S&P (AAA, AA, A, BBB), Fitch (AAA, AA, A, BBB), or in securities which are
not rated, provided that, in the opinion of the Funds' investment manager, such
securities are comparable in quality to those within the four highest ratings.
These are considered to be "investment grade" securities, although bonds rated
Baa are regarded as having an adequate capacity to pay principal and interest
but with greater vulnerability to adverse economic conditions and to have some
speculative characteristics. A description of the ratings is contained in
Appendix C to this Prospectus.
The investment manager considers the terms of the offering and various other
factors in order to determine whether the securities are consistent with the
Fund's investment objective and policies and thereafter to determine the
issuer's comparative credit rating. In making such determinations, the
investment manager typically (i) interviews representatives of the issuer at its
offices, conducting a tour and inspection of the physical facilities of the
issuer in an effort to evaluate the issuer and its operations, (ii) performs
analysis of the issuer's financial and credit position, including comparisons of
all appropriate ratios, and (iii) compares other similar securities offerings to
the issuer's proposed offering.
For temporary defensive purposes only, when the investment manager believes that
market conditions, such as rising interest rates or other adverse factors, would
cause serious erosion of portfolio value, (i) each of the Funds may invest more
than 20% of its assets (which could be up to 100%) in fixed-income obligations
the interest on which is subject to federal income tax and (ii) a State Fund may
invest more than 20% of the value of its net assets (which could be up to 100%)
in instruments the interest on which is exempt from federal income taxes but not
to a resident shareholder's named state's personal income taxes. Such temporary
investments will be limited to obligations issued or guaranteed by the full
faith and credit of the U.S. government or, except for the High Yield Fund, in
securities of other states, territories, their agencies or instrumentalities, or
in the highest quality commercial paper rated A-1 by S&P, P-1 by Moody's, or
F-1+ by Fitch. The High Yield Fund may invest in commercial paper rated in any
of the three categories of the NRSROs.
As a fundamental policy, each Fund may (i) borrow from banks for temporary or
emergency purposes up to 5% of its total assets and pledge up to 5% of its total
assets in connection therewith (ii) lend up to 10% of each Fund's portfolio
securities to qualified securities dealers, although each Fund currently intends
to limit lending securities to no more than 5% of its total assets. More details
in these types of transactions as well as a complete description of the Funds'
investment restrictions are included under "Investment Restrictions" in the SAI.
The High Yield Fund seeks to provide investors with a high current yield exempt
from federal income taxes by investing primarily in non-investment grade rated
or in unrated municipal securities. As a secondary objective, the Fund will seek
capital appreciation to the extent this is possible and is consistent with its
principal investment objective. The High Yield Fund may invest in municipal
securities regardless of the rating given by the NRSROs, including, from time to
time, defaulted debt securities if, in the opinion of the investment manager,
the issuer may resume interest payments or other advantageous developments
appear likely, in the near term. The Fund may also invest in municipal
securities which are unrated by any NRSRO but which are deemed to be of
comparable credit quality by the investment manager. Higher yields are
ordinarily available from municipal securities in the lower-rated categories of
the NRSROs (rated Baa or lower by Moody's or BBB or lower by S&P or Fitch) or
from unrated securities of comparable quality. Securities in the categories
which are rated below investment grade by the NRSROs are regarded, on balance,
as predominantly speculative with respect to the capacity to pay interest and
repay principal in accordance with the terms of the obligation. The Fund does
not intend to invest more than 10% of its total assets (at the time of purchase)
in defaulted debt securities. If the rating on an issue held in any Fund's
portfolio is changed by an NRSRO, such event will be considered by the Fund in
its evaluation of the overall investment merits of that security.
While it is expected that the portfolio of the High Yield Fund will normally
consist of lower-rated, higher yielding bonds, there may be instances when the
portfolio will contain medium grade (BBB or Baa rated), lower yielding bonds
because adequate quantities of lower-rated bonds are not available at that time.
In addition, there may be times when, due to unusual market conditions, or when
the difference in yields on higher and lower-rated bonds is narrowed to the
extent that higher risk is not justified by higher return, that the High Yield
Fund may acquire higher-rated bonds for its portfolio. It is expected that the
portfolio of the High Yield Fund will generally consist of longer-term municipal
securities as these normally return higher yields than short-term issues.
In order to achieve its objectives, the High Yield Fund will invest primarily in
securities of states, territories, and possessions of the United States ("U.S.")
and the District of Columbia and their political subdivisions, agencies, and
instrumentalities, the interest on which is exempt from federal income taxes.
Under normal market conditions, the High Yield Fund will attempt to invest 100%
and, as a matter of fundamental policy, will invest at least 80% of the value of
its net assets in securities the interest on which is exempt from federal income
tax, including the individual alternative minimum tax.
Characteristic of Municipal Securities
The term "municipal securities," as used in this Prospectus, means obligations
issued by or on behalf of states, territories and possessions of the U.S. and
the District of Columbia and their political subdivisions, agencies, and
instrumentalities, the interest on which is exempt from regular federal income
tax. An opinion as to the tax-exempt status of a municipal security generally is
rendered to the issuer by the issuer's counsel at the time of issuance of the
security.
Municipal securities are used to raise money for various public purposes such as
constructing public facilities and making loans to public institutions. Certain
types of municipal bonds are issued to provide funding for privately operated
facilities. Further information on the maturity and funding classifications of
municipal securities is included in the SAI.
The Trust has no restrictions on the maturities of municipal securities in which
the Funds may invest. Each Fund will seek to invest in municipal securities of
such maturities that, in the judgment of the Fund and its investment manager,
will provide a high level of current income consistent with prudent investment.
The investment manager will also consider current market conditions.
It is possible that any Fund from time to time will invest more than 25% of its
assets in a particular segment of the municipal securities market, such as
hospital revenue bonds, housing agency bonds, tax-exempt industrial development
revenue bonds, transportation bonds, or pollution control revenue bonds, or in
securities the interest on which is paid from revenues of a similar type of
project. In such circumstances, economic, business, political or other changes
affecting one bond (such as proposed legislation affecting the financing of a
project; shortages or price increases of needed materials; or declining markets
or needs for the projects) might also affect other bonds in the same segment,
thereby potentially increasing market risk.
Yields on municipal securities vary, depending on a variety of factors,
including the general condition of the financial markets and of the municipal
securities market, the size of a particular offering, the maturity of the
obligation and the credit rating of the issuer. Generally, municipal securities
of longer maturities produce higher current yields than municipal securities
with shorter maturities but are subject to greater price fluctuation due to
changes in interest rates, tax laws and other general market factors.
Lower-rated municipal securities generally produce a higher yield than higher
rated municipal securities due to the perception of a greater degree of risk as
to the ability of the issuer to make timely payment of principal and interest on
its obligations.
The interest on bonds issued to finance public purpose state and local
government operations is generally tax-exempt for regular federal income tax
purposes. Interest on certain private activity bonds (including those for
housing and student loans) issued after August 7, 1986, while still tax-exempt,
constitutes a preference item for taxpayers in determining the federal
alternative minimum tax under the Internal Revenue Code of 1986, as amended (the
"Code"), and under the income tax provisions of some states. This interest could
subject a shareholder to, or increase liability under, the federal and state
alternative minimum taxes, depending on the shareholder's tax situation. In
addition, all distributions derived from interest exempt from regular federal
income tax may subject a corporate shareholder to, or increase liability under,
the federal alternative minimum tax, because such distributions are included in
the corporation's "adjusted current earnings." In states with a corporate
franchise tax, distributions of a Fund may also be fully taxable to a corporate
shareholder under the state franchise tax system.
Consistent with each Fund's investment objective, a Fund may acquire such
private activity bonds if, in the investment manager's opinion, such bonds
represent the most attractive investment opportunity then available to a Fund.
For fiscal year ended February 28, 1995, the portfolios of the Funds derived the
following percentages of their income from bonds the interest on which
constitutes a preference item subject to the federal alternative minimum tax for
certain investors:
Fund Percentage
- ------------------------ --------
Arizona Fund................. 12.79%
Colorado Fund............... 8.42%
Connecticut Fund............ 8.24%
High Yield Fund............. 15.79%
Indiana Fund................ 11.23%
New Jersey Fund............. 8.67%
Oregon Fund................. 7.59%
Pennsylvania Fund........... 10.41%
Puerto Rico Fund............ 8.87%
Each Fund may purchase floating rate and variable rate obligations. These
obligations bear interest at rates that are not fixed, but that vary with
changes in specified market rates or indices on predesignated dates. The Funds
may also invest in variable or floating rate demand notes ("VRDNs") which carry
a demand feature that permits the Funds to tender the obligation back to the
issuer or a third party at par value plus accrued interest prior to maturity,
according to the terms of the obligation. Frequently VRDNs are secured by
letters of credit or other credit support arrangements provided by banks.
Because of the demand feature, the prices of VRDNs may be higher and the yields
lower than they otherwise would be for obligations without a demand feature.
Except for the Connecticut Fund, with respect to 75% of the total value of a
Fund's assets, no more than 5% of such value may be in securities underlying
"puts" from the same institution, except that each Fund may invest up to 10% of
its asset value in unconditional "puts" (exercisable even in the event of a
default in the payment of principal or interest on the underlying security) and
other securities issued by the same institution.
Each Fund may purchase and sell municipal securities on a "when-issued" and
"delayed-delivery" basis. These transactions are subject to market fluctuation,
and the value at delivery may be more or less than the purchase price. Although
the Funds will generally purchase municipal securities on a when-issued basis
with the intention of acquiring such securities, it may sell such securities
before the settlement date if it is deemed advisable. When a Fund is the buyer
in such a transaction, it will maintain, in a segregated account with its
custodian, cash or high-grade marketable securities having an aggregate value
equal to the amount of such purchase commitments until payment is made. To the
extent a Fund engages in "when-issued" and "delayed delivery" transactions, it
will do so for the purpose of acquiring securities for that Fund's portfolio
consistent with its investment objectives and policies and not for the purpose
of investment leverage.
Investment Risk Considerations
General
While an investment in any of the Funds is not without risk, certain policies
are followed in managing the Funds which may help to reduce such risk. There are
two categories of risks to which a Fund is subject: credit risk and market risk.
Credit risk is a function of the ability of an issuer of a municipal security to
maintain timely interest payments and to pay the principal of a security upon
maturity. It is generally reflected in a security's underlying credit rating and
its stated interest rate (normally the coupon rate). A change in the credit risk
associated with a municipal security may cause a corresponding change in the
security's price. Market risk is the risk of price fluctuation of a municipal
security caused by changes in general economic and interest rate conditions
generally affecting the market as a whole. A municipal security's maturity
length also affects its price. As with other debt instruments, the price of the
debt securities in which a Fund invests are likely to decrease in times of
rising interest rates. Conversely, when rates fall, the value of the Fund's debt
investments may rise. Price changes of debt securities held by a Fund have a
direct impact on the net asset value per share of that Fund. Since each State
Fund generally will invest primarily in the securities of its respective state
or territory, there are certain specific factors and considerations concerning
each state or territory which may affect the credit and market risk of the
municipal securities which such Fund purchases. These factors are described in
Appendix B to this Prospectus and in the SAI.
The High Yield Fund is diversified nationally and, as a matter of policy the
Fund, will not invest more than 25% of its net assets in the municipal
securities of any one state or territory. In addition, with respect to 75% of
its net assets, each Fund except the Connecticut Fund, as a fundamental policy,
will not purchase a security if, as a result of the investment, more than 5% of
its assets would be in the securities of any single issuer (with the exception
of obligations of the U.S. government). For this purpose, each political
subdivision, agency, or instrumentality and each multi-state agency of which a
state is a member, and each public authority which issues private activity bonds
on behalf of a private entity, will be regarded as a separate issuer for
determining the diversification of each Fund's portfolio. A bond for which the
payments of principal and interest are secured by an escrow account of
securities backed by the full faith and credit of the U.S. government
("defeased") as described in the SAI, in general, will not be treated as an
obligation of the original municipality for purposes of determining
diversification.
The Connecticut Fund is non-diversified under the federal securities laws. As a
non-diversified Fund, there is no restriction under the 1940 Act on the
percentage of assets that may be invested at any time in the securities of any
one issuer. To the extent the Fund is not fully diversified under the 1940 Act,
it may be more susceptible to adverse economic, political or regulatory
developments affecting a single issuer than would be the case if the Fund was
more broadly diversified. The Fund, however, intends to comply with the
diversification and other requirements of the Code, applicable to "regulated
investment companies" so that it will not be subject to federal income tax, and
distributions to shareholders will be free from regular federal income tax to
the extent they are derived from interest on municipal securities. For this
reason the Connecticut Fund has adopted an investment restriction, which may not
be changed without the approval of shareholders, prohibiting it from purchasing
a security if, as a result, more than 25% of the Fund's total assets would be
invested in the securities of a single issuer, or with respect to 50% of the
Fund's total assets, more than 5% of such assets would be invested in the
securities of a single issuer.
Risk Factors Relating to High
Yielding, Fixed-Income Securities
The portfolio of the High Yield Fund is subject to greater risks due to its
ability to invest in municipal securities rated below investment grade by the
NRSROs or which are unrated by an NRSRO but deemed by the investment manager to
be of comparable quality. The market values of such securities, commonly known
as junk bonds, tend to reflect individual developments affecting the issuer to a
greater extent than do higher-rated securities, which react primarily to
fluctuations in the general level of interest rates. Such lower-rated securities
also tend to be more sensitive to economic conditions than higher-rated
securities. These lower-rated fixed-income securities are considered by the
NRSROs, on balance, to be predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal in accordance with the terms of the
obligation and will generally involve more credit risk than securities in the
higher rating categories. Even securities rated BBB or Baa by S&P, Moody's or
Fitch, ratings which are considered investment grade, possess some speculative
characteristics.
Projects which are financed by the issuance of high yielding, fixed-income
securities are often highly leveraged and may not have more traditional methods
of financing available to them. Therefore, the risk associated with acquiring
the securities of such issuers is generally greater than is the case with
higher-rated securities. For example, during an economic downturn or a sustained
period of rising interest rates, projects financed by high yielding securities
may experience financial stress. During such periods, such projects may not have
sufficient funds to meet their interest payment obligations. The issuer's
ability to service its debt obligations may also be adversely affected by
specific developments, or the issuer's inability to meet specific projected
revenue forecasts, or by the unavailability of additional financing.
The High Yield Fund may have difficulty disposing of certain high yielding
securities because there may be a thin trading market for a particular security
at any given time. The market for lower-rated fixed-income securities generally
tends to be concentrated among a smaller number of dealers than is the case for
securities which trade in a broader secondary retail market. Generally,
purchasers of these securities are predominantly dealers and other institutional
buyers, rather than individuals. To the extent a secondary trading market for
high yielding, fixed-income securities does exist, it is generally not as liquid
as the secondary market for higher-rated securities. Reduced liquidity in the
secondary market may have an adverse impact on market price and the High Yield
Fund's ability to dispose of particular issues, when necessary, to meet the
Fund's liquidity needs or in response to a specific economic event, such as the
deterioration in the creditworthiness of the issuer. Reduced liquidity in the
secondary market for certain securities may also make it more difficult for the
Fund to obtain market quotations based on actual trades for purposes of valuing
the Fund's portfolio. Current values for these high yield issues are obtained
from pricing services and/or a limited number of dealers and may be based upon
factors other than actual sales. (See "Valuation of Shares of the Funds.")
Factors adversely impacting the market value of high yielding securities may
adversely impact the High Yield Fund's net asset value. In addition, the Fund
may incur additional expenses to the extent it is required to seek recovery upon
a default in the payment of principal or interest on its portfolio holding. The
Fund will rely on the investment manager's judgment, analysis and experience in
evaluating the creditworthiness of an issuer. In this evaluation, the investment
manager will take into consideration, among other things, the issuer's financial
resources, its sensitivity to economic conditions and trends, its operating
history, the quality of the issuer's management and regulatory matters.
As of February 28, 1995, two out of 624 issues (excluding short-term securities
and cash equivalents) in the Fund's portfolio were in default. In the fiscal
year ended February 28, 1995, one issue defaulted, and a total of 15 issues
defaulted over the prior three years. Defaulted issues represented 0.129% of the
net assets of the Fund at February 28, 1995. Current prices for defaulted bonds,
however, are generally significantly lower than their purchase price, and the
Fund may have unrealized losses on such defaulted securities which are reflected
in the price of the Fund's shares. In general, securities which default lose
much of their value in the time period prior to the actual default so that the
Fund's net assets are impacted prior to the default. The Fund may retain an
issue which has defaulted because such issue may present an opportunity for
subsequent price recovery. The high yield securities market is relatively new
and much of its growth prior to 1990 paralleled a long economic expansion. The
recent recession disrupted the market for high yield securities and adversely
affected the value of outstanding securities and the ability of issuers of such
securities to meet their obligations. Those adverse effects may continue even as
the economy recovers. The Fund may retain an issue which has defaulted because
such issue may present an opportunity for subsequent price recovery. As
previously noted, the Fund may also, consistent with its investment objectives
and policies, purchase debt obligations of issuers not currently paying interest
as well as issuers that are in default. Issues that are in default carry a high
degree of risk and may have the consequence that interest payments with respect
to such securities may be reduced, deferred, suspended, eliminated or never
begin, and may have the further consequences that principal payments may
likewise be reduced, suspended or canceled, causing the loss of the entire
amount of the investment.
As of February 28, 1995, approximately 26% of the Fund's assets were invested in
municipal securities which were rated lower than investment grade (rated below
the four highest grades assigned by the NRSROs) or in securities unrated by any
NRSRO but deemed by the investment manager to be of comparable credit
characteristics. (A breakdown of the bonds' ratings in the Fund's portfolio,
based on a dollar weighted average for the fiscal year ended February 28, 1995,
is included under "Asset Composition Table" below.)
Because of the High Yield Fund's policy of seeking high current yield and its
ability to invest in lower-grade debt securities, including defaulted
securities, a higher degree of risk accompanies an investment in the Fund's
shares than is the case in a more conservative tax-free, income-type investment
company. As with any other investment, there is no assurance that this Fund's
objective will be obtained.
The High Yield Fund's investment in lower-rated, unrated, and zero coupon
municipal securities may cause this Fund to recognize income and make
distributions to shareholders prior to the receipt of cash payments by the Fund.
For example, with respect to any non-performing obligations, this Fund may be
required to accrue as income the original amount of interest due on its
obligations even though such interest is not received by the Fund. In order to
generate cash to satisfy this Fund's distribution requirements, it may be
required to dispose of portfolio securities that it otherwise would have
continued to hold or to use cash flows from other sources such as the sale of
Fund shares. The SAI contains more information about zero coupon bonds.
Asset Composition Table
A credit rating by an NRSRO evaluates only the safety of principal and interest
of the bond, and does not consider the market value risk associated with an
investment in such a bond. The table below shows the percentage invested in each
of the specific rating categories by an NRSRO and those that are not rated by
the NRSROs but deemed by the investment manager to be of the same credit
quality. The information was prepared based on a dollar weighted average of the
Fund's portfolio composition based on month-end assets for each of the 12 months
in the fiscal year ended February 28, 1995. Appendix C to the Prospectus
includes a description of each rating category.
Average Weighted
Moody's and/or S%P's Rating Percentage of Assets
- --------------------------------------------------
Aaa/AAA................... 7.16%
AAA*...................... 5.15%
Aa/AA..................... 3.74%
A......................... 11.27%
Baa/BBB................... 21.03%
BBB*...................... 24.05%
Ba/BB..................... 6.78%
BB*....................... 17.43%
B......................... 1.40%
B*........................ 0.40%
Caa/CCC................... 1.43%
CCC*...................... 0.13%
Ca/CC..................... .00%
C......................... .00%
D......................... 0.04%
*Not Rated by the NRSROs. Indicates an internal rating by Manager.
Callable Bonds
Each Fund may purchase and hold callable municipal bonds which contain a
provision in the indenture permitting the issuer to redeem the bonds prior to
their maturity dates at a specified price which typically reflects a premium
over the bonds' original issue price. These bonds generally have call protection
(that is, a period of time during which the bonds may not be called) which
usually lasts for 5 to 10 years, after which time such bonds may be called away.
An issuer may generally be expected to call its bonds, or a portion of them,
during periods of declining interest rates, when borrowings may be replaced at
lower rates than those obtained in prior years. If the proceeds of a bond called
under such circumstances are reinvested, the result may be a lower overall yield
due to lower current interest rates. If the purchase price of such bonds
included a premium related to the appreciated value of the bonds, some or all of
that premium may not be recovered by bondholders, such as the Funds, depending
on the price at which such bonds were redeemed.
Certificates of Participation
Each Fund may also invest in municipal lease obligations primarily through
Certificates of Participation ("COPs"). COPs, which are widely used by state and
local governments to finance state and local government needs, function much
like installment purchase agreements. For example, a COP may be created when
long-term lease revenue bonds are issued by a governmental corporation to pay
for the acquisition of property or facilities which are then leased to a
municipality. The payments made by the municipality under the lease are used to
repay interest and principal on the bonds issued to purchase the property. Once
these lease payments are completed, the municipality gains ownership of the
property for a nominal sum. This lease format is generally not subject to
constitutional limitations on the issuance of state debt, and COPs enable a
governmental issuer to increase government liabilities beyond constitutional
debt limits.
A feature which distinguishes COPs from municipal debt is that the lease which
is the subject of the transaction contains a "nonappropriation" or "abatement"
clause. A nonappropriation clause provides that, while the municipality will use
its best efforts to make lease payments, the municipality may terminate the
lease without penalty if the municipality's appropriating body does not allocate
the necessary funds. Local administrations, being faced with increasingly tight
budgets, therefore, have more discretion to curtail payments under COPs than
they do to curtail payments on traditionally funded debt obligations. If the
government lessee does not appropriate sufficient monies to make lease payments,
the lessor or its agent is typically entitled to repossess the property. In most
cases, however, the private sector value of the property may be less than the
amount the government lessee was paying.
While the risk of nonappropriation is inherent to COP financing, the Funds
believe that this risk is mitigated by their policy of investing only in COPs
rated within the four highest rating categories of the NRSROs (except for the
High Yield Fund which may invest in securities rated in any category of the
NRSROs), or in unrated COPs believed by the investment manager to be of
comparable quality. Criteria considered by the rating agencies and the
investment manager in assessing such risk include the issuing municipality's
credit rating, the essentiality of the leased property to the municipality and
the term of the lease compared to the useful life of the leased property. The
Board of Trustees reviews the COPs held in each Fund's portfolio to assure that
they constitute liquid investments based on various factors reviewed by the
investment manager and monitored by the Board. Such factors include (a) the
credit quality of such securities and the extent to which they are rated or, if
unrated, comply with existing criteria and procedures followed to ensure that
they are of quality comparable to the ratings required for each Fund's
investment, including an assessment of the likelihood that the leases will not
be canceled; (b) the size of the municipal securities market, both in general
and with respect to COPs; and (c) the extent to which the type of COPs held by
each Fund trade on the same basis and with the same degree of dealer
participation as other municipal bonds of comparable credit rating or quality.
While there is no limit as to the amount of assets which each Fund may invest in
COPs, as of February 28, 1995, none of the Funds held as much as 5% of their
total assets in COPs and other municipal leases, except for the New Jersey Fund
which held 5.83% of the total face account of the securities in its portfolio in
COPs and other municipal leases.
How Shareholders Participate in the Results of the Funds' Activities
The assets of each Fund are invested in portfolio securities. If the securities
owned by a Fund increase in value, the value of the shares of the Fund which the
shareholder owns will increase. If the securities owned by the Fund decrease in
value, the value of the shareholder's shares will also decline. In this way,
shareholders participate in any change in the value of the securities owned by
the Funds.
In addition to the factors which affect the value of individual securities, as
described in the preceding sections, a shareholder may anticipate that the value
of Fund shares will fluctuate with movements in the broader bond markets, as
well changes in interest rates will affect the value of the Funds' portfolio and
thus their share price. In particular, changes in interest rates will affect the
value of the Funds' portfolios and thus their share price. Increased rates of
interest which frequently accompany higher inflation and/or a growing economy
are likely to have a negative effect on the value of shares of the Funds.
History reflects both increases and decreases in the prevailing rate of interest
and these may reoccur unpredictably in the future.
Management of the Trust
The Board of Trustees has the primary responsibility for the overall management
of the Trust and for electing the officers of the Trust who are responsible for
administering its day-to-day operations.
The Board has carefully reviewed the multiclass structure to ensure that no
material conflict exists between the two classes of shares. Although the Board
does not expect to encounter material conflicts in the future, the Board will
continue to monitor the Funds and will take appropriate action to resolve such
conflicts if any should later arise.
In developing the multiclass structure the Funds have retained the authority to
establish additional classes of shares. It is the Funds' present intention to
offer only two classes of shares, but new classes may be offered in the future,
including the addition of a Class II to those Funds not currently offering them.
Franklin Advisers, Inc. ("Advisers" or "Manager") serves as the Funds'
investment manager. Advisers is a wholly-owned subsidiary of Franklin Resources,
Inc. ("Resources"), a publicly owned holding company, the principal shareholders
of which are Charles B. Johnson and Rupert H. Johnson, Jr., who own
approximately 20% and 16%, respectively, of Resources' outstanding shares.
Resources is engaged in various aspects of the financial services industry
through its various subsidiaries (the "Franklin Templeton Group"). Advisers acts
as investment manager or administrator to 34 U.S. registered investment
companies (116 separate series) with aggregate assets of over $77 billion,
approximately $41.4 billion of which are in the municipal securities market.
Pursuant to the management agreement, the Manager supervises and implements each
Fund's investment activities and provides certain administrative services and
facilities which are necessary to conduct each Fund's business.
The management fees which each Class I paid to the Manager during the fiscal
year ended February 28, 1995 (as a percentage of average net assets) were as
follows:
Management
Class I Fund Name Fees Paid
- ------------------------- --------
Arizona Fund................. 0.48%
Colorado Fund................ 0.56%
Connecticut Fund............. 0.58%
High Yield Fund.............. 0.46%
Indiana Fund................. 0.62%
New Jersey Fund.............. 0.49%
Oregon Fund.................. 0.52%
Pennsylvania Fund............ 0.49%
Puerto Rico Fund............. 0.57%
It is not anticipated that the Funds will incur a significant amount of
brokerage expenses because municipal securities are generally traded in
principal transactions that involve the receipt by the broker of a spread
between the bid and ask prices for the securities and not the receipt of
commissions. In the event that a Fund does participate in transactions involving
brokerage commissions, it will be the Manager's responsibility to select brokers
through whom such transactions will be effected. The Manager will try to obtain
the best execution on all such transactions. If it was felt that more than one
broker was able to provide the best execution, the Manager will consider the
furnishing of quotations and of other market services, research, statistical and
other data for the Manager and its affiliates, as well as the sale of shares of
the Trust as factors in selecting a broker. Further information is included
under "The Trust's Policies Regarding Brokers Used on Portfolio Transactions" in
the SAI.
Shareholder accounting and many of the clerical functions for each Fund are
performed by Franklin/Templeton Investor Services, Inc. ("Investor Services" or
"Shareholder Services Agent"), in its capacity as transfer agent and
dividend-paying agent. Investor Services is a wholly-owned subsidiary of
Resources.
During the fiscal year ended February 28, 1995, total operating expenses paid by
each Fund (as a percentage of average net assets), including fees paid to the
Manager and Investor Services, were as follows:
Total
Operating
Fund Name Expenses
- --------------------------- -------
Arizona Fund................... 0.60%
Colorado Fund.................. 0.70%
Connecticut Fund............... 0.71%
High Yield Fund................ 0.60%
Indiana Fund................... 0.81%
New Jersey Fund................ 0.63%
Oregon Fund.................... 0.65%
Pennsylvania Fund.............. 0.63%
Puerto Rico Fund............... 0.73%
Plans of Distribution
A separate plan of distribution has been approved and adopted for each class
("Class I Plan" and "Class II Plan," respectively, or "Plan(s)") pursuant to
Rule 12b-1 under the 1940 Act. The Rule 12b-1 fees charged to each class are
based solely on the distribution and, with respect to the Class II Plans,
servicing fees attributable to that particular class. Under either Plan, the
portion of fees remaining after payment to securities dealers or others for
distribution or servicing may be paid to Distributors for routine ongoing
promotion and distribution expenses incurred with respect to such class. Such
expenses may include, but are not limited to, the printing of prospectuses and
reports used for sales purposes, expenses of preparing and distributing sales
literature and related expenses, advertisements, and other distribution-related
expenses, including a prorated portion of Distributors' overhead expenses
attributable to the distribution of shares of each Fund.
The maximum amount which each Fund may reimburse to Distributors or others under
the Class I Plan for such distribution expenses is 0.10% per annum of each Class
I's average daily net assets, payable quarterly. All expenses of distribution in
excess of 0.10% per annum will be borne by Distributors, or others who have
incurred them, without reimbursement from such Fund.
Under the Class II Plan, the maximum amount which each Fund is permitted to pay
to Distributors or others for distribution expenses and related expenses is
0.50% per annum of each Class II's daily net assets, payable quarterly. All
expenses of distribution, marketing and related services over that amount will
be borne by Distributors, or others who have incurred them, without
reimbursement by the Funds. In addition, the Class II Plan provides for an
additional payment by each Fund of up to 0.15% per annum of each Class II's
average daily net assets as a servicing fee, payable quarterly. This fee will be
used to pay securities dealers or others for, among other things, assisting in
establishing and maintaining customer accounts and records; assisting with
purchase and redemption requests; receiving and answering correspondence;
monitoring dividend payments from each Fund on behalf of the customers, or
similar activities related to furnishing personal services and/or maintaining
shareholder accounts.
Either Distributors or one of its affiliates, may pay, from its own resources, a
commission of up to 1% of the amount invested to securities dealers who initiate
and are responsible for purchases of Class II shares of each Fund. During the
first year following the purchase of Class II shares, Distributors will retain a
portion of Class II's Rule 12b-1 fees equal to 0.50% per annum of Class II's
average daily net assets to partially recoup fees Distributors pays to
securities dealers in connection with initial purchases of Class II shares.
Both Plans also cover any payments to or by the Funds, Advisers, Distributors,
or other parties on behalf of the Funds, Advisers or Distributors, to the extent
such payments are deemed to be for the financing of any activity primarily
intended to result in the sale of shares issued by the Funds within the context
of Rule 12b-1. The payments under the Plans are included in the maximum
operating expenses which may be borne by each class. For more information,
including a discussion of the Board's policies with regard to the amount of each
Plan's fees, please see the SAI.
Distributions to Shareholders
There are two types of distributions which a Fund may make to its shareholders:
1. Income dividends. Each Fund receives income in the form of interest and other
income derived from its investments. This income, less the expenses incurred in
the operation of such Fund, is its net investment income from which income
dividends may be distributed. Thus, the amount of dividends paid per share may
vary with each distribution.
2. Capital gain distributions. Each Fund may derive capital gains or losses in
connection with sales or other dispositions of its portfolio securities.
Distributions by a Fund derived from net short-term and net long-term capital
gains (after taking into account any net capital loss carryovers) may generally
be made twice each year. One distribution may be made in December to reflect any
net short-term and net long-term capital gains realized by a Fund as of October
31 of such year. Any net short-term and net long-term capital gains realized by
a Fund during the remainder of the fiscal year may be distributed following the
end of the fiscal year. These distributions, when made, will generally be fully
taxable to such Fund's shareholders. Each Fund may make only one distribution
derived from net short-term and net long-term capital gains in any year or
adjust the timing of its distributions for operational or other reasons.
Distributions To Each Class of Shares
According to the requirements of the Code, dividends and capital gains will be
calculated and distributed in the same manner for Class I and Class II shares.
The per share amount of any income dividends will generally differ only to the
extent that each class is subject to different Rule 12b-1 fees.
Distribution Date
Although subject to change by the Trust's Board of Trustees without prior notice
to or approval by shareholders, each Fund's current policy is to declare income
dividends daily and pay them monthly on or about the last business day of that
month. The amount of income dividend payments by each Fund is dependent upon the
amount of net income received from such Fund's portfolio holdings, is not
guaranteed, and is subject to the discretion of the Trust's Board of Trustees.
The Funds do not pay "interest" or guarantee any fixed rate of return on an
investment in their shares.
Dividend Reinvestment
Unless otherwise requested, income dividends and capital gain distributions, if
any, will be automatically reinvested in the shareholder's account in the form
of additional shares, valued at the closing net asset value (without a sales
charge) on the dividend reinvestment date. Except as otherwise noted, divided
and capital gain distributions are only eligible for reinvestment at net asset
value in the same class of shares of the Fund or the same class of another of
the Franklin Templeton Funds. Shareholders in Class II funds may also direct
their dividends and capital gain distributions for investment in a Class I
Franklin Templeton Fund at net asset value. Shareholders have the right to
change their election with respect to the receipt of distributions by notifying
the Fund, but any such change will be effective only as to distributions for
which the reinvestment date is seven or more business days after such Fund has
been notified. See the SAI for more information.
Many of the Funds' shareholders receive their distributions in the form of
additional shares. This is a convenient way to accumulate additional shares and
maintain or increase the shareholder's earnings base. Of course, any shares so
acquired remain at market risk.
Distributions in Cash
A shareholder may elect to receive income dividends, or both income dividends
and capital gain distributions, in cash. By completing the "Special Payment
Instructions for Distributions" section of the Shareholder Application included
with this Prospectus, a shareholder may direct the selected distributions to the
same class of another fund in the Franklin Templeton Funds, Class II
shareholders may also direct their distributions to a Class I Franklin Templeton
Fund, to another person, or directly to a checking account. If the bank at which
the account is maintained is a member of the Automated Clearing House, the
payments may be made automatically by electronic funds transfer. If this last
option is requested, the shareholder should allow at least 15 days for initial
processing. Dividends which may be paid in the interim will be sent to the
address of record. Additional information regarding automated fund transfers may
be obtained from Franklin's Shareholder Services Department. Shareholders may
also be able to change their dividend options by telephone. See "Telephone
Transactions."
Taxation of the Funds
and Their Shareholders
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. Additional information on tax matters
relating to the Funds and their shareholders is included in the section
entitled, "Additional Information Regarding Taxation" in the SAI.
Each Fund is treated as a separate entity for federal income tax purposes. Each
Fund intends to continue to qualify for treatment as a regulated investment
company under Subchapter M of the Code. By distributing all of its net income,
and meeting certain other requirements relating to the sources of its income and
diversification of its assets, a Fund will not be liable for federal income or
excise taxes.
By meeting certain requirements of the Code, each Fund continues to qualify to
pay exempt-interest dividends to its shareholders. Such exempt-interest
dividends are derived from interest income exempt from regular federal income
tax, and are not subject to regular federal income tax for each Fund's
shareholders. In addition, to the extent that exempt-interest dividends are
derived from interest on obligations of the state or political subdivisions of
the state of residence of the shareholder, from interest on direct obligations
of the federal government, or from interest on obligations of Puerto Rico, the
U.S. Virgin Islands or Guam, they may also be exempt from personal income tax in
such state. More information on the state taxation of interest from federal and
municipal obligations is included in the section "State Income Taxes" below and
in "Appendix A - Description of State Tax Treatment."
To the extent dividends are derived from taxable income from temporary
investments (including the discount from certain stripped obligations or their
coupons or income from securities loans or other taxable transactions), from the
excess of net short-term capital gain over net long-term capital loss, or from
ordinary income derived from the sale or disposition of bonds purchased with
market discount after April 30, 1993, they are treated as ordinary income
whether the shareholder has elected to receive them in cash or in additional
shares.
From time to time, a Fund may purchase a tax-exempt obligation with market
discount; that is, for a price that is less than the principal amount of the
bond, or for a price that is less than the principal amount of the bond where
the bond was issued with original issue discount and such market discount
exceeds a de minimis amount under the Code. For such obligations purchased after
April 30, 1993, a portion of the gain on sale or disposition (not to exceed the
accrued portion of market discount as of the time of sale or disposition) is
treated as ordinary income rather than capital gain. Any distribution by the
Fund of such ordinary income to its shareholders will be subject to regular
federal and state income taxes in the hands of Fund shareholders. In any fiscal
year, each Fund may elect not to distribute to its shareholders its taxable
ordinary income and to, instead, pay federal income or excise taxes on this
income at the Fund level. The amount of such distributions, if any, is expected
to be small.
Pursuant to the Code, certain distributions which are declared in October,
November or December but which, for operational reasons, may not be paid to the
shareholder until the following January, will be treated, for tax purposes, as
if received by the shareholder on December 31 of the calendar year in which they
are declared.
Distributions derived from the excess of net long-term capital gain over net
short-term capital loss are treated as long-term capital gain regardless of the
length of time the shareholder has owned shares of a Fund and regardless of
whether such distributions are received in cash or in additional shares.
Redemptions and exchanges of a Fund's shares are taxable events on which a
shareholder may realize a gain or loss. Any loss incurred on sale or exchange of
such Fund's shares, held for six months or less, will be treated as a long-term
capital loss to the extent of capital gain dividends received with respect to
such shares and will be disallowed to the extent of exempt-interest dividends
paid with respect to such shares.
Each Fund will inform its shareholders of the source of their dividends and
distributions at the time they are paid and will, promptly after the close of
each calendar year, advise them of the tax status for federal income tax
purposes of such dividends and distributions, including the portion of the
dividends on an average basis which constitutes taxable income or a tax
preference item under the federal alternative minimum tax. Shareholders who have
not held shares of a Fund for a full calendar year may have designated as
tax-exempt or as tax preference income a percentage of income which is not equal
to the actual amount of tax-exempt or tax preference income earned during the
period of their investment in a Fund.
Exempt-interest dividends of any Fund, although exempt from regular federal
income tax in the hands of a shareholder, are includable in the tax base for
determining the extent to which a shareholder's social security or railroad
retirement benefits will be subject to regular federal income tax. Shareholders
are required to disclose the receipt of tax-exempt interest dividends on their
federal income tax returns.
Interest on indebtedness incurred (directly or indirectly) by shareholders to
purchase or carry a Fund's shares may not be fully deductible for federal income
tax purposes.
Shareholders who are not U.S. persons for
purposes of federal income taxation should consult with their financial or tax
advisors regarding the applicability of U.S. withholding or other taxes on
distributions received by them from a Fund and the application of foreign tax
laws to these distributions.
State Income Taxes
The exemption of interest on tax-exempt municipal securities for federal income
tax purposes does not necessarily result in exemption from the income, corporate
or personal property taxes of any state or city when such income is distributed
to shareholders of a mutual fund. Appendix A to this Prospectus discusses the
tax treatment of the State Funds with respect to distributions from each
respective Fund to investors in such states. Generally, individual shareholders
of the Funds are afforded tax-exempt treatment at the state level for
distributions derived from municipal securities of their state of residency. In
some states, shareholders of the High Yield Fund also may be afforded tax-exempt
treatment at the state level on distributions from that Fund to the extent they
are derived from tax-exempt securities issued by that state or its
municipalities.
Pursuant to federal law, interest received directly from U.S. government
obligations and from obligations of the U.S. territories is generally exempt
from taxation by all states and their municipal subdivisions. Each state's
treatment of dividends paid from the interest earned on direct federal and U.S.
territorial obligations is discussed in "Appendix A, Description of State Tax
Treatment."
Shareholders should consult their tax advisors with respect to the applicability
of other state and local intangible property or income taxes to their shares in
a Fund and to distributions and redemption proceeds received from such Fund.
Additional information on tax matters relating to a Fund and its shareholders is
included under the caption "Additional Information Regarding Taxation" in the
SAI.
How to Buy Shares of the Funds
Shares of the Funds are continuously offered through securities dealers which
execute an agreement with Distributors. The use of the term "securities dealer"
shall include other financial institutions which either directly or through
affiliates have an agreement with Distributors to handle customer orders and
accounts with the Funds. Such reference, however, is for convenience only and
does not indicate a legal conclusion of capacity. The minimum initial investment
is $100 and subsequent investments must be $25 or more. These minimums may be
waived when the shares are purchased through plans established by the Franklin
Templeton Group. The Funds and Distributors reserve the right to refuse any
order for the purchase of shares.
Alternative Purchase Arrangements. The difference between Class I and Class II
shares lies primarily in their front-end and contingent deferred sales charges
and Rule 12b-1 fees as described below. Currently the Indiana Fund offers only
Class I shares.
Class I. Shares of each Fund outstanding before the implementation of the
multiclass structure have been redesignated as Class I shares, and will retain
their previous rights and privileges. Class I shares are generally subject to a
variable sales charge upon purchase and not subject to any sales charge upon
redemption. Class I shares are subject to Rule 12b-1 fees of up to an annual
maximum of 0.10% of average daily net assets of such shares. With this
multiclass structure, Class I shares have higher front-end sales charges than
Class II shares and comparatively lower Rule 12b-1 fees. Class I shares may be
purchased at reduced front-end sales charge or at net asset value if certain
conditions are met. In most circumstances, contingent deferred sales charges
will not be assessed against redemptions of Class I shares. See "Management of
the Funds," and "How to Sell Shares of the Funds" for more information.
Class II. The current public offering price of Class II shares is equal to the
net asset value, plus a flat front-end sales charge of 1% of the amount
invested. Class II shares are also subject to a contingent deferred sales charge
of 1% if shares are redeemed within 18 months of the calendar month following
purchase. In addition, Class II shares are subject to Rule 12b-1 fees of up to a
maximum of 0.65% of average daily net assets of such shares. Class II shares
have lower front-end sales charges than Class I shares and comparatively higher
Rule 12b-1 fees. See "Contingent Deferred Sales Charge" under "How to Sell
Shares of the Funds."
Deciding Which Class To Purchase. Investors should carefully evaluate their
anticipated investment amount and time horizon prior to determining which class
of shares to purchase. Generally, an investor who expects to invest less than
$100,000 in the Franklin Templeton Funds and who expects to make substantial
redemptions within approximately six years or less of investment should consider
purchasing Class II shares. However, the higher annual Rule 12b-1 fees on the
Class II shares will result in slightly higher operating expenses and lower
income dividends for Class II shares, which will accumulate over time to
outweigh the difference in initial sales charges. For this reason, Class I
shares may be more attractive to long-term investors even if no sales charge
reductions are available to them.
Investors who qualify to purchase Class I shares at reduced sales charges should
seriously consider purchasing Class I shares, especially if they intend to hold
their shares for approximately six years or more. Investors who qualify to
purchase Class I shares at reduced sales charges but who intend to hold their
shares less than approximately six years should evaluate whether it is more
economical to purchase Class I shares through a Letter of Intent or under Rights
of Accumulation or other means, rather than purchasing Class II shares.
Investors investing $1 million or more in a single payment and other investors
who qualify to purchase Class I shares at net asset value may not purchase Class
II shares.
Each class represents the same interest in the investment portfolio of the
specific Fund and has the same rights, except that each class has a different
sales charge, bears the separate expenses of its Rule 12b-1 distribution plan,
and has exclusive voting rights with respect to such plan. The two classes also
have separate exchange privileges.
Purchases of Class II shares are limited to purchases below $1 million. Any
purchases of $1 million or more will automatically be invested in Class I
shares, since that is considered more beneficial to investors. Such purchases,
however, may be subject to a contingent deferred sales charge. Investors may
exceed $1 million in Class II shares by cumulative purchases over a period of
time. Investors who intend to make investments exceeding $1 million, however,
should consider purchasing Class I shares through a Letter of Intent instead of
purchasing Class II shares.
Each class also has a separate schedule for compensating securities dealers for
selling Fund shares. Investors should take all of the factors regarding an
investment in each class into account before deciding which class of shares to
purchase.
Purchase Price of Shares of the Funds
When placing purchase orders, investors should clearly indicate which class of
shares they intend to purchase. A purchase order that fails to specify a class
will automatically be invested in Class I shares.
Shares of both classes are offered at their respective public offering prices,
which are determined by adding the net asset value per share plus a front-end
sales charge, next computed (1) after the shareholder's securities dealer
receives the order which is promptly transmitted to the Fund to be purchased or
(2) after receipt of an order by mail from the shareholder directly in proper
form (which generally means a completed Shareholder Application accompanied by a
negotiable check).
Class I. The sales charge for Class I shares is a variable percentage of the
offering price depending upon the amount of the sale. The offering price will be
calculated to two decimal places using standard rounding criteria. A description
of the method of calculating net asset value per share is included under the
caption "Valuation of Shares of the Funds."
Set forth below is a table showing front-end sales charges and dealer
concessions for Class I shares.
Total Sales Charge
Class I Shares As a Percentage Dealer Concession
Size of Transaction As a Percentage of Net Amount As a Percentage of
at Offering Price of Offering Price Invested Offering Price*
Less than $100,000 4.25% 4.44% 4.00%
$100,000 but less than $250,000 3.50% 3.63% 3.25%
$250,000 but less than $500,000 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000 2.15% 2.20% 2.00%
$1,000,000 or more none none (see below)**
*Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages indicated. At the discretion of Distributors,
all sales charges may at times be allowed to the securities dealer. If 90% or
more of the sales commission is allowed, such securities dealer may be deemed to
be an underwriter as that term is defined in the Securities Act of 1933, as
amended.
**The following commissions will be paid by Distributors, out of its own
resources, to securities dealers who initiate and are responsible for purchases
of $1 million or more: 0.75% on sales of $1 million but less than $2 million,
plus 0.60% on sales of $2 million but less than $3 million, plus 0.50% on sales
of $3 million but less than $50 million, plus 0.25% on sales of $50 million but
less than $100 million, plus 0.15% on sales of $100 million or more. Dealer
concession breakpoints are reset every 12 months for purposes of additional
purchases.
No front-end sales charge applies on investments of $1 million or more, but a
contingent deferred sales charge of 1% is imposed on certain redemptions of all
or a portion of investments of $1 million within the contingency period. See
"How to Sell Shares of the Funds - Contingent Deferred Sales Charge."
The size of a transaction which determines the applicable sales charge on the
purchase of Class I shares is determined by adding the amount of the
shareholder's current purchase plus the cost or current value (whichever is
higher) of a shareholder's existing investment in one or more of the funds in
the Franklin Group of Funds(R) and the Templeton Group of Funds. Included for
these aggregation purposes are (a) the mutual funds in the Franklin Group of
Funds except Franklin Valuemark Funds and Franklin Government Securities Trust
(the "Franklin Funds"), (b) other investment products underwritten by
Distributors or its affiliates and (c) the U.S. registered mutual funds in the
Templeton Group of Funds except Templeton Capital Accumulator Fund, Inc.,
Templeton Variable Annuity Fund, and Templeton Variable Products Series Fund
(the "Templeton Funds"). Franklin Funds and Templeton Funds are collectively
referred to as the "Franklin Templeton Fund(s). Sales charge reductions based
upon aggregate holdings of (a), (b) and (c) above ("Franklin Templeton
Investments") may be effective only after notification to Distributors that the
investment qualifies for a discount.
Other Payments to Securities Dealers. Distributors, or one of its affiliates,
may make payments, out of its own resources, of up to 1.00% of the amount
purchased to securities dealers who initiate and are responsible for purchases
made at net asset value by certain trust companies and trust departments of
banks. See definitions under "Description of Special Net Asset Value Purchases"
and as set forth in the SAI.
Class II. Unlike Class I shares, the front-end sales charges and dealer
concessions for Class II shares do not vary depending on the amount of purchase.
See table below:
Total Sales Charge
Class II Shares As a Percentage Dealer Concession
Size of Transaction As a Percentage of Net Amount As a Percentage
at Offering Price of Offering Price Invested of Offering Price*
Any amount (less than $1 million) 1.00% 1.01% 1.00%
*Distributors or one of its affiliates may make additional payments to
securities dealer, from its own resources, of up to 1% of the amount invested.
During the first year after the purchase of Class II shares, Distributors will
keep a portion of Class II Plan fees assessed on Class II shares to partially
recoup fees Distributors pays to securities dealers
Class II shares redeemed within 18 months of their purchase will be assessed a
contingent deferred sales charge of 1.0% on the lesser of the then-current net
asset value or the net asset value of such shares at the time of purchase,
unless such charge is waived as described below.
Either Distributors or one of its affiliates, out of its own resources, may also
provide additional compensation to securities dealers in connection with sales
of shares of the Franklin Templeton Funds. Compensation may include financial
assistance to securities dealers and payments made in connection with
conferences, sales or training programs for their employees, seminars for the
public, advertising, sales campaigns and/or shareholder services and programs
regarding one or more of the Franklin Templeton Funds and other dealer-sponsored
programs or events. In some instances, this compensation may be made available
only to certain securities dealers whose representatives have sold or are
expected to sell significant amounts of shares of the Franklin Templeton Funds.
Compensation may include payment for travel expenses, including lodging,
incurred in connection with trips taken by invited registered representatives
and members of their families to locations within or outside of the United
States for meetings or seminars of a business nature. Securities dealers may not
use sales of the Fund's shares to qualify for this compensation to the extent
such may be prohibited by the laws of any state or any self-regulatory agency,
such as the National Association of Securities Dealers, Inc. None of the
aforementioned additional compensation is paid for by the Funds or their
shareholders.
Additional terms concerning the offering of shares of the Funds are included in
the SAI.
Certain officers and Trustees of the Trust are also affiliated with
Distributors. A detailed description is included in the SAI.
Quantity Discounts in Sales Charges -
Class I Shares Only
Class I shares may be purchased under a variety of plans which provide for a
reduced sales charge. To be certain to obtain the reduction of the sales charge,
the investor or the securities dealer should notify Distributors at the time of
each purchase of shares which qualifies for the reduction. In determining
whether a purchase qualifies for discount, an investment in any of the Franklin
Templeton Investments may be combined with those of the investor's spouse,
children under the age of 21 and grandchildren under the age of 21. The value of
Class II shares owned by the investor may also be included for this purpose.
In addition, an investment in Class I shares may qualify for a reduction in the
sales charge under the following programs:
1. Rights of Accumulation. The cost or current value (whichever is higher) of
existing investments in the Franklin Templeton Investments may be combined with
the amount of the current purchase in determining the sales charge to be paid.
2. Letter of Intent. An investor may immediately qualify for a reduced sales
charge on a purchase of Class I shares by completing the Letter of Intent
section of the Shareholder Application (the "Letter of Intent" or "Letter"). By
completing the Letter the investor expresses (i) an intention to invest during
the next 13 months a specified amount which, if made at one time, would qualify
for a reduced sales charge, (ii) grants to Distributors a security interest in
the reserved shares discussed below and (iii) irrevocably appoints Distributors
as attorney-in-fact with full power of substitution to surrender for redemption
any or all shares for the purpose of paying any additional sales charge due.
Purchases under the Letter will conform with the requirements of Rule 22d-1
under the 1940 Act. The investor or the investor's securities dealer must inform
Investor Services or Distributors that this Letter is in effect each time a
purchase is made.
An investor acknowledges and agrees to the following provisions by completing
the Letter of Intent section of the Shareholder Application: Five percent (5%)
of the amount of the total intended purchase will be reserved in Class I shares
registered in the investor's name, to assure that the full applicable sales
charge will be paid if the intended purchase is not completed. The reserved
shares will be included in the total shares owned as reflected on periodic
statements; income and capital gain distributions on the reserved shares will be
paid as directed by the investor. The reserved shares will not be available for
disposal by the investor until the Letter of Intent has been completed or the
higher sales charge paid
Although the sales charges on Class II shares cannot be reduced through these
programs, the value of Class II shares owned by the investor may be included in
determining a reduced sales charge to be paid on Class I shares pursuant to the
Letter of Intent and Rights of Accumulation programs.
Group Purchases of Class I Shares
An individual who is a member of a qualified group may also purchase Class I
shares of the Fund at the reduced sales charge applicable to the group as a
whole. The sales charge is based upon the aggregate dollar value of shares
previously purchased and still owned by the members of the group, plus the
amount of the current purchase. For example, if members of the group had
previously invested and still held $80,000 of Fund shares and now were investing
$25,000, the sales charge would be 3.50%. Information concerning the current
sales charge applicable to a group may be obtained by contacting Distributors.
A "qualified group" is one which (i) has been in existence for more than six
months, (ii) has a purpose other than acquiring Fund shares at a discount and
(iii) satisfies uniform criteria which enable Distributors to realize economies
of scale in its costs of distributing shares. A qualified group must have more
than 10 members, be available to arrange for group meetings between
representatives of the Funds or Distributors and the members, agree to include
sales and other materials related to the Funds in its publications and mailings
to members at reduced or no cost to Distributors, and seek to arrange for
payroll deduction or other bulk transmission of investments to the Funds.
If an investor selects a payroll deduction plan, subsequent investments to a
Fund will be automatic and will continue until such time as the investor
notifies such Fund and the investor's employer to discontinue further
investments. Due to the varying procedures used to prepare, process and to
forward the payroll deduction information to the Funds, there may be a delay
between the time of the payroll deduction and the time the money reaches the
Funds. The investment in a Fund will be made at the offering price per share
determined on the day that both the check and payroll deduction data are
received in required form by such Fund.
Purchases at Net Asset Value
Class I shares may be purchased without the imposition of a front-end sales
charge ("net asset value") or a contingent deferred sales charge by (1)
officers, trustees, directors, and full-time employees of the Trust, any of the
Franklin Templeton Funds, or of the Franklin Templeton Group, and by their
spouses and family members, including any subsequent investments made by such
parties after cessation of employment; (2) companies exchanging shares or
selling assets pursuant to a merger, acquisition or exchange offer; (3) accounts
managed by the Franklin Templeton Group; (4) certain unit investment trusts and
unit holders of such trusts reinvesting their distributions from the trusts in
the Fund; (5) registered securities dealers and their affiliates, for their
investment accounts only; and (6) current employees of securities dealers and
their affiliates and by their family members, in accordance with the internal
policies and procedures of the employing securities dealer and affiliate.
For either Class I or Class II, the same class of shares of the Fund may be
purchased at net asset value by persons who have redeemed, within the previous
365 days, their shares of a Fund or another of the Franklin Templeton Funds
which were purchased with a front-end sales charge or assessed a contingent
deferred sales charge on redemption. If a different class of shares is
purchased, the full front-end sales charge must be paid at the time of purchase
of the new shares. An investor may reinvest an amount not exceeding the
redemption proceeds. While credit will be given for any contingent deferred
sales charge paid on the shares redeemed and subsequently repurchased a new
contingency period will begin. Matured shares will be reinvested at net asset
value and will not be subject to a new contingent deferred sales charge. Shares
of a Fund redeemed in connection with an exchange into another fund (see
"Exchange Privilege") are not considered "redeemed" for this privilege. In order
to exercise this privilege, a written order for the purchase of shares of a Fund
must be received by such Fund or the Fund's Shareholder Services Agent within
365 days after the redemption. The 365 days, however, do not begin to run on
redemption proceeds placed immediately after redemption in a Franklin Bank
Certificate of Deposit ("CD") until the CD (including any rollover) matures.
Reinvestment at net asset value may also be handled by a securities dealer or
other financial institution, who may charge the shareholder a fee for this
service. The redemption is a taxable transaction but reinvestment without a
sales charge may affect the amount of gain or loss recognized and the tax basis
of the shares reinvested. If there has been a loss on the redemption, the loss
may be disallowed if a reinvestment in the same fund is made within a 30-day
period. Information regarding the possible tax consequences of such a
reinvestment is included in the tax section of this Prospectus and the SAI.
For either Class I or Class II, the same class of shares of the Fund or of
another of the Franklin Templeton Funds may be purchased at net asset value and
without a contingent deferred sales charge by persons who have received
dividends and capital gains distributions in cash from investments in that class
of shares of a Fund within 365 days of the payment date of such distribution.
Class II shareholders may also direct such distributions for investment at net
asset value in a Class I Franklin Templeton Fund. To exercise this privilege, a
written request to reinvest the distribution must accompany the purchase order.
Additional information may be obtained from Shareholder Services at
1-800/632-2301. See "Distributions in Cash" under "Distributions to
Shareholders."
Class I shares may be purchased at net asset value and without the imposition of
a contingent deferred sales charge by investors who have, within the past 60
days, redeemed an investment in a mutual fund which is not part of the Franklin
Templeton Funds and which was subject to a front-end or a contingent deferred
sales charge and which has investment objectives similar to those of the Funds.
Class I shares may be purchased at net asset value and without the imposition of
a contingent deferred sales charge by securities dealers who have entered into a
supplemental agreement with Distributors, or by registered investment advisors
affiliated with such broker-dealers, on behalf of their clients who are
participating in a comprehensive fee program (sometimes known as a wrap fee
program).
Class I shares may also be purchased at net asset value and without the
imposition of a contingent deferred sales charge by any state, county, or city,
or any instrumentality, department, authority or agency thereof which has
determined that the Funds are a legally permissible investment and which is
prohibited by applicable investment laws from paying a sales charge or
commission in connection with the purchase of shares of any registered
management investment company ("an eligible governmental authority"). SUCH
INVESTORS SHOULD CONSULT THEIR OWN LEGAL ADVISORS TO DETERMINE WHETHER AND TO
WHAT EXTENT THE SHARES OF THE FUNDS CONSTITUTE LEGAL INVESTMENTS FOR THEM.
Municipal investors considering investment of proceeds of bond offerings into a
Fund should consult with expert counsel to determine the effect, if any, of
various payments made by such Fund or its investment manager on arbitrage rebate
calculations. In connection with investments by eligible governmental
authorities at net asset value made through a securities dealer who has executed
a dealer agreement with Distributors, either Distributors or one of its
affiliates may make a payment, out of their own resources, to such securities
dealer in an amount not to exceed 0.25% of the amount invested. Contact
Franklin's Institutional Sales Department for additional information.
Description of Special Net Asset Value Purchases
Class I shares may be purchased at net asset value and without the imposition of
a contingent deferred sales charge by trust companies and bank trust departments
for funds over which they exercise exclusive discretionary investment authority
and which are held in a fiduciary, agency, advisory, custodial or similar
capacity. Such purchases are subject to minimum requirements with respect to
amount of purchase, which may be established by Distributors. Currently, those
criteria require that the amount invested or to be invested during the
subsequent 13-month period in this Fund or any of the Franklin Templeton
Investments must total at least $1,000,000. Orders for such accounts will be
accepted by mail accompanied by a check or by telephone or other means of
electronic data transfer directly from the bank or trust company, with payment
by federal funds received by the close of business on the next business day
following such order.
Refer to the SAI for further information regarding net asset value purchases of
Class I shares.
General
Securities laws of states in which a Fund's shares are offered for sale may
differ from the interpretations of federal law, and banks and financial
institutions selling Fund shares may be required to register as dealers pursuant
to state law.
Other Programs and Privileges Available to Fund Shareholders
Certain of the programs and privileges described in this section may not be
available directly from the Funds to shareholders whose shares are held, of
record, by a financial institution or in a "street name" account or networked
account through the National Securities Clearing Corporation ("NSCC") (see the
section captioned "Account Registrations" in this Prospectus).
Share Certificates
Shares from an initial investment, as well as subsequent investments, including
the reinvestment of dividends and capital gain distributions, are generally
credited to an account in the name of an investor on the books of the Funds,
without the issuance of a share certificate. Maintaining shares in
uncertificated form (also known as "plan balance") minimizes the risk of loss or
theft of a share certificate. A lost, stolen or destroyed certificate cannot be
replaced without obtaining a sufficient indemnity bond. The cost of such a bond,
which is generally borne by the shareholder, can be 2% or more of the value of
the lost, stolen or destroyed certificate. A certificate will be issued if
requested by the shareholder or by the securities dealer.
Confirmations
A confirmation statement will be sent to each shareholder quarterly to reflect
the dividends reinvested during the period and after each other transaction
which affects the shareholder's account. This statement will also show the total
number of shares owned by the shareholder, including the number of shares in
"plan balance" for the account of the shareholder.
Automatic Investment Plan
Under the Automatic Investment Plan, a shareholder may be able to arrange to
make additional purchases of shares automatically on a monthly basis by
electronic funds transfer from a checking account, if the bank which maintains
the account is a member of the Automated Clearing House, or by preauthorized
checks drawn on the shareholder's bank account. A shareholder may, of course,
terminate the program at any time. The Automatic Investment Plan Application
included with this Prospectus contains the requirements applicable to this
program. In addition, shareholders may obtain more information concerning this
program from their securities dealers or from Distributors.
The market value of each class of shares of the Funds is subject to fluctuation.
Before undertaking any plan for systematic investment, the investor should keep
in mind that such a program does not assure a profit or protect against a loss.
Systematic Withdrawal Plan
A shareholder may establish a Systematic Withdrawal Plan and receive regular
periodic payments from the account, provided that the net asset value of the
shares held by the shareholder is at least $5,000. There are no service charges
for establishing or maintaining a Systematic Withdrawal Plan. The minimum amount
which the shareholder may withdraw is $50 per withdrawal transaction, although
this is merely the minimum amount allowed under the plan and should not be
mistaken for a recommended amount. The plan may be established on a monthly,
quarterly, semiannual or annual basis. If the shareholder establishes a plan,
any capital gain distributions and income dividends paid by the Fund will be
reinvested for the shareholder's account in additional shares at net asset
value. Payments will then be made from the liquidation of shares at net asset
value on the day of the transaction (which is generally the first business day
of the month in which the payment is scheduled) with payment generally received
by the shareholder three to five days after the date of liquidation. By
completing the "Special Payment Instructions for Distributions" section of the
Shareholder Application included with this Prospectus, a shareholder may direct
the selected withdrawals to the same class of another Franklin Templeton Fund,
to another person, or directly to a checking account. If the bank at which the
account is maintained is a member of the Automated Clearing House, the payments
may be made automatically by electronic funds transfer. If this last option is
requested, the shareholder should allow at least 15 days for initial processing.
Payments which may be made in the interim will be sent to the address of record.
Liquidation of shares may reduce or possibly exhaust the shares in the
shareholder's account, to the extent withdrawals exceed shares earned through
dividends and distributions, particularly in the event of a market decline. If
the withdrawal amount exceeds the total plan balance, the account will be closed
and the remaining balance will be sent to the shareholder. As with other
redemptions, a liquidation to make a withdrawal payment is a sale for federal
income tax purposes. Because the amount withdrawn under the plan may be more
than the shareholder's actual yield or income, part of the payment may be a
return of the shareholder's investment.
The maintenance of a Systematic Withdrawal Plan concurrently with purchases of
additional shares of a Fund would be disadvantageous because of the sales charge
on the additional purchases. Also, redemptions of Class I shares and Class II
shares may be subject to a contingent deferred sales charge if the shares are
redeemed within 12 months (Class I shares) or 18 months (Class II shares) of the
calendar month of the original purchase date. The shareholder should ordinarily
not make additional investments of less than $5,000 or three times the annual
withdrawals under the plan during the time such a plan is in effect.
With respect to Class I shares, the contingent deferred sales charge is waived
for redemptions through a Systematic Withdrawal Plan set up prior to February 1,
1995. With respect to Systematic Withdrawal Plans set up on or after February 1,
1995, however, the applicable contingent deferred sales charge is waived for
Class I and Class II share redemptions of up to 1% monthly of an account's net
asset value (12% annually, 6% semi-annually, 3% quarterly). For example, if a
Class I account maintained an annual balance of $1,000,000, only $120,000 could
be withdrawn through a once-yearly Systematic Withdrawal Plan free of charge;
any amount over that $120,000 would be assessed a 1% (or applicable) contingent
deferred sales charge. Likewise, if a Class II account maintained an annual
balance of $10,000 only $1,200 could be withdrawn through a once-yearly
Systematic Withdrawal Plan free of charge.
A Systematic Withdrawal Plan may be terminated on written notice by the
shareholder or the Fund, and it will terminate automatically if all shares are
liquidated or withdrawn from the account, or upon the Fund's receipt of
notification of the death or incapacity of the shareholder. Shareholders may
change the amount (but not below the specified minimum) and schedule of
withdrawal payments, or suspend one such payment by giving written notice to
Investor Services at least seven business days prior to the end of the month
preceding a scheduled payment. Share certificates may not be issued while a
Systematic Withdrawal Plan is in effect.
Institutional Accounts
There may be additional methods of purchasing, redeeming or exchanging shares of
the Fund available to institutional accounts. For further information, contact
the Franklin Templeton Institutional Services Department at 1-800/321-8563.
Exchange Privilege
The Franklin Templeton Funds consist of a number of mutual funds with various
investment objectives or policies. The shares of most of these mutual funds are
offered to the public with a sales charge. If a shareholder's investment
objective or outlook for the securities markets changes, the Fund shares may be
exchanged for the same class of shares of other Franklin Templeton Funds which
are eligible for sale in the shareholder's state of residence and in conformity
with such fund's stated eligibility requirements and investment minimums. Some
funds, however, may not offer Class II shares. Class I shares may be exchanged
for Class I shares of any Franklin Templeton Funds. Class II shares may be
exchanged for Class II shares of any Franklin Templeton Funds. No exchanges
between different classes of shares will be allowed. A contingent deferred sales
charge will not be imposed on exchanges. If, however, the exchanged shares were
subject to a contingent deferred sales charge in the original fund purchased and
shares are subsequently redeemed within 12 months (Class I shares) or 18 months
(Class II shares) of the calendar month of the original purchase date, a
contingent deferred sales charge will be imposed. See also "How to Sell Shares
of the Fund - Contingent Deferred Sales Charge." Before making an exchange
investors should review the prospectus of the fund they wish to exchange from
and the fund they wish to exchange into for all specific requirements or
limitations on exercising the exchange privilege, for example, limitations on a
fund's sale of its shares, minimum holding periods for exchanges at net asset
value or applicable sales charges.
Exchanges may be made in any of the following ways:
Exchanges By Mail
Send written instructions signed by all account owners and accompanied by any
outstanding share certificates properly endorsed. The transaction will be
effective upon receipt of the written instructions together with any outstanding
share certificates.
Exchanges By Telephone
Shareholders, or their investment representative of record, if any, may exchange
shares of the Fund by telephone by calling Investor Services at 1-800/632-2301
or the automated Franklin TeleFACTS(R), system (day or night) at 1-800/247-1753.
If the shareholder does not wish this privilege extended to a particular
account, the Fund or Investor Services should be notified.
The telephone exchange privilege allows a shareholder to effect exchanges from a
Fund into an identically registered account of the same class of shares in one
of the other available Franklin Templeton Funds. The telephone exchange
privilege is available only for uncertificated shares or those which have
previously been deposited in the shareholder's account. The Funds and Investor
Services will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. Please refer to "Telephone Transactions -
Verification Procedures."
During periods of drastic economic or market changes, it is possible that the
telephone exchange privilege may be difficult to implement and the TeleFACTS
option may not be available. In this event, shareholders should follow the other
exchange procedures discussed in this section, including the procedures for
processing exchanges through securities dealers.
Exchanges Through Securities Dealers
As is the case with all purchases and redemptions of a Fund's shares, Investor
Services will accept exchange orders from securities dealers who execute a
dealer or similar agreement with Distributors. See also "Exchanges By Telephone"
above. Such a dealer-ordered exchange will be effective only for uncertificated
shares on deposit in the shareholder's account or for which certificates have
previously been deposited. A securities dealer may charge a fee for handling an
exchange.
Additional Information Regarding Exchanges
Exchanges of the same class of shares are made on the basis of the net asset
values of the class involved, except as set forth below. Exchanges of shares of
a class which were purchased without a sales charge will be charged a sales
charge in accordance with the terms of the prospectus of the fund and the class
of shares being purchased, unless the original investment in the Franklin
Templeton Funds was made pursuant to the privilege permitting purchases at net
asset value, as discussed under "How to Buy Shares of the Funds." Exchanges of
Class I shares of a Fund which were purchased with a lower sales charge into a
fund which has a higher sales charge will be charged the difference in sales
charges, unless the shares were held in such Fund for at least six months prior
to executing the exchange.
When an investor requests the exchange of the total value of a Fund account,
declared but unpaid income dividends and capital gain distributions will be
transferred to the account in the fund being exchanged into and will be invested
at net asset value. Because the exchange is considered a redemption and purchase
of shares, the shareholder may realize a gain or loss for federal income tax
purposes. Backup withholding and information reporting may also apply.
Information regarding the possible tax consequences of such an exchange is
included in the tax section in this Prospectus and in the SAI .
If a substantial portion of a Fund's shareholders should, within a short period,
elect to redeem their shares of such Fund pursuant to the exchange privilege,
the Fund might have to liquidate portfolio securities it might otherwise hold
and incur the additional costs related to such transactions. On the other hand,
increased use of the exchange privilege may result in periodic large inflows of
money. If this should occur, it is the general policy of the Funds to initially
invest this money in short-term, tax-exempt municipal securities unless it is
felt that attractive investment opportunities consistent with the Funds'
investment objectives exist immediately. Subsequently, this money will be
withdrawn from such short-term tax-exempt municipal securities and invested in
portfolio securities in as orderly a manner as is possible when attractive
investment opportunities arise.
The exchange privilege may be modified or discontinued by the Funds at any time
upon 60 days' written notice to shareholders.
Exchanges of Class I Shares
The contingency period of Class I shares will be tolled (or stopped) for the
period such shares are exchanged into and held in a Franklin or Templeton money
market fund. If a Class I account has shares subject to a contingent deferred
sales charge, Class I shares will be exchanged into the new account on a
"first-in, first-out" basis. See also "How to Sell Shares of the Fund -
Contingent Deferred Sales Charge."
Exchanges of Class II Shares
When an account is composed of Class II shares subject to the contingent
deferred sales charge, and Class II shares that are not, the shares will be
transferred proportionately into the new fund. Shares received from reinvestment
of dividends and capital gains are referred to as "free shares," shares which
were originally subject to a contingent deferred sales charge but to which the
contingent deferred sales charge no longer applies are called "matured shares,"
and shares still subject to the contingent deferred sales charge are referred to
as "CDSC liable shares." CDSC liable shares held for different periods of time
are considered different types of CDSC liable shares. For instance, if a
shareholder has $1,000 in free shares, $2,000 in matured shares, and $3,000 in
CDSC liable shares, and the shareholder exchanges $3,000 into a new fund, $500
will be exchanged from free shares, $1,000 from matured shares, and $1,500 from
CDSC liable shares. Similarly, if CDSC liable shares have been purchased at
different periods, a proportionate amount will be taken from shares held for
each period. If, for example, a shareholder holds $1,000 in shares bought 3
months ago, $1,000 bought 6 months ago, and $1,000 bought 9 months ago, and the
shareholder exchanges $1,500 into the new fund, $500 from each of these shares
will be deemed exchanged into the new fund.
The money market fund exchange option available to Class II shareholders is the
Franklin Templeton Money Fund II ("Money Fund II"), a series of the Franklin
Templeton Money Fund Trust. No drafts (checks) may be written on Money Fund II
accounts, nor may shareholders purchase shares of Money Fund II directly. Class
II shares exchanged for shares of Money Fund II will continue to age and a
contingent deferred sales charge will be assessed if CDSC liable shares are
redeemed. No other money market funds are available for Class II shareholders
for exchange purposes. Class I shares may be exchanged for shares of any of the
money market funds in the Franklin Templeton Funds except Money Fund II. Draft
writing privileges and direct purchases are allowed on these other money market
funds as described in their respective prospectuses.
To the extent shares are exchanged proportionately, as opposed to another
method, such as first-in first-out, or free-shares followed by CDSC liable
shares, the exchanged shares may, in some instances, be CDSC liable even though
a redemption of such shares, as discussed elsewhere herein, may no longer be
subject to a CDSC. The proportional method is believed by management to more
closely meet and reflect the expectations of Class II shareholders in the event
shares are redeemed during the contingency period. For federal income tax
purposes, the cost basis of shares redeemed or exchanged is determined under the
Code without regard to the method of transferring shares chosen by the Fund.
Transfers
Transfers between identically registered accounts in the same fund and class are
treated as non-monetary and non-taxable events, and are not subject to a
contingent deferred sales charge. The transferred shares will continue to age
from the date of original purchase. Like exchanges, Class II shares will be
moved proportionately from each type of shares in the original account.
Conversion Rights
It is not presently anticipated that Class II shares will be convertible to
Class I shares. A shareholder may, however, sell his Class II shares and use the
proceeds to purchase Class I shares, subject to all applicable sales charges.
Timing Accounts
"Timing Accounts" are not permitted to purchase shares of either Class I or
Class II or to exchange into either Class I or Class II. This policy does not
affect any other types of investor. "Timing Accounts" generally include market
timing or allocation services; accounts administered so as to redeem or purchase
shares based upon certain predetermined market indicators; or any person whose
transactions seem to follow a timing pattern.
How to Sell Shares of the Fund
A shareholder may at any time liquidate shares of a Fund owned and receive from
such Fund the value of the shares. Shares may be redeemed in any of the
following ways:
Redemptions by Mail
Send a written request, signed by all registered owners, to Investor Services,
at the address shown on the back cover of this Prospectus, and any share
certificates which have been issued for the shares of the Fund being redeemed,
properly endorsed and in order for transfer. The shareholder will then receive
from the Fund the value of the shares redeemed based upon the net asset value
per share (less a contingent deferred sales charge, if applicable) next computed
after the written request in proper form is received by Investor Services. The
shareholder will then receive from the Fund the value of the shares based upon
the net asset value per share (less the contingent deferred sales charge, if
applicable) next computed after the written request in proper form is received
by Investor Services. Redemption requests received after the time at which the
net asset value is calculated (at the scheduled closing of the New York Stock
Exchange (the "Exchange") which is generally 1:00 p.m. Pacific time) each day
that the Exchange is open for business will receive the price calculated on the
following business day. Shareholders are requested to provide a telephone
number(s) where they may be reached during business hours, or in the evening if
preferred. Investor Services' ability to contact a shareholder promptly when
necessary will speed the processing of the redemption.
To be considered in proper form, signature(s) must be guaranteed if the
redemption request involves any of the following:
(1) the proceeds of the redemption are over $50,000;
(2) the proceeds (in any amount) are to be paid to someone other than the
registered owner(s) of the account;
(3) the proceeds (in any amount) are to be sent to any address other than the
shareholder's address of record, preauthorized bank account or brokerage
firm account;
(4) share certificates, if the redemption proceeds are in excess of $50,000; or
(5) the Funds or Investor Services believe that a signature guarantee would
protect against potential claims based on the transfer instructions,
including, for example, when (a) the current address of one or more joint
owners of an account cannot be confirmed, (b) multiple owners have a
dispute or give inconsistent instructions to the Funds, (c) the Funds have
been notified of an adverse claim, (d) the instructions received by the
Funds are given by an agent, not the actual registered owner, (e) the Funds
determine that joint owners who are married to each other are separated or
may be the subject of divorce proceedings, or (f) the authority of a
representative of a corporation, partnership, association, or other entity
has not been established to the satisfaction of the Funds.
Signature(s) must be guaranteed by an "eligible guarantor institution" as
defined under Rule 17Ad-15 under the Securities Exchange Act of 1934. Generally,
eligible guarantor institutions include (1) national or state banks, savings
associations, savings and loan associations, trust companies, savings banks,
industrial loan companies and credit unions; (2) national securities exchanges,
registered securities associations and clearing agencies; (3) securities dealers
which are members of a national securities exchange or a clearing agency or
which have minimum net capital of $100,000; or (4) institutions that participate
in the Securities Transfer Agent Medallion Program ("STAMP") or other recognized
signature guarantee medallion program. A notarized signature will not be
sufficient for the request to be in proper form.
Share Certificates - Where shares to be redeemed are represented by share
certificates, the request for redemption must be accompanied by the share
certificate and a share assignment form signed by the registered shareholders
exactly as the account is registered, with the signature(s) guaranteed as
referenced above. Shareholders are advised, for their own protection, to send
the share certificate and assignment form in separate envelopes if they are
being mailed in for redemption.
Liquidation requests of corporate, partnership, trust and custodianship
accounts, and accounts under court jurisdiction require the following
documentation to be in proper form:
Corporation - (1) Signature guaranteed letter of instruction from the authorized
officer(s) of the corporation and (2) a corporate resolution.
Partnership - (1) Signature guaranteed letter of instruction from a general
partner and (2) pertinent pages from the partnership agreement identifying the
general partners or a certification for a partnership agreement.
Trust - (1) Signature guaranteed letter of instruction from the trustee(s) and
(2) a copy of the pertinent pages of the trust document listing the trustee(s)
or a Certification for Trust if the trustee(s) are not listed on the account
registration.
Custodial - Signature guaranteed letter of instruction from the custodian.
Accounts under court jurisdiction - Check court documents and the applicable
state law since these accounts have varying requirements, depending upon the
state of residence.
Payment for redeemed shares will be sent to the shareholder within seven days
after receipt of the request in proper form.
Redemptions by Telephone
Shareholders who complete the Franklin Templeton Telephone Redemption
Authorization Agreement (the "Agreement"), included with this Prospectus, may
redeem shares of a Fund by telephone, subject to the Restricted Account
exception noted under "Telephone Transactions - Restricted Accounts."
Information may also be obtained by writing to the Fund or Investor Services at
the address shown on the cover or by calling 1-800/632-2301. The Funds and
Investor Services will employ reasonable procedures to confirm that instructions
given by telephone are genuine. Shareholders, however, bear the risk of loss in
certain cases as described under "Telephone Transactions - Verification
Procedures."
For shareholder accounts with a completed Agreement on file, redemptions of
uncertificated shares or shares which have previously been deposited with a Fund
or Investor Services may be made for up to $50,000 per day per Fund account.
Telephone redemption requests received before the scheduled close of the
Exchange (generally 1:00 p.m. Pacific time) on any business day will be
processed that same day. The redemption check will be sent within seven days,
made payable to all the registered owners on the account, and will be sent only
to the address of record. Redemption requests by telephone will not be accepted
within 30 days following an address change by telephone. In that case, a
shareholder should follow the other redemption procedures set forth in this
Prospectus. Institutional accounts (certain corporations, bank trust departments
and government entities which qualify to purchase shares at net asset value
pursuant to the terms of this Prospectus) that wish to execute redemptions in
excess of $50,000 must complete an Institutional Telephone Privileges Agreement
which is available from the Franklin Templeton Institutional Services Department
by telephoning 1-800/321-8563.
Redeeming Shares Through Securities Dealers
The Funds will accept redemption orders from securities dealers who have entered
into an agreement with Distributors. This is known as a repurchase. The only
difference between a normal redemption and a repurchase is that if the
shareholder redeems shares through a dealer, the redemption price will be the
net asset value next calculated after the shareholder's dealer receives the
order which is promptly transmitted to a Fund, rather than on the day the Fund
receives the shareholder's written request in proper form. The documents
described under "Redemptions by Mail" above, as well as a signed letter of
instruction, are required regardless of whether the shareholder redeems shares
directly or submits such shares to a securities dealer for repurchase. After
receipt of a repurchase order from the dealer, the Fund will still require a
signed letter of instruction and all other documents set forth above. A
shareholder's letter should reference the Fund, the class, the account number,
the fact that the repurchase was ordered by a dealer and the dealer's name.
Details of the dealer-ordered trade, such as trade date, confirmation number,
and the amount of shares or dollars, will help speed processing of the
redemption. The seven-day period within which the proceeds of the shareholder's
redemption will be sent will begin when the Fund receives all documents required
to complete ("settle") the repurchase in proper form. The shareholder's dealer
may charge a fee for handling the order. The SAI contains more information on
the redemption of shares.
Contingent Deferred Sales Charge
Class I. In order to recover commissions paid to securities dealers on
investments of $1 million or more, a contingent deferred sales charge of 1%
applies to redemptions of all or a portion of those investments within the
contingency period of 12 months of the calendar month of their purchase. The
charge is 1% of the lesser of the net asset value of the shares redeemed
(exclusive of reinvested dividends and capital gain distributions) or the total
cost of such shares at the time of purchase, and is retained by Distributors.
The contingent deferred sales charge is waived in certain instances.
Class II. Class II shares redeemed within the contingency period of 18 months of
the calendar month of their purchase will be assessed a contingent deferred
sales charge, unless one of the exceptions described below applies. The charge
is 1% of the lesser of the value of the shares redeemed (exclusive of reinvested
dividends and capital gain distributions) or the net asset value at the time of
purchase of such shares, and is retained by Distributors. The contingent
deferred sales charge is waived in certain instances. See below.
Class I and Class II. In determining if a contingent deferred sales charge
applies, shares not subject to a contingent deferred sales charge are deemed to
be redeemed first, in the following order: (i) Shares representing amounts
attributable to capital appreciation on shares held less than the contingency
period (12 months in the case of Class I shares and 18 months in the case of
Class II shares); (ii) shares purchased with reinvested dividends and capital
gain distributions; and (iii) other shares held longer than the contingency
period. Shares subject to a contingent deferred sales charge will then be
redeemed on a "first in," "first out" basis. For tax purposes, a contingent
deferred sales charge is treated as either a reduction in redemption proceeds or
an adjustment to the cost basis of the shares redeemed.
The contingent deferred sales charge on each class of shares is waived, as
applicable, for: exchanges; any account fees; redemptions through a Systematic
Withdrawal Plan set up prior to February 1, 1995, and for Systematic Withdrawal
Plans set up thereafter, redemptions of up to 1% monthly of an account's net
asset value (3% quarterly, 6% semi-annually or 12% annually); redemptions
initiated by a Fund due to a shareholder's account falling below the minimum
specified account size; and redemptions following the death of the shareholder
or the beneficial owner.
All investments made during a calendar month, regardless of when during the
month the investment occurred, will age one month on the last day of that month
and each subsequent month.
Unless otherwise specified, requests for redemptions of a specified dollar
amount will result in additional shares being redeemed to cover any applicable
contingent deferred sales charge, while requests for redemption of a specific
number of shares will result in the applicable contingent deferred sales charge
being deducted from the total dollar amount redeemed.
Additional Information Regarding Redemptions
The Funds may delay the mailing of the redemption check, or a portion thereof,
until the clearance of the check used to purchase Fund shares, which may take up
to 15 days or more. Although the use of a certified or cashier's check will
generally reduce this delay, shares purchased with these checks will also be
held pending clearance. Shares purchased by federal funds wire are available for
immediate redemption. In addition, the right of redemption may be suspended or
the date of payment postponed if the Exchange is closed (other than customary
closing) or upon the determination of the SEC that trading on the Exchange is
restricted or an emergency exists, or if the SEC permits it, by order, for the
protection of shareholders. Of course, the amount received may be more or less
than the amount invested by the shareholder, depending on fluctuations in the
market value of securities owned by the Fund.
Other Information
Distribution or redemption checks sent to shareholders do not earn interest or
any other income during the time such checks remain uncashed and neither the
Funds nor their affiliates will be liable for any loss to the shareholder caused
by the shareholder's failure to cash such check(s).
"Cash" payments to or from a Fund may be made by check, draft or wire. The Funds
have no facility to receive, or pay out, cash in the form of currency.
For any information required about a proposed liquidation, a shareholder may
call Franklin's Shareholder Services Department or the securities dealer may
call Franklin's Dealer Services Department.
Telephone Transactions
Shareholders of the Funds and their investment representative of record, if any,
may be able to execute various transactions by calling Investor Services at
1-800/632-2301.
All shareholders will be able to execute various telephone transactions,
including to: (i) effect a change in address, (ii) change a dividend option,
(iii) transfer shares of a Fund in one account to another identically registered
account in that Fund, (iv) request the issuance of certificates, to be sent to
the address of record only, and (v) exchange Fund shares as described in this
Prospectus by telephone. In addition, shareholders who complete and file an
Agreement as described under "How to Sell Shares of the Funds" will be able to
redeem shares of a Fund.
Verification Procedures
The Funds and Investor Services will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine. These will include:
recording all telephone calls requesting account activity by telephone,
requiring that the caller provide certain personal and/or account information
requested by the telephone service agent at the time of the call for the purpose
of establishing the caller's identification, and by sending a confirmation
statement on redemptions to the address of record each time account activity is
initiated by telephone. So long as the Funds and Investor Services follow
instructions communicated by telephone which were reasonably believed to be
genuine at the time of their receipt, neither they nor their affiliates will be
liable for any loss to the shareholder caused by an unauthorized transaction.
The Funds and Investor Services may be liable for any losses due to unauthorized
or fraudulent instructions only in the event such reasonable procedures are not
followed. Shareholders are, of course, under no obligation to apply for or
accept telephone transaction privileges. In any instance where a Fund or
Investor Services is not reasonably satisfied that instructions received by
telephone are genuine, the requested transaction will not be executed, and
neither the Fund nor Investor Services will be liable for any losses which may
occur because of a delay in implementing a transaction.
General
During periods of drastic economic or market changes, it is possible that the
telephone transaction privileges will be difficult to execute because of heavy
telephone volume. In such situations, shareholders may wish to contact their
investment representative for assistance or send written instructions to the
Funds as detailed elsewhere in this Prospectus.
Neither the Funds nor Investor Services will be liable for any losses resulting
from the inability of a shareholder to execute a telephone transaction.
Valuation of Shares of the Funds
The net asset value per share of each Fund (and each class) is determined
separately as of the scheduled closing of the Exchange (generally 1:00 p.m.
Pacific time) each day that the Exchange is open for trading. Many newspapers
carry daily quotations of the prior trading day's closing "bid" (net asset
value) and "ask" (offering price, which includes the maximum front-end sales
charge of each Fund).
The net asset value per share of each Fund is determined in the following
manner: The aggregate of all liabilities is deducted from the aggregate gross
value of all assets, and the difference is divided by the number of shares of
the Fund outstanding at the time. For the purpose of determining the aggregate
net assets of each class of the Fund, cash and receivables are valued at their
realizable amounts. Interest is recorded as accrued. Portfolio securities for
which market quotations are readily available are valued within the range of the
most recent bid and ask prices as obtained from one or more dealers that make
markets in the securities. Portfolio securities which are traded both in the
over-the-counter market and on a stock exchange are valued according to the
broadest and most representative market as determined by the Manager. Municipal
securities generally trade in the over-the-counter market rather than on a
securities exchange. Other securities for which market quotations are readily
available are valued at the current market price, which may be obtained from a
pricing service, based on a variety of factors, including recent trades,
institutional size trading in similar types of securities (considering yield,
risk and maturity) and/or developments related to specific issues. Securities
and other assets for which market prices are not readily available are valued at
fair value as determined following procedures approved by the Board of Trustees.
With the approval of trustees, the Fund may utilize a pricing service, bank or
securities dealer to perform any of the above described functions.
Each of the classes will bear, pro rata, all of the common expenses of that
Fund. The net asset value of all outstanding shares of each class will be
computed on a pro rata basis for each outstanding share based on the
proportionate participation in the Funds represented by the value of shares of
such classes, except that the Class I and Class II shares will bear the Rule
12b-1 expenses payable under their respective plans. Due to the specific
distribution expenses and other costs that will be allocable to each class, the
dividends paid to each class of the Fund may vary.
How to Get Information Regarding
an Investment in the Fund
Any questions or communications regarding a shareholder's account should be
directed to Investor Services at the address shown on the back cover of this
Prospectus.
From a touch tone phone, Franklin and Templeton shareholders may access an
automated system (day or night)which offers the following features.
By calling the Franklin TeleFACTS(R), system at 1-800/247-1753, shareholders may
obtain Class I and Class II account information, current price and, if
available, yield or other performance information specific to a fund or any
Franklin Templeton Fund. In addition, Franklin Class I shareholders may process
an exchange, within the same class, into an identically registered Franklin
account; obtain account information and request duplicate confirmation or
year-end statements, money fund checks, if applicable, and deposit slips.
The system's automated operator will prompt the caller with easy to follow
step-by-step instructions from the main menu. Other features may be added in the
future.
The code numbers for each class, which will be needed to access system
information, are:
FUND
CODE * FUND NAME
- -------------------------------------------
126 ARIZONA FUND, CLASS I
226 ARIZONA FUND, CLASS II
127 COLORADO FUND, CLASS I
227 COLORADO FUND, CLASS II
166 CONNECTICUT FUND, CLASS I
FUND
CODE * FUND NAME
- -------------------------------------------
266 CONNECTICUT FUND, CLASS II
167 INDIANA FUND, CLASS I
171 NEW JERSEY FUND, CLASS I
271 NEW JERSEY FUND, CLASS II
161 OREGON FUND, CLASS I
261 OREGON FUND, CLASS II
129 PENNSYLVANIA FUND, CLASS I
229 PENNSYLVANIA FUND, CLASS II
123 PUERTO RICO FUND, CLASS I
223 PUERTO RICO FUND, CLASS II
130 HIGH YIELD FUND, CLASS I
230 HIGH YIELD FUND, CLASS II
*Follow the Fund code number with the # sign
To assist shareholders and securities dealers wishing to speak directly with a
representative, the following list of various Franklin departments, telephone
numbers and hours of operation is provided. The same numbers may be used when
calling from a rotary phone:
In order to ensure that the highest quality of service is being provided,
telephone calls placed to or by representatives in Franklin's service
departments may be accessed, recorded and monitored. These calls can be
determined by the presence of a regular beeping tone.
Hours of Operation (Pacific time)
Department Name Telephone No. (Monday through Friday)
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
8:30 a.m. to 5:00 p.m. (Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
TDD (hearing impaired)1-800/851-0637 5:30 a.m. to 5:00 p.m.
Performance
Advertisements, sales literature and communications to shareholders may contain
various measures of a class' performance including current yield, tax equivalent
yield, various expressions of total return, current distribution rate and
taxable equivalent distribution rate. Each Fund may occasionally cite statistics
to reflect its volatility or risk.
Average annual total return figures as prescribed by the SEC represent the
average annual percentage change in value of $1,000 invested at the maximum
public offering price (offering price includes sales charge) for one-, five-,
and ten-year periods, or portion thereof, to the extent applicable, through the
end of the most recent calendar quarter, assuming reinvestment of all
distributions. Each class may also furnish total return quotations for other
periods or based on investments at various sales charge levels (for Class I
shares) or at net asset value. For such purposes total return equals the total
of all income and capital gain paid to shareholders, assuming reinvestment of
all distributions, plus (or minus) the change in the value of the original
investment, expressed as a percentage of the purchase price.
Current yield for each class reflects the income per share earned by each Fund's
portfolio investments; it is calculated for each class by dividing that class'
net investment income per share during a recent 30-day period by the maximum
public offering price for that class of shares on the last day of that period
and annualizing the result. Tax equivalent yield demonstrates the yield from a
taxable investment necessary to produce an after-tax yield equivalent to that of
a fund which invests in tax-exempt obligations. It is computed by dividing the
tax-exempt portion of each class' yield (calculated as indicated) by one minus a
stated income tax rate and adding the product to the taxable portion (if any) of
the class' yield.
Current yield and tax equivalent yield which are calculated according to a
formula prescribed by the SEC (see the SAI) are not indicative of the dividends
or distributions which were or will be paid to shareholders. Dividends or
distributions paid to shareholders are reflected in the current distribution
rate or taxable equivalent distribution rate which may be quoted to
shareholders. The current distribution rate is computed by dividing the total
amount of dividends per share paid by a class during the past 12 months by the
current maximum offering price for that class of shares. A taxable equivalent
distribution rate demonstrates the taxable distribution rate necessary to
produce an after tax distribution rate equivalent to that of a fund which
invests in tax-exempt obligations. Under certain circumstances, such as when
there has been a change in the amount of dividend payout or a fundamental change
in investment policies, it might be appropriate to annualize the dividends paid
during the period such policies were in effect, rather than using the dividends
during the past 12 months. The current distribution rate differs from the
current yield computation because it may include distributions to shareholders
from sources other than dividends and interest, such as short-term capital gain,
and is calculated over a different period of time.
In each case, performance figures are based upon past performance, reflect all
recurring charges against a class' income and will assume the payment of the
maximum sales charge on the purchase of that class of shares. When there has
been a change in the sales charge structure, the historical performance figures
will be restated to reflect the new rate. The investment results of a Fund, like
all other investment companies, will fluctuate over time; thus, performance
figures should not be considered to represent what an investment may earn in the
future or what a class' yield, tax equivalent yield, distribution rate, taxable
equivalent distribution rate or total return may be in any future period.
Because Class II shares were not offered prior to May 1, 1995, no performance
data is available for those shares. After a sufficient period of time has
passed, Class II performance data will be available.
General Information
Reports to Shareholders
The Trust's fiscal year ends February 28. Annual Reports containing audited
financial statements of the Trust, including the auditors' report, and
Semi-Annual Reports containing unaudited financial statements are automatically
sent to shareholders. To reduce the volume of mail sent to one household as well
as to reduce Fund expenses, Investor Services will attempt to identify related
shareholders within a household, and send only one copy of the report.
Additional copies may be obtained, without charge, upon request to the Trust at
the telephone number or address set forth on the cover page of this Prospectus.
Additional information on Fund performance is included in the Trust's Annual
Report to Shareholders and the SAI.
Organization and Voting Rights
The Trust was organized as a Massachusetts business trust on September 18, 1984.
The Agreement and Declaration of Trust permits the trustees to issue an
unlimited number of full and fractional shares of beneficial interest without
par value, which may be issued in any number of series and classes. Shares
issued will be fully paid and non-assessable and will have no preemptive,
conversion, or sinking rights. Shares of each series have equal and exclusive
rights as to dividends and distributions as declared by such series and the net
assets of such series upon liquidation or dissolution. Additional series may be
added in the future by the Board of Trustees.Following is a list of the 27
series currently authorized by the Board of Trustees:
Franklin Alabama Tax-Free Income Fund
Franklin Arizona Tax-Free Income Fund
Franklin Arizona Insured Tax-Free Income Fund
Franklin Colorado Tax-Free Income Fund
Franklin Connecticut Tax-Free Income Fund
Franklin Federal Intermediate-Term Tax-Free
Income Fund
Franklin Florida Tax-Free Income Fund
Franklin Florida Insured Tax-Free Income Fund
Franklin Georgia Tax-Free Income Fund
Franklin High Yield Tax-Free Income Fund
Franklin Indiana Tax-Free Income Fund
Franklin Insured Tax-Free Income Fund
Franklin Kentucky Tax-Free Income Fund
Franklin Louisiana Tax-Free Income Fund
Franklin Maryland Tax-Free Income Fund
Franklin Massachusetts Insured Tax-Free
Income Fund
Franklin Michigan Insured Tax-Free Income Fund
Franklin Minnesota Insured Tax-Free Income Fund
Franklin Missouri Tax-Free Income Fund
Franklin New Jersey Tax-Free Income Fund
Franklin North Carolina Tax-Free Income Fund
Franklin Ohio Insured Tax-Free Income Fund
Franklin Oregon Tax-Free Income Fund
Franklin Pennsylvania Tax-Free Income Fund
Franklin Puerto Rico Tax-Free Income Fund
Franklin Texas Tax-Free Income Fund
Franklin Virginia Tax-Free Income Fund
All series, except Indiana, Arizona Insured, Florida Insured, Kentucky and
Intermediate-Term Funds currently offer Classes I and II. The remaining five
series may in the future offer Class II and all series may offer other classes.
Shares of each series have equal rights as to voting and vote separately as to
issues affecting that series, or the Trust, unless otherwise permitted by the
1940 Act. Voting rights are noncumulative, so that in any election of trustees,
the holders of more than 50% of the shares voting can elect all of the trustees,
if they choose to do so, and in such event the holders of the remaining shares
voting will not be able to elect any person or persons to the Board of Trustees.
The Trust does not intend to hold annual shareholders meetings. The Trust may
however, hold a special shareholders meeting of a series for such purposes as
changing fundamental investment restrictions for the series, approving a new
management agreement or any other matters which are required to be acted on by
shareholders under the 1940 Act. A meeting may also be called by the trustees in
their discretion or by shareholders holding at least ten percent of the
outstanding shares of the Trust. Shareholders will receive assistance in
communicating with other shareholders in connection with the election or removal
of trustees such as that provided in Section 16(c) of the 1940 Act.
Shares of each class of a Fund represent proportionate interests in the assets
of the Fund and have the same voting and other rights and preferences as the
other classes and series of the Trust for matters that affect the Trust as a
whole. For matters that only affect a certain class of a Fund's shares, however,
only shareholders of that class will be entitled to vote. Therefore each class
of shares of a Fund will vote separately on matters (1) affecting only that
class of such Fund, (2) expressly required to be voted on separately by state
law, or (3) required to be voted on separately by the 1940 Act, or the rules
adopted thereunder. For instance, if a change to the Rule 12b-1 plan relating to
Class I shares of a Fund requires shareholder approval, only shareholders of
Class I of that Fund may vote on the change to the Rule 12b-1 plan affecting
that class. Similarly, if a change to the Rule 12b-1 plan relating to Class II
shares requires approval, only shareholders of Class II of such Fund may vote on
changes to such plan. On the other hand, if there is a proposed change to the
investment objective of a Fund, this affects all shareholders of that Fund,
regardless of which class of shares they hold and, therefore, each share has the
same voting rights.
Redemptions by the Fund
Each Fund reserves the right to redeem, at net asset value, shares of any
shareholder whose account has a value of less than $50, but only where the value
of such account has been reduced by the shareholder's prior voluntary redemption
of shares and has been inactive (except for the reinvestment of distributions)
for a period of at least six months, provided advance notice is given to the
shareholder.
More information is included in the SAI.
Account Registrations
An account registration should reflect the investor's intentions as to
ownership. Where there are two co-owners on the account, the account will be
registered as "Owner 1" and "Owner 2"; the "or" designation is not used except
for money market fund accounts. If co-owners wish to have the ability to redeem
or convert on the signature of only one owner, a limited power of attorney may
be used.
Accounts should not be registered in the name of a minor either as sole or
co-owner of the account. Transfer or redemption for such an account may require
court action to obtain release of the funds until the minor reaches the legal
age of majority. The account should be registered in the name of one "Adult" as
custodian for the benefit of the "Minor" under the Uniform Transfer or Gifts to
Minors Act.
A trust designation such as "trustee" or "in trust for" should only be used if
the account is being established pursuant to a legal, valid trust document. Use
of such a designation in the absence of a legal trust document may cause
difficulties and require court action for transfer or redemption of the funds.
Shares, whether in certificate form or not, registered as joint tenants or "Jt
Ten" shall mean "as joint tenants with rights of survivorship" and not "as
tenants in common."
Except as indicated, a shareholder may transfer an account in a Fund carried in
"street" or "nominee" name by the shareholder's securities dealer to a
comparably registered Fund account maintained by another securities dealer. Both
the delivering and receiving securities dealer must have executed dealer
agreements on file with Distributors. Unless a dealer agreement has been
executed and is on file with Distributors, the Fund will not process the
transfer and will so inform the shareholder's delivering securities dealer. To
effect the transfer, a shareholder should instruct the securities dealer to
transfer the account to a receiving securities dealer and sign any documents
required by the securities dealer to evidence consent to the transfer. Under
current procedures the account transfer may be processed by the delivering
securities dealer and a Fund after such Fund receives authorization in proper
form from the shareholder's delivering securities dealer. Account transfers may
be effected electronically through the services of the NSCC.
Each Fund may conclusively accept instructions from an owner or the owner's
nominee listed in publicly available nominee lists, regardless of whether the
account was initially registered in the name of or by the owner, the nominee, or
both. If a securities dealer or other representative is of record on an
investor's account, the investor will be deemed to have authorized the use of
electronic instructions on the account, including, without limitation, those
initiated through the services of the NSCC, to have adopted as instruction and
signature any such electronic instructions received by the Fund and the
Shareholder Services Agent, and to have authorized them to execute the
instructions without further inquiry. At the present time, such services which
are available include the NSCC's "Networking," "Fund/SERV," and "ACATS" systems.
Any questions regarding an intended registration should be answered by the
securities dealer handling the investment or by calling Franklin's Fund
Information Department.
Important Notice Regarding
Taxpayer IRS Certifications
Pursuant to the Code and U.S. Treasury regulations, a Fund may be required to
report to the Internal Revenue Service ("IRS") any taxable dividend, capital
gain distribution or other reportable payment (including share redemption
proceeds) and withhold 31% of any such payments made to individuals and other
non-exempt shareholders who have not provided a correct taxpayer identification
number ("TIN") and made certain required certifications that appear in the
Shareholder Application. A shareholder may also be subject to backup withholding
if the IRS or a securities dealer notifies the Fund that the number furnished by
the shareholder is incorrect or that the shareholder is subject to backup
withholding for previous under-reporting of interest or dividend income.
Each Fund reserves the right to (1) refuse to open an account for any person
failing to provide a TIN along with the required certifications and (2) close an
account by redeeming its shares in full at the then-current net asset value upon
receipt of notice from the IRS that the TIN certified as correct by the
shareholder is in fact incorrect or upon the failure of a shareholder who has
completed an "awaiting TIN" certification to provide the Fund with a certified
TIN within 60 days after opening the account.
Portfolio Operations
The following persons are primarily responsible for the day-to-day management of
the Funds' portfolios:
Thomas Kenny
Senior Vice President.
Franklin Advisers, Inc.
Mr. Kenny has been responsible for portfolio recommendations and decisions of
all nine Funds since August 1994. He is director of Franklin's municipal bond
department. He joined Franklin in 1986. He received a Bachelor of Arts degree in
Business and Economics from the University of California at Santa Barbara and a
Master of Science degree in Finance from Golden Gate University. He is a member
of several municipal securities industry related committees and associations.
John Pinkham
Portfolio Manager
Franklin Advisers, Inc.
Mr. Pinkham has been responsible for portfolio recommendations and decisions
since inception of the Connecticut Fund. He has a Bachelor of Science degree in
business from Columbia University, has been in the municipal securities industry
since 1956 and with Advisers since 1985. He is a member of the Financial
Analysts Federation.
John Pomeroy
Portfolio Manager
Franklin Advisers, Inc.
Mr. Pomeroy has been responsible for portfolio recommendations and decisions
since inception of the Connecticut Fund. He received a Bachelor of Arts degree
in Business Administration from San Francisco State University and joined
Advisers in 1986 and is a member of industry-related committees and
associations.
Stella Wong
Portfolio Manager
Franklin Advisers, Inc.
Ms. Wong has been responsible for portfolio recommendations and decisions for
the Indiana Fund, New Jersey Fund and Pennsylvania Fund since their inception,
the Puerto Rico Fund since she joined Advisers in 1986 and the High Yield Fund
since August of 1994. She holds a Bachelor of Science degree in Business
Administration from San Francisco State University and a Master's degree in
Financial Planning from Golden Gate University, and is a member of several
industry-related committees and associations.
Andrew Jennings, Sr.
Vice President
Franklin Advisers, Inc.
Mr. Jennings has been responsible for portfolio recommendations and decisions of
the Indiana Fund, since joining Advisers in 1990. He attended Villanova
University in Philadelphia, has been in the securities industry for over 33
years and is a member of several municipal securities industry-related
committees and associations. From 1985 to 1990 Mr. Jennings was First Vice
President and Manager of the Municipal Institutional Bond Department at Dean
Witter Reynolds Inc.
Don Duerson
Vice President
Franklin Advisers, Inc.
Mr. Duerson has been responsible for portfolio recommendations and decisions
since inception of the Arizona Fund and Colorado Fund. He has a Bachelor of
Science degree in Business and Public Administration from the University of
Arizona, has experience in the securities industry dating back to 1977 and is a
member of industry-related committees and associations. He joined Advisers in
1986.
Sheila Amoroso
Portfolio Manager
Franklin Advisers, Inc.
Ms. Amoroso has been responsible for portfolio recommendations and decisions of
the Arizona Fund, Colorado Fund, High Yield Fund, Oregon Fund, Pennsylvania Fund
and Puerto Rico Fund since 1987 and the New Jersey Fund since its inception. She
joined Franklin in 1986. She holds a Bachelor of Science degree from San
Francisco State University and is a member of municipal securities
industry-related committees and associations.
Bob Schubert
Portfolio Manager
Franklin Advisers, Inc.
Mr. Schubert has been responsible for portfolio recommendations and decisions of
the Oregon Fund since August of 1994. He attended Fairleigh Dickenson
University, Rutherford, New Jersey, and has been in the securities industry
since 1960. Mr. Schubert has been with the Franklin Templeton Group since 1989,
initially managing two taxexempt bond funds and the equity trading desk at
Templeton in Florida and moving to Franklin in California in 1994.
Appendix A -
Description of State Tax Treatment
The following information on the state income tax treatment of dividends from
the State Funds is based upon correspondence and sources believed to be
reliable. Except where otherwise noted, the information pertains to individual
state income taxation only. Investors may be subject to local taxes on dividends
or the value of their shares. Corporations, trusts, estates and other entities
may be subject to other taxes and should consult with their tax advisors or
their state department of revenue. For some investors, a portion of the dividend
income may be subject to the federal and/or state alternative minimum tax.
Arizona
Section 43-1021(4) of the Arizona Income Tax Code states that interest on
obligations of the state of Arizona or its political subdivisions is exempt from
personal and corporate income tax. Sections 43-1022(6) and 43-1122(6) provide
similar tax-exempt treatment for interest on obligations of the U.S. or its
territories (including Puerto Rico, Guam and the Virgin Islands). Pursuant to
State Income Tax Ruling Number 84-10-5, Arizona does not tax dividend income
from regulated investment companies, such as the Arizona Fund, to the extent
that such income is derived from such exempt obligations. Dividends paid from
interest earned on indirect U.S. government obligations (GNMAs, FNMAs, etc.),
repurchase agreements collateralized by U.S. government obligations or
obligations from other states and their political subdivisions are fully
taxable. To the extent that such taxable investments are made by the Fund for
temporary or defensive purposes, the distributions will be taxable on a pro rata
basis.
Any distributions of net short-term and net long-term capital gain earned by the
Fund are included in each shareholder's Arizona taxable income as dividend
income and long-term capital gain respectively, and are taxed at ordinary income
tax rates.
Colorado
Sections 39-22-104 and 39-22-304 of the Colorado Revised Statutes state that
interest on obligations of the state of Colorado or its political subdivisions
and direct obligations of the U.S. or its possessions is exempt from personal
and corporate income tax. The Colorado Department of Revenue has advised that
distributions from a regulated investment company, such as the Colorado Fund,
will also be exempt from personal and corporate income tax if the Fund invests
in such exempt obligations. The state of Colorado has confirmed that this
exclusion also applies to territorial obligations of the U.S. (including Puerto
Rico, Guam and the Virgin Islands). Dividends paid from interest earned on
indirect U.S. government obligations (GNMAs, FNMAs, etc.), repurchase agreements
collateralized by U.S. government obligations or obligations of other states and
their political subdivisions do not qualify for this exemption. To the extent
that such taxable investments are made by the Fund for temporary or defensive
purposes, the distributions will be taxable on a pro rata basis.
Any distributions of net short-term and net long-term capital gain earned by the
Fund are included in each shareholder's Colorado taxable income as dividend
income and long-term capital gain respectively, and are taxed at ordinary income
tax rates.
Connecticut
Section 12-701(a)(20) of the Connecticut General Statutes states that interest
income from obligations issued by or on behalf of the state of Connecticut, its
political subdivisions, public instrumentalities, state or local authority,
district, or a similar public entity created under the laws of the state of
Connecticut and direct obligations of the U.S. or its territories (including
Puerto Rico, Guam and the Virgin Islands) is exempt from state personal income
tax. Dividends paid by a regulated investment company, such as the Connecticut
Fund, which are derived from such exempt obligations will be exempt from state
personal income tax to the extent of such obligations. Corporate shareholders
are generally subject to Connecticut corporation income taxes on distributions
from the Fund. Section 12-701(a)(20) of the Connecticut General Statutes also
states that a fund is qualified to pay exempt dividends derived from exempt U.S.
government obligations to its shareholders if, at the close of each quarter of
its taxable year, at least 50% of the value of its total assets consists of
exempt U.S. government obligations. Dividends paid from interest earned on
indirect U.S. government obligations (GNMAs, FNMAs, etc.), repurchase agreements
collateralized by U.S. government securities or obligations of other states and
their political subdivisions do not qualify for this exemption. It is not
anticipated that the Fund will invest 50% or more of the value of its assets in
qualifying U.S. government obligations and, therefore, will not be able to pass
through tax-exempt income derived from such obligations.
Any distributions of net short-term and long-term capital gain earned by the
Fund are included in each shareholder's Connecticut taxable income as dividend
income and long-term capital gain, respectively, and are taxed at ordinary
income tax rates.
Indiana
Information Bulletins 19 and 79 of the state of Indiana Department of Revenue
provide that the proportionate share of dividends received from a regulated
investment company, such as the Indiana Fund, derived from investments in direct
obligations of the U.S. or its possessions (including Puerto Rico, Guam and the
Virgin Islands), will be exempt from the Indiana Gross Income Tax (for residents
and persons or corporations doing business in Indiana). An exemption is also
provided under Indiana law for exempt interest dividends derived from interest
on obligations of the state of Indiana or its political subdivisions. For the
Indiana Adjusted Gross Income Tax (for resident individuals, estates and
trusts), all of the above obligations are exempt from taxation in addition to
obligations of other states and their political subdivisions. Dividends paid
from interest earned on indirect U.S. government obligations (GNMAs, FNMAs,
etc.) and repurchase agreements collateralized by U.S. government obligations,
to the extent that such taxable investments are made by the Fund for temporary
or defensive purposes, will be taxable on a pro rata basis. The Fund will file
all appropriate certification documents with the Indiana Department of Revenue
indicating the exempt portion of distributions to shareholders.
Any distributions of net short-term and net long-term capital gain earned by the
Fund are included in each shareholder's Indiana taxable income as dividend
income and long-term capital gain, respectively, and are taxed at ordinary
income tax rates.
New Jersey
Section 54A:6-14.1 of the New Jersey Statutes provides that distributions paid
by qualified investment funds, such as the New Jersey Fund, are not included in
gross income for purposes of the New Jersey gross income tax to the extent the
distributions are attributable to interest or gain from obligations issued by or
on behalf of the state of New Jersey or its political subdivisions, or
obligations free from state or local taxation by any act of the state of New
Jersey or laws of the U.S. (including obligations of the District of Columbia,
Puerto Rico, Guam and the Virgin Islands). To qualify the Fund must invest at
least 80% of its assets (excluding financial options, futures, forward
contracts, or other similar financial instruments related to interest-bearing
obligations, obligations issued at a discount or bond indexes related thereto,
cash and cash items) in such exempt obligations and have no investments other
than interest-bearing or discounted obligations, cash or cash items, including
receivables, and financial options, futures, forward contracts or other similar
financial instruments related to interest-bearing obligations, obligations
issued at a discount or bond indexes related thereto. Dividends paid from
interest earned on indirect U.S. government obligations (GNMAs, FNMAs, etc.),
repurchase agreements collateralized by U.S. government obligations or
obligations of other states and their political subdivisions are fully taxable.
To the extent that such taxable investments are made by the Fund for temporary
or defensive purposes, the distributions will be taxable on a pro rata basis.
The Fund will file all appropriate certification documents with the New Jersey
Department of Revenue to qualify to distribute exempt interest dividends to
shareholders.
Any distributions of net short-term and net long-term capital gain earned by the
Fund from taxable obligations are included in each shareholder's New Jersey
taxable income as dividend income and long-term capital gain, respectively, and
are taxed at ordinary income tax rates.
Oregon
Section 316.683 of the Oregon Revised Statutes and Oregon Administrative Rule
150-316.680(B) provide that the state exempt-interest dividends received by
residents of the state paid by a regulated investment company, such as the
Oregon Fund, are exempt from Oregon personal income tax. State exempt-interest
dividends are dividends from interest earned on exempt obligations of the U.S.,
its territories (including Puerto Rico, Guam and the Virgin Islands), and
possessions of any U.S. authority, commission, or instrumentality, or on state
and local obligations of Oregon. Corporate shareholders are generally subject to
the Oregon corporation income tax on distributions from the Fund. Dividends paid
from interest earned on indirect U.S. government obligations (GNMAs, FNMAs,
etc.), repurchase agreements collateralized by U.S. government obligations or
obligations of other states and their political subdivisions are fully taxable.
To the extent that such taxable investments are made by the Fund for temporary
or defensive purposes, the distributions will be taxable on a pro rata basis.
Any distributions of net short-term and net long-term capital gain earned by the
Fund are included in each shareholder's Oregon taxable income as dividend income
and long-term capital gain respectively, and are taxed at ordinary income tax
rates.
Pennsylvania
Section 303 of the Tax Reform Code of Pennsylvania states that interest income
derived from obligations which are statutorily free from state or local taxation
under the laws of the Commonwealth of Pennsylvania or under the laws of the U.S.
is exempt from state personal income tax. Such exempt obligations include
obligations issued by the Commonwealth of Pennsylvania, any public authority,
commission, board or other state agency, any political subdivision of the state
or its public authority, and certain obligations of the U.S. or its territories
(including Puerto Rico, Guam and the Virgin Islands). Section 301 of the Code of
Pennsylvania states that interest derived by an investment trust, such as the
Pennsylvania Fund, from such exempt obligations is not subject to state personal
or corporate net income tax. Fund distributions and the value of Fund shares,
however, are generally included in the tax base in determining the corporation
capital stock or foreign franchise tax. Distributions paid from interest earned
on indirect U.S. government obligations (GNMAs, FNMAs, etc.), repurchase
agreements collateralized by U.S. government obligations or obligations of other
states and their political subdivisions are fully taxable. To the extent that
such taxable investments are made by the Fund for temporary or defensive
purposes, the distributions will be taxable on a pro rata basis. Distributions
paid by the Fund are also generally exempt from the Philadelphia School District
Investment Income Tax.
Shareholders of the Fund who are subject to the Pennsylvania personal property
tax in their county of residence will be exempt from county personal property
tax to the extent that the portfolio of the Fund consists of such exempt
obligations on the annual assessment date of January 1. Information regarding
the portion of the value of the shares, if any, which is subject to the
Pennsylvania personal property tax will be provided to shareholders of the Fund.
Any distributions of net short-term and long-term capital gain earned by the
Fund are included in each shareholder's Pennsylvania taxable income as dividend
income and long-term capital gain respectively, and are taxed at ordinary income
tax rates.
Puerto Rico
For U.S. citizens and residents, exempt-interest dividends received from the
Puerto Rico Fund are generally exempt from U.S. federal and state personal
income taxation in all states which impose an income tax. Residents of Puerto
Rico should consult their tax advisors prior to investing in any of the Funds.
Appendix B -
Special Factors Affecting Each State Fund
The following information is a brief summary of factors affecting each of the
individual State Funds and does not purport to be a complete description of such
factors. The information is based primarily upon information derived from public
documents relating to securities offerings of issuers of such states, from
independent municipal credit reports and historically reliable sources, but has
not been independently verified by the Trust. The market value of the shares of
any Fund may fluctuate due to factors such as changes in interest rates, matters
affecting a particular state or for other reasons. Additional information
regarding each state is included in the SAI.
Arizona
Arizona continues to be one of the fastest growing states in the nation. While
the state's economy is growing more slowly than it did in the mid-1980s, its
growth in employment and population still exceeds the national average.
Contributing to the economy's growth have been the state's affordable housing,
competitive wage rates, and pro-business regulatory climate which have
successfully allowed the state to attract new businesses.
Arizona's economy has been undergoing a restructuring, shifting employment away
from agriculture and mining towards manufacturing (10%), trade (21%), and
services (25%) and government (16%). At present, the state's agricultural
industry consumes approximately 80% of the water used in the state. The
continued shift away from farming will provide a greater amount of water for
municipal use and growth, as will the completion of the Central Arizona Project,
a 335 mile aqueduct which enables the state to fully utilize its allotted share
of water from the Colorado River. As the state continues to urbanize, incomes
and jobs should increase, due to the generally higher demand for services in
urban areas. Although Arizona experienced an overall job loss of 2% and a rise
in unemployment during the recent recession, the downturn was short-lived, and
long-term employment growth is projected.
Colorado
Colorado's economy has substantially diversified away from its dependence on the
energy sector, which contributed significantly to the state's sharp economic
down-turn in the mid-to late-1980's, through growth in services, construction
and trade employment. Even the manufacturing segment has stabilized despite
possible further downsizing from Colorado's high technology manufacturers,
particularly those linked to defense.
Wage and salary employment expanded 1.6%, and 3.4% and 4.3% in 1991, 1992 and
1993 respectively, while real personal income grew 3% annually for the same
periods. Unemployment has remained below the national level, averaging 4.7% for
1994 and ending 1994 at 3.3%. Employment consists of services (28.1% of total),
trade (24.2%), government (17.8%) and manufacturing (11.3%). Strong population
gains should continue, drawing a substantial influx from California.
Connecticut
Despite being considered the wealthiest of the states, with income levels of
135% of the national average, Connecticut's recession was the longest
(1989-1993) and one of the most severe in the country, with the impact felt in
virtually every sector of the economy. Connecticut's employment declined nearly
10% during the recession, and while recovery has begun, employment is not
expected to reach its pre-recession peak until the end of the decade.
The state has a concentrated economy, with manufacturing, particularly defense
industries, constituting the largest concentration in the nation, ranking
eleventh in terms of the dollar amount of prime defense contracts and first on a
per capita basis. The ability of Connecticut's defense contractors, who are
expected to otherwise reduce payrolls through 1997, to expand their commercial
business lines will be vital to the state's economy.
Because of its high per capita income level and its concentration of
defense-related industries, passage of the federal Omnibus Budget Reconciliation
Act in August 1993 continues to be especially disadvantageous to the state
because it increases taxes on wealthier households and continues to cut on
defense spending.
An early return to the pre-recession rate of economic growth is not likely, with
any significant growth not predicted until the end of the decade. The best
growth prospects are in the service-related industries, including health care,
business/professional and tourism.
Despite continued economic weaknesses and overall debt levels, which are among
the highest in the nation, the state's outlook reflects an improved fiscal
position and revenue structure that was initiated with measures started in
fiscal 1992.
Indiana
Indiana's stable outlook reflects its somewhat cyclical tax and employment base,
its good operating balance position, the administration's ability and proven
willingness to adjust state spending in response to revenue shortfalls and the
state's establishment and funding of a budget stabilization fund.
The state's economy continues to rely heavily on its manufacturing sector, which
provides products such as primary metals, machinery and transportation
equipment. Although this concentration has lessened of late, manufacturing still
accounted for about 25% of employment through 1993.
During 1992-1993, the state experienced good cyclical employment and income
growth, with the state's manufacturing sector experiencing positive growth,
fueled by the national economic recovery. There has been increased business and
capital spending by the state's manufacturing firms, which has contributed to
the expanding support industries. Basic considerations for the inflow of capital
are the state's central location, competitive costs, and extensive transit
network. The state also has emerged as a transportation and distribution center
due to a $1 billion ongoing construction of a maintenance facility by United Air
Lines, Inc. and various airport expansions underway.
New Jersey
The state's economy performed strongly for much of the 1980s, and like much of
the Northeast in the 1980s, outpaced national trends. However, since 1989 the
state's economic performance has been weak and it has under-performed the rest
of the nation. Unemployment currently exceeds the national average, and weakness
in the economy appears in many employment sectors. The downward trend was
apparent in New Jersey 18 months before national indicators.
Nevertheless, New Jersey's economic base continues to be strong, fortified by
one of the most diversified structures in the nation. The leading employment
sectors are services, wholesale and retail trade, government and manufacturing.
Although restructuring in some key industries may result in additional job
losses, the state's extensive transportation network, and other fundamental
strengths, such as its location between New York City and Philadelphia and its
massive retail and trade sectors, should contribute to long term stability.
Oregon
Since 1987, Oregon's economy has outperformed the nation's, with total jobs
increasing 19% during the period. The recent national recession had only a
moderate effect on Oregon.
In-migration coupled with the increasing importance of high technology
manufacturing and Pacific Rim trade have helped drive economic growth and
diversification away from the timber and wood products sector. Except for a
temporary upswing in early 1994, the timber industry continues to lose jobs. The
service sector has led job creation, and as a result income growth has not kept
pace with employment increases because service jobs generally are low paying.
Oregon anticipates that personal income will drop to 90.8% of the national
average by 2000 from 91.5% in 1992. Population growth is expected to continue as
the state's comparatively strong economy and low cost of living draw residents
from outside the state, primarily California. The resulting increasing pool of
skilled labor has increased the interest of out-of-state businesses in
relocating to Oregon.
Pennsylvania
The recent national recession adversely affected the commonwealth starting in
1991, but its effects were more moderate than in other mid-atlantic and
northeastern states as the state's economy is less dependent on financial
services and the defense/aerospace industry. Pennsylvania is likely to
experience stronger economic activity than its neighboring states for the next
several years due to the restructuring and modernization of many of its
manufacturing factories, but its growth still will lag the national averages.
Competition from foreign markets has contributed to job losses in the
commonwealth's manufacturing sector and forced restructuring. This trend will
probably continue. Employment growth has shifted to the trade and services
sectors, with losses in more high-paid manufacturing. Overall job growth should
lag the rest of the nation. The replacement of highly paid manufacturing jobs
for those in the services and trade sectors will impede income growth.
Relative cost advantages that are available to businesses in the commonwealth
compared to its neighboring states, as well as the restructuring and
modernization of manufacturing plans, should aid in boosting Pennsylvania's
economy.
Puerto Rico
Despite economic progress, Puerto Rico continues to suffer from high
unemployment and poverty. In 1993, Puerto Rico's unemployment rate was 17%, more
than twice the corresponding rate in the U.S., and its income levels were below
even the poorest of the 50 states. Manufacturing has accounted for the majority
of Puerto Rico's growth since the early 1970s, especially in the areas of
pharmaceuticals, machinery and metal products, with manufacturing's share in the
island's gross product increasing from 25% in 1971 to 39% in 1991.
Puerto Rico is uniquely susceptible to outside influences which affect its
economic development. Largely dependent on imported oil as a primary energy
source, the island's economy is vulnerable to changes in the price and supply of
such oil. In the early 1980s, high oil prices adversely affected Puerto Rico's
economy and enhanced the effects of an economic recession, while later in the
decade, lower oil prices contributed to economic growth.
Similarly, Puerto Rico's relationship with the U.S., while providing economic
benefit to the island, has left it vulnerable to changes in U.S. policy.
Recently, changes were made to Section 936 of the Internal Revenue Code, which
allows qualifying U.S. corporations to receive tax credits which offset all or a
portion of their tax liability on earnings from Puerto Rican operations. Section
936 had been a major force behind the development of manufacturing in Puerto
Rico. The impact of changes to Section 936, which restrict corporations ability
to take advantage of its tax credits, on future investment in Puerto Rico is
uncertain. However, some slowing effect on the Puerto Rican economy is expected.
NAFTA also is likely to result in increased competition for Puerto Rican
labor-intensive industries such as textiles and apparel.
Appendix C -
Description of Municipal Securities Ratings
Municipal Bonds
Moody's
Aaa: Municipal bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt-edged." Interest payments are protected by a large or by an
exceptionally stable margin, and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa: Municipal bonds which are rated Aa are judged to be high quality by all
standards. Together with the Aaa group, they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities, fluctuation of protective
elements may be of greater amplitude, or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A: Municipal bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and, in
fact, have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have predominantly speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and, thereby,
not well safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative to a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest-rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Con. (-): Bonds for which the security depends upon the completion of some act
or the fulfillment of some condition are rated conditionally. These are bonds
secured by (a) earnings of projects under construction, (b) earnings of projects
unseasoned in operation experience, (c) rentals which begin when facilities are
completed, or (d) payments to which some other limiting condition attaches.
Parenthetical rating denotes probable credit stature upon completion of
construction or elimination of basis condition.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
S&P
AAA: Municipal bonds rated AAA are highest-grade obligations. They possess the
ultimate degree of protection as to principal and interest. In the market they
move with interest rates and, hence, provide the maximum safety on all counts.
AA: Municipal bonds rated AA also qualify as high-grade obligations, and in the
majority of instances differ from AAA issues only in a small degree. Here, too,
prices move with the long-term money market.
A: Municipal bonds rated A are regarded as upper medium-grade. They have
considerable investment strength but are not entirely free from adverse effects
of changes in economic and trade conditions. Interest and principal are regarded
as safe. They predominantly reflect money rates in their market behavior, but
also, to some extent, economic conditions.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
BB, B, CCC, CC: Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C: This rating is reserved for income bonds on which no interest is being paid.
D: Debt rated "D" is in default, and payment of interest and/or repayment of
principal is in arrears.
Note: The S&P ratings may be modified by the addition of a plus (+) or minus (-)
sign to show relative standing within the major rating categories.
Fitch
AAA bonds: Considered to be of investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal which is unlikely to be affected by reasonably foreseeable
events.
AA bonds: Considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong although
not quite as strong as bonds rated AAA and not significantly vulnerable to
foreseeable future developments.
A bonds: Considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings."
BBB bonds: Considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefor impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
BB bonds: Considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B bonds: Considered highly speculative. While bonds in this class are currently
meeting debt service requirements, the probability of continued timely payment
of principal and interest reflects the obligor's limited margin of safety and
the need for reasonable business and economic activity throughout the life of
the issue.
CCC bonds: Have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC bonds: Minimally protected. Default in payment of interest and/or principal
seems probable over time.
C bonds: Imminent default in payment of interest or principal.
DDD, DD and D bonds: Are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. DDD
represents the highest potential for recovery while D represents the lowest
potential for recovery.
Plus (+) or minus (-) signs are used with a rating symbol to indicate the
relative position of a credit within the rating category. Plus or minus are not
used for the AAA and the DDD, DD or D categories.
Municipal Notes
Moody's
Moody's ratings for state, municipal and other short-term obligations will be
designated Moody's Investment Grade ("MIG"). This distinction is in recognition
of the differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower are uppermost in importance in
short-term borrowing; factors of the first importance in long-term borrowing
risk are of lesser importance in the short run. Symbols used will be as follows:
MIG 1: Notes are of the best quality enjoying strong protection from established
cash flows of funds for their servicing or from established and broad-based
access to the market for refinancing, or both.
MIG 2: Notes are of high quality, with margins of protection ample, although not
so large as in the preceding group.
MIG 3: Notes are of favorable quality, with all security elements accounted for,
but lacking the undeniable strength of the preceding grades. Market access for
refinancing, in particular, is likely to be less well established.
MIG 4: Notes are of adequate quality, carrying specific risk but having
protection and not distinctly or predominantly speculative.
S&P
Until June 29, 1984, S&P used the same rating symbols for notes and bonds. After
June 29, 1984, for new municipal note issues due in three years or less, the
ratings below will usually be assigned. Notes maturing beyond three years will
most likely receive a bond rating of the type recited above.
SP-1: Issues carrying this designation have a very strong or strong capacity to
pay principal and interest. Issues determined to possess overwhelming safety
characteristics will be given a "plus" (+) designation.
SP-2: Issues carrying this designation have a satisfactory capacity to pay
principal and interest.
Commercial Paper
Moody's
Moody's Commercial Paper ratings, which are also applicable to municipal paper
investments permitted to be made by the Trust, are opinions of the ability of
issuers to repay punctually their promissory obligations not having an original
maturity in excess of nine months. Moody's employs the following designations,
all judged to be investment grade, to indicate the relative repayment capacity
of rated issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
Fitch's
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of generally up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes. The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
F-1+: Exceptionally strong credit quality. Regarded as having the strongest
degree of assurance for timely payment.
F-1: Very strong credit quality. Reflect on assurance of timely payment only
slightly less in degree than issues rated F-1+.
F-2: Good credit quality. A satisfactory degree of assurance for timely payment,
but the margin of safety is not as great as for issues assigned F-1+ and F-1
ratings.
F-3: Fair credit quality. Have characteristics suggesting that the degree of
assurance for timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment grade.
F-5: Weak credit quality. Have characteristics suggesting a minimal degree of
assurance for timely payment and are vulnerable to near-term adverse changes in
financial and economic conditions.
D: Default. Actual or imminent payment default.
LOC: The symbol LOC indicates that the rating is based on a letter of credit
issued by a commercial bank.
