As filed with the Securities and Exchange Commission on April 28,
1995
File Nos.
2-94222
811-4149
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. _____
Post-Effective Amendment No. 21 (X)
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 22 (X)
FRANKLIN TAX-FREE TRUST
(Exact Name of Registrant as Specified in Charter)
777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (415) 312-2000
Harmon E. Burns, 777 Mariners Island Blvd., San Mateo, CA 94404
(Name and Address of Agent for Service of Process)
Approximate Date of Proposed Public Offering:
It is proposed that this filing will become effective (check
appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[X] on May 1, 1995 pursuant to paragraph (b)
[ ] 60 after filing pursuant to paragraph (a)(i)
[ ] on (date) pursuant to paragraph (a)(ii)
[ ] on (date) pursuant to paragraph (a)(ii) of rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective
date for a previously filed post-effective amendment.
Calculation of Registration Fee Under the Securities Act of 1933
Proposed
Title of Maximum Proposed
Securities Amount Offering Aggregate Amount of
Being Being Price Offering Registration
Registered Registered Per Share Price* Fee*
Beneficial 24,754,402
Interest shares $12.08 $289,992 $100
*Registrant elects to calculate the maximum aggregate offering
price pursuant to Rule 24e-2. 206,408,723 shares were redeemed
during the fiscal year ended February 28, 1995. 181,678,327
shares were used for reductions pursuant to Paragraph (d) of Rule
24f-2 during the current year. 24,730,396 shares is the amount
of redeemed shares used for reduction in this amendment.
Pursuant to Rule 457(d) under the Securities Act of 1933, the
maximum public offering price of $12.08 per share on April 19,
1995, is the price used as the basis for these calculations. The
Registrant's maximum public offering price per share varies and,
thus, may be higher or lower than $12.08 in the future. While no
fee is required for the 24,730,396 shares, the registrant has
elected to register, for $100, an additional $289,992 of shares
(approximately 24,006 shares at $12.08 per share).
As part of its initial Registration Statement, the Registrant has
elected to register an indefinite number of shares pursuant to
Rule 24f-2 under the Investment Company Act of 1940, as amended
and hereby continues such election. The Registrant filed the
notice required by Rule 24f-2 for its most recent fiscal year on
April 25, 1995.
FRANKLIN TAX-FREE TRUST
CROSS REFERENCE SHEET
FORM N-1A
Part A: Information Required in Prospectus
(Franklin Arizona Insured Tax-Free Income Fund,
Franklin Florida Insured Tax-Free Income Fund,
Franklin Insured Tax-Free Income Fund,
Franklin Massachusetts Insured Tax-Free Income Fund,
Franklin Michigan Insured Tax-Free Income Fund,
Franklin Minnesota Insured Tax-Free Income Fund and
Franklin Ohio Insured Tax-Free Income Fund)
N-1A Location in
Item No. Item Registration Statement
1. Cover Page Cover Page
2. Synopsis Expense Table
3. Condensed Financial "Financial Highlights",
Information "Performance"
4. General Description "About the Trust", "Investment
of Registrant Objective and Policies of Each
Fund", "General Information"
5. Management of the "Management of the Fund"
Fund
5A. Management's Contained in Registrant's
Discussion of Fund Annual Report to Shareholders
Performance
6. Capital Stock and "Distributions to
Other Securities Shareholders", "Taxation of the
Funds and Their Shareholders",
"General Information"
7. Purchase of "How To Buy Shares of the
Securities Being Fund", "Other Programs and
Offered Privileges Available to
Shareholders of the Funds",
"Valuation of Shares of the
Funds"
8. Redemption or "How To Sell Shares of a Fund",
Repurchase "How to Get Information
Regarding an Investment in the
Fund, "Exchange Privilege",
"Telephone Transactions"
9. Pending Legal Not Applicable
Proceedings
FRANKLIN TAX-FREE TRUST
CROSS REFERENCE SHEET
FORM N-1A
Part A: Information Required in Prospectus
(Franklin Alabama Tax-Free Income Fund,
Franklin Florida Tax-Free Income Fund,
Franklin Georgia Tax-Free Income Fund,
Franklin Kentucky Tax-Free Income Fund,
Franklin Louisiana Tax-Free Income Fund,
Franklin Maryland Tax-Free Income Fund,
Franklin Missouri Tax-Free Income Fund,
Franklin North Carolina Tax-Free Income Fund,
Franklin Texas Tax-Free Income Fund and
Franklin Virginia Tax-Free Income Fund)
N-1A Location in
Item No. Item Registration Statement
1. Cover Page Cover Page
2. Synopsis Expense Table
3. Condensed Financial "Financial Highlights",
Information "Performance
4. General Description of "About the Trust", "Investment
Registrant Objective and Policies of Each
Fund", "General Information"
5. Management of the Fund "Management of the Trust"
5A. Management's Discussion Contained in Registrant's
of Fund Performance Annual Report to Shareholders
6. Capital Stock and Other "Distributions to
Securities Shareholders", "Taxation of the
Funds and Their Shareholders",
"General Information"
7. Purchase of Securities "How To Buy Shares of a Fund",
Being Offered "Other Programs and Privileges
Available to Shareholders of
the Funds", "Valuation of
Shares of the Funds"
8. Redemption or "How To Sell Shares of a Fund",
Repurchase "How to Get Information
Regarding an Investment in a
Fund", "Exchange Privilege",
"Telephone Transactions"
9. Pending Legal Not Applicable
Proceedings
FRANKLIN TAX-FREE TRUST
CROSS REFERENCE SHEET
FORM N-1A
Part A: Information Required in Prospectus
(Franklin Arizona Tax-Free Income Fund,
Franklin Colorado Tax-Free Income Fund,
Franklin Connecticut Tax-Free Income Fund,
Franklin Indiana Tax-Free Income Fund,
Franklin New Jersey Tax-Free Income Fund,
Franklin Oregon Tax-Free Income Fund,
Franklin Pennsylvania Tax-Free Income Fund,
Franklin Puerto Rico Tax-Free Income Fund and
Franklin High Yield Tax-Free Income Fund)
N-1A Location in
Item No. Item Registration Statement
1. Cover Page Cover Page
2. Synopsis Expense Table
3. Condensed "Financial Highlights",
Financial "Performance"
Information
4. General "About the Trust", "Investment
Description of Objective and Policies of Each
Registrant Fund", "General Information"
5. Management of the "Management of the Trust"
Fund
5A. Management's Contained in Registrant's Annual
Discussion of Fund Report to Shareholders
Performance
6. Capital Stock and "Distributions to Shareholders",
Other Securities "Taxation of the Funds and Their
Shareholders", "General Information"
7. Purchase of "How To Buy Shares of a Fund",
Securities Being "Other Programs and Privileges
Offered Available to Shareholders of the
Funds", "Valuation of Shares of the
Funds"
8. Redemption or "How To Sell Shares of a Fund", "How
Repurchase to Get Information Regarding an
Investment in a Fund", "Exchange
Privilege", "Telephone Transactions"
9. Pending Legal Not Applicable
Proceedings
FRANKLIN TAX-FREE TRUST
CROSS REFERENCE SHEET
FORM N-1A
Part A: Information Required in Prospectus
(Franklin Federal Intermediate-Term Tax-Free Income Fund)
N-1A Location in
Item No. Item Registration Statement
1. Cover Page Cover Page
2. Synopsis "Expense Table"
3. Condensed Financial "Financial Highlights",
Information "Performance"
4. General Description "About the Trust",
of Registrant "Investment Objective and
Policies of the Fund",
"General Information"
5. Management of the "Management of the Fund"
Fund
5A. Management's Contained in Registrant's
Discussion of Fund Annual Report to
Performance Shareholders
6. Capital Stock and "Distributions to
Other Securities Shareholders", "Taxation of
the Fund and Its
Shareholders", "General
Information"
7. Purchase of "How To Buy Shares of the
Securities Being Fund", "Other Programs and
Offered Privileges Available to
Shareholders of the Fund",
"Valuation of Fund Shares"
8. Redemption or "How To Sell Shares of the
Repurchase Fund", "How to Get
Information Regarding an
Investment in the Fund",
"Exchange Privilege",
"Telephone Transactions"
9. Pending Legal Not Applicable
Proceedings
FRANKLIN TAX-FREE TRUST
CROSS REFERENCE SHEET
FORM N-1A
Part B: Information Required in
Statement of Additional Information
(Franklin Arizona Insured Tax-Free Income Fund,
Franklin Florida Insured Tax-Free Income Fund,
Franklin Insured Tax-Free Income Fund,
Franklin Massachusetts Insured Tax-Free Income Fund,
Franklin Michigan Insured Tax-Free Income Fund,
Franklin Minnesota Insured Tax-Free Income Fund and
Franklin Ohio Insured Tax-Free Income Fund)
N-1A Location in
Item No. Item Registration Statement
10. Cover Page Cover Page
11. Table of Contents Contents
12. General Information "About the Trust",
and History "Miscellaneous Information"
13. Investment Objectives "The Trust's Investment
and Policies Objectives and Policies";
"Description of Municipal and
Other Securities", "Investment
Restrictions", "Insurance"
14. Management of the "Trustees and Officers",
Registrant "Investment Advisory and Other
Services"
15. Control Persons and "Trustees and Officers",
Principal Holders of "Investment Advisory and Other
Securities Services"
16. Investment Advisory "Investment Advisory and Other
and Other Services Services"
17. Brokerage Allocation "The Trust's Policies
and Other Practices Regarding Brokers Used on
Portfolio Transactions"
18. Capital Stock and "About the Trust",
Other Securities "Miscellaneous Information"
19. Purchase, Redemption "Additional Information
and Pricing of Regarding Purchases and
Securities Being Redemptions of Trust Shares",
Offered "Financial Statements"
20. Tax Status "Additional Information
Regarding Taxation",
"Miscellaneous Information"
21. Underwriters "The Trust's Underwriter"
22. Calculation of "Performance"
Performance Data
23. Financial Statements Financial Statements
FRANKLIN TAX-FREE TRUST
CROSS REFERENCE SHEET
FORM N-1A
Part B: Information Required in
Statement of Additional Information
(Franklin Alabama Tax-Free Income Fund,
Franklin Florida Tax-Free Income Fund,
Franklin Georgia Tax-Free Income Fund,
Franklin Kentucky Tax-Free Income Fund,
Franklin Louisiana Tax-Free Income Fund,
Franklin Maryland Tax-Free Income Fund,
Franklin Missouri Tax-Free Income Fund,
Franklin North Carolina Tax-Free Income Fund,
Franklin Texas Tax-Free Income Fund and
Franklin Virginia Tax-Free Income Fund)
N-1A Location in
Item No. Item Registration Statement
10. Cover Page Cover Page
11. Table of Contents Contents
12. General Information "About the Trust",
and History "Miscellaneous Information"
13. Investment Objectives "The Trust's Investment
and Policies Objectives and Policies";
"Description of Municipal
and Other Securities",
"Investment Restrictions"
14. Management of the "Trustees and Officers",
Registrant "Investment Advisory and
Other Services"
15. Control Persons and "Trustees and Officers",
Principal Holders of "Investment Advisory and
Securities Other Services"
16. Investment Advisory "Investment Advisory and
and Other Services Other Services"
17. Brokerage Allocation "The Trust's Policies
and Other Practices Regarding Brokers Used on
Portfolio Transactions"
18. Capital Stock and "About the Trust",
Other Securities "Miscellaneous Information"
19. Purchase, Redemption "Additional Information
and Pricing of Regarding Purchases and
Securities Being Redemptions of Trust
Offered Shares", "Financial
Statements"
20. Tax Status "Additional Information
Regarding Taxation",
"Miscellaneous Information"
21. Underwriters "The Trust's Underwriter"
22. Calculation of "Performance"
Performance Data
23. Financial Statements Financial Statements
CROSS REFERENCE SHEET
FORM N-1A
Part B: Information Required in
Statement of Additional Information
(Franklin Arizona Tax-Free Income Fund,
Franklin Colorado Tax-Free Income Fund,
Franklin Connecticut Tax-Free Income Fund,
Franklin Indiana Tax-Free Income Fund,
Franklin New Jersey Tax-Free Income Fund,
Franklin Oregon Tax-Free Income Fund,
Franklin Pennsylvania Tax-Free Income Fund,
Franklin Puerto Rico Tax-Free Income Fund and
Franklin High Yield Tax-Free Income Fund)
N-1A Location in
Item No. Item Registration Statement
10. Cover Page Cover Page
11. Table of Contents Contents
12. General Information "About the Trust", "Miscellaneous
and History Information"
13. Investment "The Trust's Investment Objectives
Objectives and and Policies"; "Description of
Policies Municipal and Other Securities",
"Investment Restrictions"
14. Management of the "Trustees and Officers",
Registrant "Investment Advisory and Other
Services"
15. Control Persons and "Trustees and Officers",
Principal Holders "Investment Advisory and Other
of Securities Services"
16. Investment Advisory "Investment Advisory and Other
and Other Services Services"
17. Brokerage "The Trust's Policies Regarding
Allocation and Brokers Used on Portfolio
Other Practices Transactions"
18. Capital Stock and "About the Trust", "Miscellaneous
Other Securities Information"
19. Purchase, "Additional Information Regarding
Redemption and Purchases and Redemptions of Trust
Pricing of Shares", "Financial Statements"
Securities Being
Offered
20. Tax Status "Additional Information Regarding
Taxation", "Miscellaneous
Information"
21. Underwriters "The Trust's Underwriter"
22. Calculation of "Performance"
Performance Data
23. Financial Financial Statements
Statements
FRANKLIN TAX-FREE TRUST
CROSS REFERENCE SHEET
FORM N-1A
Part B: Information Required in
Statement of Additional Information
(Franklin Federal Intermediate-Term Tax-Free Income Fund)
N-1A Location in
Item No. Item Registration Statement
10. Cover Page Cover Page
11. Table of Contents Contents
12. General Information and "About the Trust",
History "Miscellaneous Information"
13. Investment Objectives "The Fund's Investment
and Policies Objective and Policies";
"Description of Municipal and
Other Securities", "Investment
Restrictions"
14. Management of the "Trustees and Officers",
Registrant "Investment Advisory and Other
Services"
15. Control Persons and "Trustees and Officers",
Principal Holders of "Investment Advisory and Other
Securities Services"
16. Investment Advisory and "Investment Advisory and Other
Other Services Services"
17. Brokerage Allocation "The Fund's Policies Regarding
and Other Practices Brokers Used on Portfolio
Transactions"
18. Capital Stock and "About the Trust",
Other Securities "Miscellaneous Information"
19. Purchase, Redemption "Additional Information
and Pricing of Regarding Fund Shares",
Securities Being "Financial Statements"
Offered
20. Tax Status "Additional Information
Regarding Taxation",
"Miscellaneous Information"
21. Underwriters "The Fund's Underwriter"
22. Calculation of "Performance"
Performance Data
23. Financial Statements Financial Statements
Franklin
Tax-Free Trust
PROSPECTUS May 1, 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. As of May 1,
1995, most of the series offer two classes of shares to their
investors. This Prospectus relates only to the seven series
listed below, five of which, as noted, currently offer two
classes of shares:
Class I Class II
Franklin Arizona Insured Tax- not available
Free Income Fund, Class I
Franklin Florida Insured Tax- not available
Free Income Fund, Class I
Franklin Insured Tax-Free Franklin Insured Tax-Free
Income Fund, Class I Income Fund, Class II
Franklin Massachusetts Insured Franklin Massachusetts Insured
Tax-Free Income Fund, Class I Tax-Free Income Fund, Class II
Franklin Michigan Insured Tax- Franklin Michigan Insured Tax-
Free Income Fund, Class I Free Income Fund, Class II
Franklin Minnesota Insured Tax- Franklin Minnesota Insured Tax-
Free Income Fund, Class I Free Income Fund, Class II
Franklin Ohio Insured Tax-Free Franklin Ohio Insured Tax-Free
Income Fund, Class I Income Fund, Class II
Each Fund may, separately or collectively, be referred to as the
"Fund" or "Funds," the "State Funds" (for the six insured state
funds), or by the state and/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
Arizona and Florida Insured Funds will be included in all
discussions pertaining to Class I in this Prospectus. Investors
can choose between Class I shares, 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, if available for
the series, 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 ("multiclass"), including the
impact of sales charges and distribution fees, in choosing the
more suitable class given their anticipated investment amount and
time horizon.
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 State Fund also seeks to provide a maximum level of
income which is exempt from the personal income taxes, if any,
for resident shareholders of the named state. The state of
Florida currently imposes no state personal income tax.
The Insured Fund invests in a diversified portfolio of municipal
securities from different states. Each of the State Funds invests
primarily in municipal securities issued by its respective state
and its political subdivisions, agencies and instrumentalities.
The Funds invest in municipal securities which are covered by
insurance guaranteeing the scheduled payment of principal and
interest, in securities backed by or subject to an escrow account
secured by securities backed by the full faith and credit of the
United States ("U.S.") government, in municipal securities
secured by such U.S. government obligations, and in short-term
obligations of issuers with the highest rating from Moody's
Investors Service ("Moody's"), Standard & Poor's Corporation
("S&P") or Fitch Investors Service, Inc. ("Fitch"). All insured
securities not insured by the issuer will be insured by a
qualified municipal bond insurer. An investment in any of the
Funds is not insured by the U.S. government or any state
government. (See "Insurance.")
This Prospectus is intended to set forth in a clear and concise
manner information about the Trust and each of the seven 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.
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.
A Statement of Additional Information ("SAI") concerning the
Funds described in this Prospectus, 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 above.
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.
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
Financial Highlights
About the Funds
Investment Objective
and Policies of the Funds
Insurance
Management of the Funds
Distributions to Shareholders
Taxation of the Funds
and Their Shareholders
How to Buy Shares of the Funds
Other Programs and Privileges
Available to Shareholders of the Funds
Exchange Privilege
How to Sell Shares of the Funds
Telephone Transactions
Valuation of a Fund's Shares
How to Get Information Regarding
an Investment in a Fund
Performance
General Information
Account Registrations
Important Notice Regarding
Taxpayer IRS Certifications
Portfolio Operations
Appendix A
Description of State Tax Treatment
Appendix B
Special Factors Affecting Each State Fund
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 each Fund. These figures are based on
the aggregate operating expenses of each Fund (before fee
waivers and expense reductions) for the fiscal year ended
February 28, 1995.
<TABLE>
<CAPTION>
Massa-
Arizona chusets Minnesota Ohio
Insured Florida Insured Insured Michigan Insured Insured
Fund Insured Fund Insured Insured Fund Fund
Class I Fund Class I Fund Fund Class I Class I
ClassI ClassI Class I
<S> <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%
Deferred Sales NONE NONE NONE NONE NONE NONE NONE
Charge*
Exchange Fee (per NONE NONE $5.00 NONE NONE NONE NONE
transaction)**
Annual Fund
Operating Expenses
(as a percentage of
average net assets)
Management Fees 0.63%^^ 0.63% 0.46% 0.53% 0.47% 0.50% 0.49%
^^
Rule 12b-1 Fees^ 0.08% 0.09% 0.07%+ 0.07% 0.07%+ 0.07%+ 0.07%+
Other Expenses 0.25% 0.16% 0.06% 0.07 0.07% 0.09% 0.07%
Total Fund Operating
Expenses 0.96%^^ 0.88% 0.59% 0.67% 0.61% 0.66 0.63%
</TABLE>
Massa
chus Minneso
etts Michigan ta Ohio
Insured Insured Insured Insured
Fund Insured Fund Fund
Class Fund Fund Class Class
II Class Class II II
II II
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%
Deferred Sales 1.00% 1.00% 1.00% 1.00% 1.00%
Charge+++
Exchange Fee (per $5.00 NONE NONE NONE NONE
transaction)**
Annual Fund
Operating Expenses
(as apercentage of
average net assets)
Management Fees 0.46% 0.53% 0.47% 0.50% 0.49%
Rule 12b-1 Fees^ 0.65% 0.65% 0.65% 0.65% 0.65%
Other Expenses 0.06% 0.07% 0.08% 0.10% 0.08%
Total Fund Operating
Expenses 1.17% 1.25% 1.19% 1.24 1.21%
*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 following such investments. See "How to Sell Shares of
a Fund - Contingent Deferred Sales Charge."
**$5.00 fee imposed only on Timing Accounts in the Insured
Fund; the other Funds described in this Prospectus currently
do not permit investment by Timing Accounts. See "Exchange
Privilege" below for more information. All other exchanges
are processed without a fee.
^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. Rule 12b-1 fees for Class II are based on the maximum
amount allowed under Class II's plan of distribution. The
Arizona and Florida Insured Funds' plan of distribution have
been in effect since the inception of these Funds. Class I's
plan for the other Funds was effective May 1, 1994, and
Class II's plan is effective May 1, 1995.
^^Represents the amount that would have been payable by the
each Fund absent a fee reduction by the investment manager.
The investment manager, however, has agreed in advance to
waive a portion of its management fee and assume
responsibility for making payments to offset certain
operating expenses otherwise payable by the Fund. With this
reduction, the Arizona Insured Fund paid no management fees,
and total operating expenses represented .10% of its average
net assets. The Florida Insured Fund paid management fees
and total operating expenses of .11% and .35%, respectively,
of its average net assets. These arrangements may be
terminated by the investment manager at any time.
+Annualized. Actual Rule 12b-1 fees incurred by the Insured,
Massachusetts, Michigan, Minnesota and Ohio Funds for the
ten month period ended February 28, 1995 were 0.06% for each
Fund.
++Although Class II has a lower front-end sales charge than
Class I, over time the higher Rule 12b-1 fee 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.
+++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."
++++"Other Expenses" for Class II shares are estimates based
on actual expenses incurred by Class I shares for the fiscal
year ended February 28, 1995.
Investors should be aware that the preceding table is not
intended to reflect in precise detail the fees and expenses
associated with an individual shareholder's own investment
in each Fund listed. Rather the table has been provided only
to assist investors in gaining a more complete understanding
of fees, charges and expenses that an investor in the
classes will bear directly or indirectly. 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 example
illustrates the expenses, including the maximum front-end
sales charge and applicable contingent deferred sales
charge, that apply to a $1,000 investment in each Fund over
various time periods assuming (1) a 5% annual rate of return
for each Fund and (2) redemption at the end of each time
period.
Class I
Massach Minne-
Arizona Florida usetts Michigan sota Ohio
Insured Insured Insured Insured Insured Insured Insured
Fund Fund Fund Fund Fund Fund Fund
One Year $ 52 $ 51 $ 48 $ 49 $ 49 $ 49 $ 49
Three Years 72 69 61 63 62 63 62
Five Years 93 89 75 79 76 78 77
Ten Years 155 146 114 124 117 122 119
Class II
Massach Minne-
usetts Michigan sota Ohio
Insured Insured Insured Insured Insured
Fund Fund Fund Fund Fund
One Year $ 32 $ 33 $ 32 $ 33 $ 32
Three Years 47 50 48 49 48
Five Years 73 79 75 78 76
Ten Years 151 161 154 160 156
This example is based on the aggregate annual operating
expenses of each Fund shown above and should not be
considered a representation of 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 such Fund. In addition,
federal 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
each Fund from the effective date of the registration statement for each Fund,
as indicated below, through the fiscal year ended February 28, 1994. The
information for each of the five fiscal years in the period ended February 28,
1994, has been audited by Coopers & Lybrand, independent auditors, whose audit
report appears in the financial statements in the Fund's Statement of Additional
Information. The remaining figures, which are also audited, are not covered by
the auditor's current report. See also, "General Information - Reports to
Shareholders."
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE
- ------------------------------------------------------------------------------------------------------------
NET
NET REALIZED & DISTRI- DISTRI-
ASSET UNREALIZED TOTAL BUTIONS BUTIONS NET ASSET
YEAR VALUE NET GAIN FROM FROM NET FROM VALUE
ENDED BEGINNING INVESTMENT (LOSS) ON INVESTMENT INVESTMENT CAPITAL TOTAL AT END
FEB. 28 OF YEAR INCOME SECURITIES OPERATIONS INCOME GAINS DISTRIBUTIONS OF YEAR
- ------------------------------------------------------------------------------------------------------------
FRANKLIN INSURED TAX-FREE INCOME FUND:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1986+ $10.00 $0.69 $ 1.343 $ 2.033 $(0.423) $ -- $(0.423) $11.61
1987 11.61 0.80 0.541 1.341 (0.852) (0.079) (0.931) 12.02
1988 12.02 0.79 (0.837) (0.047) (0.852) (0.001) (0.853) 11.12
1989 11.12 0.78 0.032 0.812 (0.852) -- (0.852) 11.08
1990 11.08 0.78 0.204 0.984 (0.804) -- (0.804) 11.26
1991 11.26 0.78 0.156 0.936 (0.786) -- (0.786) 11.41
1992 11.41 0.74 0.298 1.038 (0.768) -- (0.768) 11.68
1993 11.68 0.74 0.751 1.491 (0.741) -- (0.741) 12.43
1994 12.43 0.73 0.020 0.750 (0.730) -- (0.730) 12.45
1995 12.45 0.71 (0.481) 0.229 (0.709) -- (0.709) 11.97
<CAPTION>
FRANKLIN MASSACHUSETTS TAX-FREE INCOME FUND:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1986+ 10.00 0.61 1.045 1.655 (0.405) -- (0.405) 11.25
1987 11.25 0.74 0.226 0.966 (0.816) -- (0.816) 11.40
1988 11.40 0.71 (0.725) (0.015) (0.775) -- (0.775) 10.61
1989 10.61 0.71 (0.017) 0.693 (0.713) -- (0.713) 10.59
1990 10.59 0.72 0.118 0.838 (0.708) -- (0.708) 10.72
1991 10.72 0.72 0.040 0.760 (0.720) -- (0.720) 10.76
1992 10.76 0.68 0.307 0.987 (0.717) -- (0.717) 11.03
1993 11.03 0.69 0.685 1.375 (0.675) -- (0.675) 11.73
1994 11.73 0.67 0.092 0.762 (0.682) -- (0.682) 11.81
1995 11.81 0.66 (0.468) 0.192 (0.662) -- (0.662) 11.34
<CAPTION>
RATIOS/SUPPLEMENTAL DATA
----------------------------------------------------
NET
RATIO OF INVESTMENT
YEAR NET ASSETS EXPENSES INCOME PORTFOLIO
ENDED TOTAL AT END TO AVERAGE TO AVERAGE TURNOVER
FEB. 28 RETURN** OF YEAR NET ASSETS NET ASSETS RATE
(IN 000'S)
- ----------------------------------------------------------------------------
FRANKLIN INSURED TAX-FREE INCOME FUND:
<S> <C> <C> <C> <C> <C>
1986+ 22.46%++ $ 28,696 0.24% 6.29% 97.58%
1987 11.84 182,994 0.72 6.14 18.93
1988 (0.17) 316,606 0.62 7.03 5.65
1989 7.38 551,436 0.58 7.01 12.79
1990 8.81 711,300 0.54 6.92 11.96
1991 8.38 850,089 0.53 6.95 9.76
1992 9.29 1,130,592 0.53 6.55 6.35
1993 12.93 1,539,186 0.53 6.22 7.95
1994 5.93 1,802,548 0.52 5.79 6.85
1995 2.03 1,683,234 0.59 6.00 14.42
<CAPTION>
FRANKLIN MASSACHUSETTS TAX-FREE INCOME FUND:
<S> <C> <C> <C> <C> <C>
1986+ 18.27++ 17,655 0.23 6.32 51.07
1987 8.71 73,285 0.75 5.90 3.34
1988 0.07 102,764 0.80 6.71 12.50
1989 6.56 109,851 0.75* 6.81 22.97
1990 7.82 123,906 0.72 6.65 14.14
1991 7.10 152,622 0.70 6.72 11.47
1992 9.34 218,336 0.67 6.40 7.49
1993 12.61 278,510 0.64 6.09 9.65
1994 6.39 307,013 0.60 5.69 13.82
1995 1.83 288,331 0.67 5.89 16.90
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE
---------------------------------------------------------------------------------------------------
NET
NET REALIZED & DISTRI- DISTRI-
ASSET UNREALIZED TOTAL BUTIONS BUTIONS NET ASSET
YEAR VALUE NET GAIN FROM FROM NET fROM VALUE
ENDED BEGINNING INVESTMENT (LOSS) ON INVESTMENT INVESTMENT CAPITAL TOTAL AT END
FEB. 28 OF YEAR INCOME SECURITIES OPERATIONS INCOME GAINS DISTRIBUTIONS OF YEAR
- ------------------------------------------------------------------------------------------------------------
FRANKLIN MICHIGAN TAX-FREE INCOME FUND:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1986+ $10.00 $0.62 $1.041 $1.661 $(0.411) $ -- $(0.411) $11.25
1987 11.25 0.76 0.488 1.248 (0.828) -- (0.828) 11.67
1988 11.67 0.75 (0.735) 0.015 (0.795) -- (0.795) 10.89
1989 10.89 0.74 0.032 0.772 (0.772) -- (0.772) 10.89
1990 10.89 0.75 0.152 0.902 (0.732) -- (0.732) 11.06
1991 11.06 0.75 0.124 0.874 (0.744) -- (0.744) 11.19
1992 11.19 0.71 0.254 0.964 (0.744) -- (0.744) 11.41
1993 11.41 0.71 0.766 1.476 (0.706) -- (0.706) 12.18
1994 12.18 0.70 0.066 0.766 (0.706) -- (0.706) 12.24
1995 12.24 0.69 (0.484) 0.206 (0.686) -- (0.686) 11.76
<CAPTION>
FRANKLIN MINNESOTA TAX-FREE INCOME FUND:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1986+ 10.00 0.67 1.393 2.063 (0.423) -- (0.423) 11.64
1987 11.64 0.79 0.437 1.227 (0.847) -- (0.847) 12.02
1988 12.02 0.75 (0.718) 0.032 (0.792) -- (0.792) 11.26
1989 11.26 0.76 0.012 0.772 (0.792) -- (0.792) 11.24
1990 11.24 0.77 0.182 0.952 (0.792) -- (0.792) 11.40
1991 11.40 0.76 0.072 0.832 (0.792) -- (0.792) 11.44
1992 11.44 0.73 0.275 1.005 (0.765) -- (0.765) 11.68
1993 11.68 0.73 0.667 1.397 (0.727) -- (0.727) 12.35
1994 12.35 0.70 (0.014) 0.686 (0.706) -- (0.706) 12.33
1995 12.33 0.69 (0.451) 0.239 (0.685 (0.004) (0.889) 11.88
<CAPTION>
FRANKLIN OHIO TAX-FREE INCOME FUND:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1986+ 10.00 0.64 1.083 1.723 (0.413) -- (0.413) 11.31
1987 11.31 0.77 0.452 1.222 (0.842) -- (0.842) 11.69
1988 11.69 0.74 (0.765) (0.025) (0.732) (0.003) (0.735) 10.93
1989 10.93 0.74 0.082 0.822 (0.732) -- (0.732) 11.02
1990 11.02 0.75 0.141 0.891 (0.741) -- (0.741) 11.17
1991 11.17 0.75 0.172 0.922 (0.762) -- (0.762) 11.33
1992 11.33 0.71 0.275 0.985 (0.765) -- (0.765) 11.55
1993 11.55 0.72 0.776 1.496 (0.706) -- (0.706) 12.34
1994 12.34 0.70 0.066 0.766 (0.706) -- (0.706) 12.40
1995 12.40 0.69 (0.499) 0.191 (0.691) -- (0.691) 11.90
<CAPTION>
FRANKLIN ARIZONA INSURED TAX-FREE INCOME FUND:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1994+++ 10.00 0.34 0.265 0.605 (0.325) -- (0.325) 10.28
1995 10.28 0.55 (0.485) 0.065 (0.545) -- (0.545) 9.80
<CAPTION>
FRANKLIN FLORIDA INSURED TAX-FREE INCOME FUND:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1994+++ 10.00 0.34 0.060 0.400 (0.330) -- (0.330) 10.07
1995 10.07 0.52 (0.531) (0.11) (0.529) -- (0.529) 9.53
<CAPTION>
RATIOS/SUPPLEMENTAL DATA
--------------------------------------------------------
NET
RATIO OF INVESTMENT
YEAR NET ASSETS EXPENSES INCOME PORTFOLIO
ENDED TOTAL AT END TO AVERAGE TO AVERAGE TURNOVER
FEB. 28 RETURN** OF YEAR NET ASSETS NET ASSETS RATE
- -----------------------------------------------------------------------------
FRANKLIN MICHIGAN TAX-FREE INCOME FUND:
<S> <C> <C> <C> <C> <C>
1986+ 18.36%++ $ 67,507 0.36% 6.29% 34.18%
1987 11.28 234,890 0.78 6.13 4.80
1988 0.33 291,806 0.72 6.85 10.16
1989 7.15 370,238 0.67 6.86 9.83
1990 8.21 427,818 0.63 6.72 7.93
1991 7.93 515,313 0.61 6.72 4.17
1992 8.78 665,914 0.59 6.45 10.80
1993 13.23 882,361 0.58 6.09 2.04
1994 6.18 1,055,452 0.54 5.66 3.21
1995 1.87 1,037,717 0.61 5.87 9.12
<CAPTION>
FRANKLIN MINNESOTA TAX-FREE INCOME FUND:
<S> <C> <C> <C> <C> <C>
1986+ 22.77++ 30,603 0.24 6.57 37.37
1987 10.72 119,877 0.78 5.87 12.38
1988 0.48 155,509 0.76 6.68 19.11
1989 6.90 183,867 0.75* 6.80 15.19
1990 8.39 235,058 0.70 6.68 4.55
1991 7.29 284,779 0.67 6.62 9.12
1992 8.95 357,279 0.65 6.43 3.14
1993 12.23 445,767 0.63 6.12 5.58
1994 5.42 499,619 0.60 5.67 13.42
1995 2.12 479,934 0.66 5.81 17.59
<CAPTION>
FRANKLIN OHIO TAX-FREE INCOME FUND:
<S> <C> <C> <C> <C> <C>
1986+ 19.04++ 27,004 0.23 6.61 54.11
1987 11.01 192,647 0.80 5.61 4.96
1988 (0.01) 193,702 0.75 6.80 15.54
1989 7.58 203,230 0.71 6.80 32.48
1990 8.00 224,722 0.65 6.71 10.80
1991 8.28 273,119 0.65 6.67 4.44
1992 8.86 409,044 0.62 6.36 1.16
1993 13.26 564,758 0.59 6.05 2.87
1994 6.08 686,398 0.56 5.59 7.29
1995 1.74 652,545 0.63 5.83 11.76
<CAPTION>
FRANKLIN ARIZONA INSURED TAX-FREE INCOME FUND:
<S> <C> <C> <C> <C> <C>
1994+++ 6.04 12,895 0.03++* 4.85++ 62.88
1995 0.94 20,794 0.10 5.80 44.61
<CAPTION>
FRANKLIN FLORIDA INSURED TAX-FREE INCOME FUND:
<S> <C> <C> <C> <C> <C>
1994+++ 3.97 32,150 --++* 4.97++ 28.72
1995 0.21 46,847 0.35 5.61 43.71
</TABLE>
+For the period April 3, 1985 (effective date of registration) to
February 28, 1986
++Annualized
+++For the period April 30, 1993 (effective date of registration) to February
28, 1994.
*During the fiscal year ended February 28, 1989, the investment manager limited
its management fees. Had such action not been taken, the ratio of expenses to
average net assets for Franklin Massachusetts Insured Tax-Free Income Fund and
Franklin Minnesota Insured Tax-Free Income Fund would have been .79% and .76%,
respectively. During the fiscal year ended February 28, 1994, the investment
manager limited its management fees and reimbursed other expenses incurred by
the Franklin Arizona Insured Tax-Free Income Fund and the Franklin Florida
Insured Tax-Free Income Fund. Had such action not been taken, the ratio of
expenses to average net assets for the Franklin Arizona Insured Tax-Free Income
Fund and the Franklin Florida Insured Tax-Free Income Fund would have been .83%
and .83%, respectively.
**Total return measures the change in value of an investment over the periods
indicated. It does not include the maximum 4.5% initial sales charge for the
Franklin Arizona Insured Tax-Free Income Fund and the Franklin Florida Insured
Tax-Free Income Fund and the maximum 4% initial sales charge for the other
Funds. (Effective July 1, 1994, the maximum initial sales charge has been
changed to 4.25% for all such Funds.) It assumes reinvestment of dividends at
net asset value for the Franklin Arizona Insured Tax-Free Income Fund and the
Franklin Florida Insured Tax-Free Income Fund, and at offering price for the
other Funds, and of capital gains, if any, at net asset value.
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 only to
the seven series shown on the cover, of which only the Arizona
and Florida Insured Funds are 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 a Fund's
Shares"), 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 sales charge of 1.0% of the amount invested.
(See "How to Buy Shares of a Fund.")
Investment Objective
and Policies of Each Fund
The Insured Fund's investment objective is to provide investors
with as high a level of income exempt from federal income taxes
as is consistent with prudent investment, while seeking
preservation of shareholders' capital. Each State Fund's
investment objective is to maximize income exempt from federal
income taxes and from the personal income taxes, if any, for
resident shareholders of the named state to the extent consistent
with prudent investing and the preservation of shareholders'
capital. The state of Florida currently imposes no state personal
income tax. Each Fund's objective is a fundamental policy and may
not be changed without shareholder approval. There is, of course,
no assurance that each Fund's objective will be achieved.
In order to achieve its objective, the Insured Fund will invest
primarily in securities 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 taxes. Each State
Fund will invest primarily in municipal securities of its
respective state and its municipalities, other political
subdivisions and public authorities, the interest on which is
exempt from regular federal income taxes and the personal income
taxes, if any, of its respective state.
Under normal market conditions, the Insured 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. 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 and from the personal income taxes, if any, of its
respective state. Thus it is possible, although not anticipated,
that up to 20% of a State Fund's net assets could be in municipal
securities from another state and/or taxable obligations,
including municipal obligations such as "private activity bonds,"
the interest on which may be subject to the alternative minimum
tax. To the extent that a state requires that a Fund consist of a
specified amount of obligations of such state or of the United
States government, its agencies, instrumentalities, commissions,
possessions or territories which are exempt from taxation under
the laws of such state in order for any portion of the
distributions from such Fund to be exempt from income taxation, a
Fund will attempt to invest at least the minimum of such amount
in such securities. See "Taxation of the Funds and Their
Shareholders" for additional information.
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 regular 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 regular 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 securities of other states, their
agencies or instrumentalities, or in the highest quality
commercial paper rated P-1 or A-1 by Moody's or S&P,
respectively.
Under normal circumstances, at least 65% of each Fund's assets
will be invested in insured municipal securities. Although an
insurer's quality standards are independently determined and may
vary from time to time, generally such municipal securities are
rated at the date of purchase in one of the four highest ratings
of S&P (AAA, AA, A and BBB for bonds and SP-1 through SP-2 for
notes) or of Moody's (Aaa, Aa, A and Baa for bonds and MIG 1
through MIG 3 for notes). Short-term tax-exempt commercial paper
(which will not be insured) will have a P-1, A-1 or F-1 short-
term rating by Moody's, S&P or Fitch, respectively, or will have
a long-term rating of Aaa, or equivalent, by Moody's, S&P or
Fitch. For a description of such ratings, see the Appendix in the
SAI. An insurer may also insure municipal securities which are
unrated or have lower S&P or Moody's ratings that, in the
judgment of such insurer, meet its insurance standards.
A 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 and (ii) lend up to 10% of
its portfolio securities to qualified securities dealers or other
institutional investors, although each Fund currently intends to
limit its lending of securities to no more than 5% of its total
assets. A complete description of each Fund's investment
restrictions is included under "Investment Restrictions" in the
SAI.
It is the policy of each 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 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 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 and the relative value of such insurance on such
securities.
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, 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
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 objectives, 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 the fiscal
year ended February 28, 1995, the portfolios of the Funds 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 Insured Fund 4.84%
Florida Insured Fund 0.21%
Insured Fund 7.78%
Massachusetts Insured Fund 3.77%
Michigan Insured Fund 5.00%
Minnesota Insured Fund 4.71%
Ohio Insured Fund 7.71%
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 prevailing market rates
on predesignated dates. Each Fund may also invest in variable or
floating rate demand notes ("VRDNs"), which carry a demand
feature that permits a 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. Although it is not a put
option in the usual sense, such a demand feature is sometimes
known as a "put." Except for the Franklin Arizona Insured Tax-
Free Income Fund and the Franklin Florida Insured Tax-Free Income
Fund, with respect to 75% of the total value of each Fund's
assets, no more than 5% of such value may be in securities
underlying "puts" from the same institution, except that the 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. Because of the "put"
feature, the prices of VRDNs may be higher and the yields lower
than they otherwise would be for obligations without this
feature. Each Fund will limit its purchases of securities and
variable rate obligations to those meeting the quality standards
set forth in the Prospectus.
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, they 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.
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
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, 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 insured COPs. 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 insured COPs.
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 Florida Insured Fund, which held
12.94% of the total face amount of the securities in its
portfolio in COPs and other municipal leases.
Investment Risk Considerations
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 a 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, there are certain specific factors and
considerations concerning the states 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 greater detail in the SAI. The insurance does
not guarantee the market value of the municipal securities and,
except as indicated in this Prospectus, has no effect on the net
asset value, redemption price, or dividends paid by the Fund.
The Insured Fund is diversified nationally and, as a matter of
policy, this 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 each Fund's net assets, except
the Trust's Arizona and Florida Insured Funds, none of the Funds
will, as a fundamental policy, 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 Arizona and Florida Insured Funds are non-diversified under
the federal securities laws. As non-diversified Funds, there are
no restrictions 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 a 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 were more broadly diversified.
The Funds intend, however, to comply with the diversification and
other requirements of the Code, applicable to "regulated
investment companies" so that they will not be subject to federal
income tax on their incomes 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 Arizona and Florida Insured Funds have each adopted an
investment restriction, which may not be changed without the
approval of shareholders, prohibiting them from purchasing a
security, if as a result, more than 25% of any such Fund's total
assets would be invested in the securities of a single issuer, or
with respect to 50% of such Fund's total assets, more than 5% of
such assets would be invested in the securities of a single
issuer.
Insurance
Except as indicated, each insured municipal security in the
portfolio of each Fund will be covered by either a "New Issue
Insurance Policy," a "Portfolio Insurance Policy" issued by a
qualified municipal bond insurer, or a "Secondary Insurance
Policy."
Any of the policies discussed herein are intended to insure the
scheduled payment of all principal and interest on each
individual municipal security (rather than the portfolio of each
Fund) when due. The insurance of principal refers to the face or
par value of each security and is not affected by the price paid
therefor by each Fund or the market value thereof. Each municipal
security is secured by an insurance policy from one of several
qualified insurance companies which allows the investment manager
to diversify among credit enhancements. The Funds will acquire
municipal securities secured by insurance policies only where the
claims paying ability of the insurer thereof is rated "Aaa," or
equivalent, by Moody's, S&P or Fitch.
New Issue Insurance Policy
New Issue Insurance Policies, if any, have been obtained by the
respective issuers of the municipal securities and all premiums
for such securities have been paid in advance by such issuers.
Such policies are noncancelable and will continue in force so
long as the municipal securities are outstanding and the
respective insurers remain in business. Since New Issue Insurance
Policies remain in effect as long as the securities are
outstanding, the insurance may have an effect on the resale value
of securities in a Fund's portfolio. Therefore, New Issue
Insurance Policies may be considered to represent an element of
market value with regard to municipal securities thus insured,
but the exact effect, if any, of this insurance on such market
value cannot be estimated. As stated earlier, the Fund will
acquire portfolio securities subject to New Issue Insurance
Policies only where the claims paying ability of the insurer
thereof is rated "Aaa," or equivalent, by Moody's, S&P or Fitch.
In determining whether to insure any municipal security, the
insurer has applied its own standards, which are not necessarily
the same as the criteria used in regard to the selection of
securities by the investment manager. No contract to purchase an
insured municipal security is entered into without either
permanent insurance in place or an irrevocable commitment to
insure the municipal security by a qualified insurer.
Portfolio Insurance Policy
The Portfolio Insurance Policy to be obtained by the Funds from a
qualified municipal bond insurer will be effective only so long
as the Funds are in existence, the insurer is still in business
and meeting its obligations, and the municipal securities
described in the policy continue to be held by the Funds. In the
event of a sale of any municipal security by a Fund or payment
thereof prior to maturity, the Portfolio Insurance Policy
terminates as to such municipal security.
The Portfolio Insurance Policy to be obtained by the Funds may
also be canceled for failure to pay the premium. Nonpayment of
premiums on such policy obtained by the Funds will, under certain
circumstances, result in the cancellation of a Portfolio
Insurance Policy and will also permit the insurer to take action
against such Fund to recover premium payments due. Premium rates
for each issue of securities covered by the Portfolio Insurance
Policy may not be changed regardless of the issuer's ability or
willingness to pay. The insurance premiums are payable monthly by
each Fund and are adjusted for purchases and sales of covered
securities during the month. The insurer cannot cancel coverage
already in force with respect to municipal securities owned by a
Fund and covered by the Portfolio Insurance Policy, except for
nonpayment of premiums. In the event that a portfolio holding
which has been covered by a Portfolio Insurance Policy is pre-
refunded and irrevocably secured by a U.S. government security,
the insurance is no longer required. Any security for which
insurance is canceled other than as provided herein will be sold
by the Fund as promptly thereafter as possible.
The premium on each Fund's Portfolio Insurance Policy is an item
of expense and will be reflected in each Fund's average annual
expenses. The average annual premium rate for the Portfolio
Insurance Policy is determined by dividing the amount of a Fund's
annual Portfolio Insurance Policy premium by the face amount of
the insured bonds in its investment portfolio covered by that
policy. Premiums are paid from a Fund's assets and reduce the
current yield on its portfolio by the amount thereof. When a Fund
purchases a Secondary Insurance Policy (see below), the single
premium is added to the cost basis of the municipal security and
is not considered an item of expense of that Fund.
Each Fund may also own, without insurance coverage, municipal
securities for which an escrow or trust account has been
established pursuant to the documents creating the municipal
security and containing sufficient U.S. government securities
backed by the government's full faith and credit pledge in order
to ensure the payment of principal and interest on such bonds.
Secondary Insurance Policy
Each Fund may at any time purchase from the provider of a
Portfolio Insurance Policy a permanent Secondary Insurance Policy
on any municipal security so insured and held by a Fund. The
coverage and obligation of a Fund to pay monthly premiums under a
Portfolio Insurance Policy would cease with the purchase by that
Fund of a Secondary Insurance Policy on such security.
By purchasing a Secondary Insurance Policy, the Fund would, upon
payment of a single premium, obtain similar insurance against
nonpayment of scheduled principal and interest for the remaining
term of the security. Such insurance coverage will be
noncancelable and will continue in force so long as the
securities so insured are outstanding. One of the purposes of
acquiring such a policy would be to enable the Fund to sell the
portfolio security to a third party as a AAA-rated insured
security at a market price higher than what otherwise might be
obtainable if the security was sold without the insurance
coverage. (Such rating is not automatic, however, and must
specifically be requested from Moody's, S&P or Fitch for each
bond.) Such a policy would likely be purchased if, in the opinion
of the investment manager, the market value or net proceeds of a
sale by a Fund would exceed the current value of the security
(without insurance) plus the cost of the policy. Any difference
between the excess of a security's market value as a AAA-rated
security over its market value without such rating, including the
single premium cost thereof, would inure to a Fund in determining
the net capital gain or loss realized by that Fund upon the sale
of the portfolio security. Each Fund may purchase insurance under
a Secondary Insurance Policy in lieu of a Portfolio Insurance
Policy at any time, regardless of the effect of market value on
the underlying municipal security, if the investment manager
believes such insurance would best serve that Fund's interests in
meeting its objective and policies.
Since under the original agreement to provide a temporary
insurance policy a Fund has the right to purchase a permanent
Secondary Insurance Policy even if the security is currently in
default as to any payments by the issuer, such Fund would have
the opportunity to sell such security rather than be obligated to
hold the security in its portfolio in order to continue in force
the applicable Portfolio Insurance Policy, as discussed below.
Because coverage under the Portfolio Insurance Policy terminates
upon sale of a security from a Fund's portfolio, such insurance
does not have an effect on the resale value of the securities.
Therefore, a Fund may retain any municipal securities insured
under a Portfolio Insurance Policy which are in default or in
significant risk of default, and place a value on the insurance
which will be equal to the difference between the market value of
the defaulted security and the market value of similar securities
which are not in default. (See "Valuation of a Fund's Shares.")
Because of this policy, the Funds' investment manager may be
unable to manage a Fund's portfolio to the extent that it holds
defaulted securities, which may limit its ability in certain
circumstances to purchase other municipal securities. While a
defaulted municipal security is held in a Fund's portfolio, that
Fund continues to pay the insurance premium thereon but also
collects interest payments from the insurer and retains the right
to collect the full amount of principal from the insurer when the
security comes due. This would not be applicable if the Fund
elected to purchase the Secondary Insurance Policy discussed
above in lieu of the Portfolio Insurance Policy.
Municipal Bond Insurer
A "qualified municipal bond insurer" refers to companies whose
charter limits their risk assumption to insurance of financial
obligations only. This precludes assumption of other types of
risk, such as life, medical, fire and casualty, auto and home
insurance. The bond insurance industry is a regulated industry.
All bond insurers must be licensed in each state in order to
write financial guaranties in that jurisdiction. Regulations vary
from state to state; however, most regulators require minimum
standards of solvency and limitations on leverage and investment
of assets. New York State, which is one of the most active
regulators, requires a minimum capital base of $72.5 million for
a new primary bond insurer. Regulators also place restrictions on
the amount an insurer can guarantee in relation to the insurer's
capital base. Neither the Funds nor their investment manager make
any representations as to the ability of any insurance company to
meet its obligation to a Fund if called upon to do so. The SAI
contains more information on municipal bond insurers. Currently,
there are no bonds in a Fund's portfolio on which an insurer is
paying the principal or interest otherwise payable by the issuer
of the Fund's portfolio obligations.
How Shareholders Participate in the Results of a Fund's
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 a 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 a 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 a Fund's shares will fluctuate
with movements in the broader bond markets. In particular,
changes in interest rates will affect the value of a Fund's
portfolio and thus its 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 a
Fund's shares. History reflects both increases and decreases in
the prevailing rate of interest and these may reoccur
unpredictably in the future.
Management of the Funds
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 second class 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 33 U.S. registered investment companies (111
separate series) with aggregate assets of over $74 billion,
approximately $40.2 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 Class I of each Fund paid to the
Manager during the fiscal year ended February 28, 1995 (as a
percentage of average net assets) were as follows:
Class I Fund Name Ma Management Fees Paid
Arizona Insured Fund 0.63%*
Florida Insured Fund 0.63%*
Insured Fund 0.46%
Massachusetts Insured 0.53%
Fund
Michigan Insured Fund 0.47%
Minnesota Insured Fund 0.50%
Ohio Insured Fund 0.49%
It is not anticipated that any of the Funds will incur a
significant amount of brokerage expenses because municipal
securities are generally traded on a "net" basis, that is, in
principal transactions without the addition or deduction of
brokerage commissions or transfer taxes. 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 is felt
that more than one broker is able to provide the best execution,
the Manager would 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 Class I of each Fund (as a percentage of average
net assets), including fees paid to the Manager and Investor
Services, were as follows:
Class I Fund Name Ma Total Operating
Expenses
Arizona Insured Fund 0.96%
Florida Insured Fund 0.88%
Insured Fund 0.59%
Massachusetts Insured 0.67%
Fund
Michigan Insured Fund 0.61%
Minnesota Insured Fund 0.66%
Ohio Insured Fund 0.63%
*Represents the amount that would have been payable by the each
Fund absent a fee reduction by the investment manager. The
investment manager, however, has agreed in advance to waive a
portion of its management fee and assume responsibility for
making payments to offset certain operating expenses otherwise
payable by the Fund. With this reduction, the Arizona Insured
Fund paid no management fees, and total operating expenses
represented .10% of its average net assets. The Florida Insured
Fund paid management fees and total operating expenses of .11%
and .35%, respectively, of its average net assets. These
arrangements may be terminated by the investment manager at any
time.
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
"Plans") pursuant to Rule 12b-1 under the 1940 Act. The Rule 12b-
1 fees charged to each class will be based solely on the
distribution and servicing fees attributable to that particular
class. Any portion of fees remaining from either Plan after
distribution to securities dealers up to the maximum amount
permitted under each Plan may be used by that class to reimburse
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, 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 Funds, Distributors or its affiliates.
The maximum amount which each Fund may pay to Distributors or
others under the Class I Plan for such distribution expenses is
0.15% per annum of each Class I's average daily net assets of the
Arizona and Florida Insured Funds and 0.10% per annum of each
Class I's average daily net assets for the other Funds described
in this Prospectus, payable on a quarterly basis. All expenses of
distribution and marketing in excess of the maximum for each Fund
stated above 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 shares 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 Fund's Class II shares' 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 customers; or similar
activities related to furnishing personal services and/or
maintaining shareholder accounts.
Distributors, or 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 after the purchase
of Class II shares, Distributors will keep a portion of the Plan
fees assessed on the Class II shares to partially recoup fees
Distributors pays to securities dealers.
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 of the Funds.
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 each 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 such 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
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.
Because ongoing Rule 12b-1 expenses will be lower for Class I
than Class II, the per share dividends distributed to Class I
shares will generally be higher than those distributed to Class
II shares.
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 any 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 front-end sales charge) on
the dividend reinvestment date. Dividend and capital gain
distributions are only eligible for investment at net asset value
in the same class of shares of the Funds or the same class of
another of the Franklin Templeton Funds. Shareholders have the
right to change their election with respect to the receipt of
distributions by notifying the Funds, 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, 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. Dividend and capital gain
distributions are eligible for investment in another fund in the
Franklin Templeton Funds at net asset value. See "Purchases at
Net Asset Value" under "How to Buy Shares of the Fund."
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 its
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 be exempt from personal
income tax, if any, 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 or not the shareholder has
elected to receive them in cash 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. 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 a Fund of such ordinary income to its
shareholders will be subject to regular federal and state income
taxes in the hands of that Fund's shareholders. In any fiscal
year, a 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 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 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 a 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 a 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. The state of Florida currently imposes no state
personal income tax.
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 a Fund
Shares of the Funds are continuously offered through securities
dealers which execute an agreement with Distributors, the
principal underwriter of each Fund's shares. The use of the term
"securities dealer" includes other financial institutions which,
pursuant to an agreement with Distributors (directly or through
affiliates), handle customer orders and accounts with the Funds.
Such reference, however is for convenience only and does not
indicate a legal conclusion of capacity. Sales of the shares of
the Funds may be restricted to residents of their respective
states. The minimum initial investment in each Fund 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. None of
the State Funds currently 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.
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 Arizona and Florida Insured offer
only Class I shares.
Class I. All 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. Voting rights attributable to each class will,
however, be different. 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 .10% of average daily net
assets of such shares (.15% for the Arizona and Florida Insured
Funds).. With this 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 a Fund" for
more information.
Class II. The current public offering price of Class II shares is
equal to the net asset value, plus a sales charge of 1% of the
amount invested. Class II shares are also subject to a contingent
deferred sales charge of 1.0% 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 a Fund."
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 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.
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. Over time,
however, the higher annual Rule 12b-1 fees on the Class II shares
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 should also consider
that the higher Rule 12b-1 fees for Class II shares will
generally result in lower dividends and consequently lower yields
for Class II shares. See "General Information" in the SAI for
more information regarding the calculation of dividends.
Investors who qualify to purchase Class I shares at reduced sales
charges definitely should consider purchasing Class I shares,
especially if they intend to hold their shares for more than six
years. Investors who qualify to purchase Class I shares at
reduced sales charges but who intend to hold their shares less
than 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 will be precluded from purchasing
Class II shares. See "How to Buy Shares of the Fund."
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.
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 a Fund
Shares of both classes of the Funds 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 such 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).
Class I. The sales charge for Class I shares is a variable
percentage of the offering price depending upon the amount of the
sale. On orders for 100,000 shares or more, the offering price
will be calculated to four decimal places. On orders for less
than 100,000 shares, 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 a Fund's Shares."
Set forth below is a table of total front-end sales charges or
underwriting commissions and dealer concessions for Class I
shares.
Class I Shares Total Sales Charge
Size of As a Percentage As a Percentage Dealer
Transaction at of Offering of Net Amount Concession as a
Offering Price Price Invested Percentage of
Offering
Price*,***
Less than 4.25% 4.44% 4.00%
$100,000
$100,000 but 3.50% 3.63% 3.25%
less than
$250,000
$250,000 but 2.75% 2.83% 2.50%
less than
$500,000
$500,000 but 2.15% 2.20% 2.00%
less than
$1,000,000
$1,000,000 none none (see below)**
or more
*Financial institutions or their affiliated brokers may receive
an agency transaction fee in the percentages set forth above.
**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.
***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 dealer may be deemed to be an
underwriter as that term is defined in the Securities Act of
1933, as amended.
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 investment of $1
million within the contingency period. See "How to Sell Shares of
a Fund - 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(Registered Trademark) 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 (although certain investments may not have the same
schedule of sales charges and/or may not be subject to reduction)
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
1.00% 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:
Class II Shares Total Sales Charge
Size of As a As a Dealer
Transaction Percentage of Percentage of Concession As
at Offering Net Offering Net Amount a Percentage
Price Price Invested of Offering
Price*
any amount 1.00% 1.01% 1.00%
(less than $1
million)
*During the first year after the purchase of Class II shares,
Distributors will keep a portion of the Plan fees assessed on
Class II shares to partially recoup fees Distributors pays to
securities dealers. Distributors or one of its affiliates may
make additional payments to securities dealers, from its own
resources, of up to 1% of the amount invested.
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.
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 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 such shares. 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 a Fund or its 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 discounts, any Franklin Templeton
Investments may be combined with those of the investor's spouse
and children under the age of 21. In addition, the aggregate
investments of a trustee or other fiduciary account (for an
account under exclusive investment authority) may be considered
in determining whether a reduced sales charge is available, even
though there may be a number of beneficiaries of the account. 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 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 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 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. For more information,
see "Additional Information Regarding Purchases" in the SAI.
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 a 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 payments by such parties after
cessation of employment; (2) companies exchanging shares with or
selling assets pursuant to a merger, acquisition or exchange
offer; (3) accounts managed by the Franklin Templeton Group; (4)
registered securities dealers and their affiliates, for their
investment account only, and (5) registered personnel and
employees of securities dealers and by their spouses and family
members, in accordance with the internal policies and procedures
of the employing securities dealer.
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 120 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. Credit will be
given for any contingent deferred sales charge paid on the shares
redeemed and subsequently repurchased, but the period for which
such shares may be subject to a contingent deferred sales charge
will begin as of the date the proceeds are reinvested. 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 Funds' Shareholder Services Agent within 120 days
after the redemption. The 120 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 one
of the Funds 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 120 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 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
which charged the investor a contingent deferred sales charge
upon redemption 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. 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 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.
Purchasing Class I and Class II Shares
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. Initial purchases of $1 million or more in a
single payment will be invested in Class I shares. There are no
conversion features attached to either class of shares.
Investors who qualify to purchase Class I shares at net asset
value should purchase Class I rather than Class II shares. See
the section "Purchases at Net Asset Value" and "Description of
Special Net Asset Value Purchases" above for a discussion of when
shares may be purchased at net asset value.
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 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 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 in writing 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 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
a 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 another fund 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.
Payments 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 an 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 Franklin's
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, a Fund's 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. 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, minimum holding
periods 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 a Fund by telephone by calling
Investor Services at 1-800/632-2301 or the automated Franklin
TeleFACTS 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 originally
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 on which no sales charge was paid was transferred in
from a fund on which the investor paid a sales charge. 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.
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."
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 .
There are differences among the many Franklin Templeton Funds.
Before making an exchange, a shareholder should obtain and review
a current prospectus of the fund into which the shareholder
wishes to transfer.
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 only 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 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, 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
In the Insured Fund, accounts which are administered by
allocation or market timing services to purchase or redeem shares
based on predetermined market indicators ("Timing Accounts") will
be charged a $5.00 administrative service fee per each such
exchange. All other exchanges are without charge. The State Funds
currently will not accept investments from Timing Accounts.
Restrictions on Exchanges
In accordance with the terms of their respective prospectuses,
certain funds do not accept or may place differing limitations
than those below on exchanges by Timing Accounts.
The Insured Fund reserves the right to temporarily or permanently
terminate the exchange privilege or reject any specific purchase
order for any Timing Account or any person whose transactions
seem to follow a timing pattern who: (i) makes an exchange
request out of the Insured Fund within two weeks of an earlier
exchange request out of that Fund, or (ii) makes more than two
exchanges out of the Insured Fund per calendar quarter, or (iii)
exchanges shares equal in value to at least $5 million, or more
than 1% of the Insured Fund's net assets. Accounts under common
ownership or control, including accounts administered so as to
redeem or purchase shares based upon certain predetermined market
indicators, will be aggregated for purposes of the exchange
limits.
The Insured Fund also reserves the right to refuse the purchase
side of an exchange request by any Timing Account, person, or
group if, in the Manager's judgment, the Insured Fund would be
unable to invest effectively in accordance with its investment
objectives and policies, or would otherwise potentially be
adversely affected. A shareholder's purchase exchanges may be
restricted or refused if the Insured Fund receives or anticipates
simultaneous orders affecting significant portions of its assets.
In particular, a pattern of exchanges that coincide with a
"market timing" strategy may be disruptive to the Insured Fund
and therefore may be refused.
The Funds and Distributors also, as indicated in "How to Buy
Shares of the Fund," reserve the right to refuse any order for
the purchase of shares.
How to Sell Shares of a 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. Redemption requests
received after the time at which the net asset value is
calculated, that is, at the scheduled closing time of the New
York Stock Exchange ("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 (other than a retirement account) - 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 the 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 closing time 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, government entities, and
qualified retirement plans 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 Franklin's 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. These documents, as described in
the preceding section, are required even if the shareholder's
securities dealer has placed the repurchase order. 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 redemption proceeds will not earn
dividends or interest during the time between receipt of the
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 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 those
investments within the contingency period of 12 months of the
calendar month following their purchase. The charge is 1% of the
lesser of the 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. See "Purchases at Net Asset Value" under "How
to Buy Shares of the Fund."
Class II. Class II shares redeemed within the contingency period
of 18 months of the calendar month following 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 of those 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; and
followed by any shares held less than the contingency period, 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 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); and redemptions initiated by a Fund due to a
shareholder's account falling below the minimum specified account
size.
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 for 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 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
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: (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, and (iv) exchange shares of a Fund 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 Fund - Redemptions by Telephone" 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 Fund and Investor Services
may be liable for any losses due to unauthorized or fraudulent
instructions only if 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 to 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.
The telephone transaction privilege may be modified or
discontinued by the Funds at any time upon 60 days' written
notice to shareholders.
Valuation of a Fund's Shares
The net asset value per share of each class of a Fund is
determined separately as of the scheduled closing time 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 class of shares of each Fund).
The net asset value per share for each class of a 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 respective class of a 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, a 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 of a Fund 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 a 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, shareholders may access the automated
Franklin TeleFACTS system (day or night) at 1-800/247-1753 to
obtain current price, yield or other performance information
specific to a fund in the Franklin Funds, process an exchange as
discussed under the "Exchange Privilege", and request duplicate
confirmation or year-end statements, money fund checks, if
applicable, and deposit slips. Current prices for the Templeton
Funds are also available through TeleFACTS. 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.
Each Fund's code, which will be needed to access system
information, are as follows:
FUND CODE * FUND NAME
177 ARIZONA INSURED FUND, CLASS I
178 FLORIDA INSURED FUND, CLASS I
121 INSURED FUND, CLASS I
221 INSURED FUND, CLASS II
118 MASSACHUSETTS INSURED FUND, CLASS
I
218 MASSACHUSETTS INSURED FUND, CLASS
II
119 MICHIGAN INSURED FUND, CLASS I
219 MICHIGAN INSURED FUND, CLASS II
120 MINNESOTA INSURED FUND, CLASS I
220 MINNESOTA INSURED FUND, CLASS II
122 OHIO INSURED FUND, CLASS I
222 OHIO INSURED FUND, CLASS II
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
Department Name Telephone No. Operation(Pacific Time)
(Monday through Friday)
Shareholder 1-800/632-2301 6:00 a.m. to 5:00 p.m.
Services
Dealer Services 1-800/524-4040 6:00 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 6:00 a.m. to 8:00 p.m.
8:30 a.m. to 5:00 p.m.
(Saturday)
Retirement Plans 1-800/527-2020 6:00 a.m. to 5:00 p.m.
TDD (hearing 1-800/851-0637 6:00 a.m. to 5:00 p.m.
impaired)
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.
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 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 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 of a class of the Funds. 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. A taxable equivalent distribution rate
demonstrates the taxable distribution rate necessary to produce
an after tax distribution rate equivalent to a class'
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 a class'
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 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 these shares. After a
sufficient period of time has passed, Class II performance data
will be available. Except as noted, it is likely that the
performance data relating to Class II shares will reflect lower
total return and yield figures than those for Class I shares
because Class II Rule 12b-1 fees are higher than Class I Rule 12b-
1 fees. During at least the first year of operation, Class II
share performance will be higher than Class I in light of the
higher initial sales charge applicable to Class I share.
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. Copies may be obtained by investors or
shareholders, 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
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.
Voting Rights
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 series 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 series' shares,
however, only shareholders of that class will be entitled to
vote. Therefore each class of shares of a series will vote
separately on matters (1) affecting only that class of such
series, (2) expressly required to be voted on separately by state
business trust 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
series requires shareholder approval, only shareholders of Class
I of that series 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 series may vote on changes to
such plan. On the other hand, if there is a proposed change to
the investment objective of a series, this affects all
shareholders of that series, regardless of which class of shares
they hold and, therefore, each share has the same voting rights.
Redemptions by a 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.
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.
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 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 a Fund after
such Fund receives authorization in proper form from the
shareholder's delivering securities dealer. In the future it may
be possible to effect such transfers 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 a 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.
Sheila Amoroso
Portfolio Manager
Ms. Amoroso has been responsible for portfolio recommendations
and decisions for the Arizona Insured and Florida Insured Funds
since their inception, and for the Massachusetts Insured Fund,
Michigan Insured Fund and Minnesota Insured Fund since 1987. 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.
Don Duerson
Vice President and Senior Portfolio Manager
Mr. Duerson has been responsible for portfolio recommendations
and decisions for the Arizona Insured and Florida Insured Funds
since their inception, and for the Insured Fund, Massachusetts
Insured Fund, Michigan Insured Fund, Minnesota Insured Fund and
Ohio Insured Fund since he joined Advisers in 1986. 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 1956 and is a member of industry-related
committees and associations.
Andrew Jennings
Senior Vice President and Senior Portfolio Manager
Mr. Jennings has been responsible for portfolio recommendations
and decisions for the Insured 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.
Thomas Kenny
Senior Vice President
Mr. Kenny is responsible for portfolio recommendations and
decisions of all 27 Funds of the Tax-Free Trust since August,
1994. He is Senior Vice President of the investment manager and
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 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 of Advisers
Ms. Wong has been responsible for portfolio recommendations and
decisions for the Ohio Insured Fund since 1986. 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. She joined Advisers
in 1986.
Appendix A
Description of State Tax Treatment
The following information on the state income tax treatment of
dividends from the Funds is based upon correspondence and sources
believed to be reliable. Except where otherwise noted, the
information pertains to individual state income taxation only.
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
personal 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.
Florida
Florida does not have a personal income tax but does have an
intangible personal property tax for residents. According to
Florida Statute Section 199.185 and Technical Assistance
Advisement No. 90 (C)2-003, issued by the Florida Department of
Revenue on August 8, 1990 (as subsequently revised), shares in
regulated investment companies organized as business trusts, such
as the Florida Fund, will not be subject to Florida's intangible
property tax to the extent that the Fund is invested in
obligations of the U.S. government, its agencies,
instrumentalities and territories (including Puerto Rico, Guam
and the Virgin Islands) at the close of business on the last
business day of the calendar year. If the Fund invests all of the
remaining portion of its net asset value in exempt obligations of
the state of Florida or its municipalities or political
subdivisions on such date, then that remaining portion of the net
asset value of the Fund (and corresponding value of Fund shares)
will also be exempt from Florida's intangibles tax. If the Fund
invests, such as for temporary or defensive purposes, any of the
remaining portion of its portfolio in any asset which is taxable
under Florida's intangible tax law, including investments in
indirect federal obligations (GNMAs, FNMAs, etc.), in repurchase
agreements collateralized by U.S. government securities or in any
obligations of other states, then that remaining portion of the
net asset value of the Fund (and the corresponding value of Fund
shares) will be taxable under Florida's intangible property tax.
Massachusetts
Chapter 62 of the Massachusetts General Laws states that
dividends received from a regulated investment company, such as
the Massachusetts Insured Fund, are exempt from state personal
income tax to the extent that such dividends are attributable to
interest on obligations of the U.S. or its territories (including
Puerto Rico, Guam and the Virgin Islands). Dividends received
from the Fund, which are either exempt-interest dividends or
capital gain dividends, to the extent that the interest or gains
are attributable to obligations of the Commonwealth, or any
political subdivision, agency or instrumentality within the
Commonwealth, are also exempt from state personal income tax.
Dividends paid from interest earned on indirect U.S. government
obligations (GNMAs, FNMAs, etc.), repurchase agreements
collateralized by U.S. government obligations, or other
obligations from other states and their political subdivisions
are fully taxable. To the extent that such taxable investments
are made by the Fund for temporary or defensive purposes, the
distributions will be taxable on a pro rata basis.
Any distributions of net short-term and net long-term capital
gains earned by the Fund which are derived from taxable
obligations are taken into account by a Massachusetts resident in
determining the amount of capital gain net income subject to tax,
and are taxed at ordinary income rates.
In determining the Massachusetts excise tax on corporations
subject to state taxation, distributions from the Fund will
generally be included in a corporate shareholder's net income,
and in the case of intangible property corporations, shares of
the Fund will be included in the computation of net worth.
Michigan
Section 206.30(1) of the Michigan Compiled Laws generally
provides that interest income from obligations of the state of
Michigan, its political or governmental subdivisions, or
obligations of the U.S., its agencies, instrumentalities, or
possessions (including Puerto Rico, Guam and the Virgin Islands)
is exempt from state personal income tax. Revenue Administrative
Bulletin 1986-3, states that a regulated investment company, such
as the Michigan Insured Fund, which invests in tax-free municipal
obligations of the state of Michigan and its political and
governmental subdivisions is permitted to pass-through the
exemption of such interest to its shareholders to the extent that
such interest qualifies as an exempt-interest dividend of a
regulated investment company. The exempt nature of interest from
obligations of the U.S. and its territories and possessions may
also be passed-through to shareholders. Dividends paid from
interest earned on indirect U.S. government obligations (GNMAs,
FNMAs, etc.), repurchase agreements collateralized by U.S.
government obligations, or other obligations from other states
and their political subdivisions are fully taxable. To the extent
that such taxable investments are made by the Fund for temporary
or defensive purposes, the distributions will be taxable on a pro
rata basis.
Any distributions of net short-term and net long-term capital
gains earned by the Fund are included in each shareholder's
Michigan taxable income as dividend income and long-term capital
gain respectively, and are taxed at ordinary income tax rates.
Section 205.133(b) of the Michigan Compiled Laws exempts from the
intangible personal property tax obligations of the state of
Michigan and its political and governmental subdivisions and
obligations of the U.S. and its possessions, agencies and
instrumentalities. Pursuant to Revenue Administrative Bulletin
1986-3, yield (for intangibles tax purposes) is determined with
respect to shares of the Michigan Insured Fund by excluding from
gross dividends or interest the pro rata share of the interest or
dividends received from such exempt obligations held by such
fund. Capital gains from a regulated investment company that are
reinvested in additional shares of the Fund are exempt from
intangibles taxes, where as capital gains distributed in cash are
taxable.
Minnesota
Section 290.01 of the Code of Minnesota states that individual
shareholders will generally not be subject to state income
taxation on the exempt-interest dividends distributed by a
regulated investment company, such as the Minnesota Insured Fund,
provided that at least 95% of the exempt-interest dividends are
derived from obligations of the state of Minnesota, or its
political or governmental subdivisions. However, such dividends
are taken into account in computing the state's alternative
minimum tax to the extent they are derived from Minnesota private
activity bonds. Minnesota Rule 8002.0300 generally states that
dividends paid by the Fund, to the extent attributable to
interest derived from obligations of the U.S. government, its
authorities, commissions, instrumentalities or territories
(including Puerto Rico, Guam and the Virgin Islands), will also
be exempt from Minnesota's personal income tax. As a matter of
policy, the Fund will continue to earn at least 95% of its income
from interest on Minnesota obligations and invest less than 5% of
its assets in direct U.S. government, Puerto Rico or other
obligations to ensure that the Fund continues to qualify to pay
exempt-interest dividends on income from Minnesota obligations.
Dividends paid from interest earned on indirect U.S. government
obligations (GNMAs, FNMAs, etc.), repurchase agreements
collateralized by U.S. government obligations, or other
obligations from other states and their political subdivisions
are fully taxable. To the extent that such taxable investments
are made by the Fund for temporary or defensive purposes, the
distributions will be taxable on a pro rata basis.
Any distributions of net short-term and net long-term capital
gains earned by the Fund are included in each shareholder's
Minnesota taxable income as dividend income and long-term capital
gain respectively, and are taxed at ordinary income tax rates.
Ohio
Section 5747.01(a) of the Ohio Revised Code states generally that
interest on obligations of the state of Ohio and its subdivisions
and authorities and of the U.S. and its territories and
possessions (to the extent included in federal adjusted gross
income but exempt from state income taxes under U.S. laws) is
exempt from Ohio state personal income tax. Distributions of such
income by regulated investment companies, such as the Ohio
Insured Fund, will also be exempt from the Ohio personal income
tax and the Ohio corporation franchise tax computed on the net
income basis. Shares of the Ohio Insured Fund will, however, be
included in a shareholder's tax base for purposes of computing
the Ohio corporation franchise tax on the net worth basis.
Dividends paid from interest earned on indirect U.S. government
obligations (GNMAs, FNMAs, etc.), repurchase agreements
collateralized by U.S. government obligations, or other
obligations from other states and their political subdivisions
are fully taxable. To the extent that such taxable investments
are made by the Fund for temporary or defensive purposes, the
distributions will be taxable on a pro rata basis.
Shareholders will not be required to include in income for Ohio
personal income tax purposes their allocable share of insurance
proceeds received by the Fund on any default of interest of Ohio
obligations which the Fund distributes to such shareholders and
clearly identifies as directly attributable to insurance on
defaulted interest earned on Ohio obligations, if and to the
extent that such proceeds would not be subject to such taxes if
paid in the normal course by the issuer of such defaulted
obligations and further provided that such proceeds are not
taxable under federal law.
Any distributions of net short-term and net long-term capital
gains earned by the Fund are included in each shareholder's Ohio
taxable income as dividend income and long-term capital gain
respectively, and are taxed at ordinary income tax rates.
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.
Florida
Florida's economy is experiencing slow but steady economic growth
driven by one the nation's fastest growing populations. Florida
has an estimated population of nearly 14 million, an increase of
over 38% from 1980 levels, and ranks as the fourth most populous
state in the nation. While high population growth has
strengthened the state's economy, such growth, along with the
state's large and growing elderly population, has put pressure on
government funding for health and human services, corrections,
education and transportation.
The state's economy centers on a growing trade and services
sector, although agriculture and tourism remain important
influences. Tourism has stabilized from the effects of the early
1990s recession. Since that recession, Florida has outperformed
the nation and the east south central region in employment and
personal income growth. By 1994 personal income had climbed to
match the national average.
In November 1994 Florida voters adopted a proposal to cap the
amount of taxes and other revenues that can be raised by the
state in any fiscal year without a two-thirds vote of each house
of the legislature to raise the cap. However, the measure
exempts revenues that are pledged to pay bonds and Medicaid and
proceeds from the state lottery. Consequently, the measure does
not appear to represent any major impediment for state financing
needs.
Massachusetts
Massachusetts has a well developed economy with a large service
sector, particularly in health and education, and one of the
highest personal income levels in the nation. During the 1980s,
Massachusetts' economy experienced steady growth, due in large
part to its high technology manufacturing industry. The recent
recession, however, hit the state hard, causing extensive job
losses and a reduction in personal income growth. While the
state's economy has stabilized, the state's recovery is expected
to lag behind that of the nation over the next few years. Despite
continued losses in the manufacturing industry caused by the
restructuring of computer, defense and health care industries,
the state expected overall employment growth between 1% and 2%
for 1994 and 1995. Gains are most likely in the service sector,
especially in construction and health services.
While modest growth is projected for Massachusetts' economy,
recently legislation has dampened such growth. In August 1993,
the federal Omnibus Budget Reconciliation Act was passed,
increasing taxes on wealthier households, limiting Medicare and
Medicaid spending, and decreasing defense spending. The adverse
economic impact of this legislation is greater in Massachusetts
than in other states due to Massachusetts' relatively higher
concentration of upper income households and its large share of
the health services and defense industries. Health care reform
may also significantly impact the state's economy. While the
health services sector has been one of the primary sources of new
jobs, new cost-containment measures are expected to curtail such
growth, despite continuing increases in the demand for such
services. Accordingly, economic recovery began to slow in late
1994.
Michigan
For over a decade, Michigan's economy has been evolving from a
heavy manufacturing base to a more diversified base increasingly
reliant on services and trade. This evolution has resulted in
declines per capita relative to the national average, from 108%
in 1977 to 98% in 1992. While manufacturing remains important,
23% of total jobs in 1991 versus 17% nationally, it still is a
significantly share than in the 1970s, when it was 35%.
Manufacturing is concentrated in the cyclical automotive
industry, which has reduced its employment from 10.8% in 1979 to
6.9% in 1989. Michigan is experiencing strong economic growth,
since, the early 1990s recession, when unemployment reached 10%,
total employment has reached an all time, and unemployment has
been below national average for the first time in 20 years. The
state's future economic growth will likely come from growth in
its service sector.
Minnesota
Minnesota's economic structure is well diversified among trade
(23%) services (27%) and durable and nondurable manufacturing
(17%). As a result, the recent recession was less severe in
Minnesota than the nation as a whole. During the 1980s, in
contrast to many other states, Minnesota's manufacturing sector
grew, largely due to gains in durable manufacturing, especially
in the food, paper, and related products industries. Nondurable
manufacturing also experienced growth, although such growth was
offset to a certain degree by contractions in the mainframe
computer industry. Notwithstanding the growth in its
manufacturing sector, Minnesota's overall employment growth
lagged slightly behind that of the nation since the last
recession, while unemployment remained well below the national
average.
Despite continued declines in the state's computer industry and a
struggling agricultural industry, growth is expected in the
state's manufacturing, businesses, services and finance sectors.
Low labor and land costs and population gains are attracting new
investment to the state, particularly in the areas of business,
health and financial services. Minnesota's near-term growth is
expected to exceed that of the nation as a whole, with continued
growth in personal income and exceptionally low unemployment
levels.
Ohio
Ohio's economy has traditionally been highly industrialized. In
the early 1980s, however, the state's economy underwent a period
of restructuring. While still concentrated in manufacturing,
growth in nonmanufacturing sectors, especially trade, services,
has led to a more diversified economy with employment more in
line with that of the motion, greater stability and steady
overall growth.
The recent recession's effect on the state was relatively mild,
compared to other economic downturns, with losses in the
manufacturing sector offset from strong employment gains in the
service, trade, financial and real estate sectors. The rate of
personal income growth, however, has declined as lower-paying
service jobs have replaced those lost in manufacturing, with
income levels currently slightly below the national average.
Ohio, like much of the Midwest continues to show strong economic
growth through 1994 and into 1995. By the end of 1994,
unemployment was a low 4.2%.
FRANKLIN TAX-FREE TRUST
PROSPECTUS
May 1, 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. As of May 1,
1995, most of the series offer two classes of shares to their
investors. This Prospectus relates to the ten series listed
below, nine of which, as noted, are currently offering two
classes of shares:
Class I Class II
Franklin Alabama Tax-Free Franklin Alabama Tax-Free
Income Fund, Class I Income Fund, Class II
Franklin Florida Tax-Free Franklin Florida Tax-Free
Income Fund, Class I Income Fund, Class II
Franklin Georgia Tax-Free Franklin Georgia Tax-Free
Income Fund, Class I Income Fund, Class II
Franklin Kentucky Tax-Free Not Available
Income Fund, Class I
Franklin Louisiana Tax-Free Franklin Louisiana Tax-Free
Income Fund, Class I Income Fund, Class II
Franklin Maryland Tax-Free Franklin Maryland Tax-Free
Income Fund, Class I Income Fund, Class II
Franklin Missouri Tax-Free Franklin Missouri Tax-Free
Income Fund, Class I Income Fund, Class II
Franklin North Carolina Franklin North Carolina
Tax-Free Income Fund, Class I Tax-Free Income Fund, Class
II
Franklin Texas Tax-Free Franklin Texas Tax-Free
Income Fund, Class I Income Fund, Class II
Franklin Virginia Tax-Free Franklin Virginia Tax-Free
Income Fund, Class I Income Fund, Class II
Each Fund may, separately or collectively, be referred to as a
"Fund," the "Funds," or individually by the state 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
Kentucky 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.
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 also seeks to provide a maximum level of
income which is exempt from the personal income taxes, if any,
for resident shareholders of the named state. The states of
Florida and Texas currently impose no state personal income
taxes.
Each 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 ten 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.
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.
A Statement of Additional Information ("SAI"), concerning the
Trust and the Funds described in this Prospectus, 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 above.
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.
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
Financial Highlights
About the Trust
Investment Objective and
Policies of Each Fund
Management of the Funds
Distributions to Shareholders
Taxation of the Funds
and Their Shareholders
How to Buy Shares of a Fund
Other Programs and Privileges
Available to Shareholders of the Funds
Exchange Privilege
How to Sell Shares of a Fund
Telephone Transactions
Valuation of a Fund's Shares
How to Get Information
Regarding an Investment in a Fund
Performance
General Information
Account Registrations
Important Notice Regarding
Taxpayer IRS Certifications
Portfolio Operations
Appendix A
Description of State Tax Treatment
Appendix B
Special Factors Affecting Each Fund
<TABLE>
<CAPTION>
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 the aggregate operating expenses of
the Class I shares (before fee waivers and expense reductions) for the
fiscal year ended February 28, 1995.
NORTH
ALABAMA FLORIDA GEORGIA KENTUCKY LOUISIANA MARYLAND MISSOURI CAROLINA TEXAS VIRGINIA
FUND 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 Class I
------------------------------------------------------------------------------------------
<S> <C> <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% 4.25%
*Deferred Sales Charge . . . . . NONE NONE NONE NONE NONE NONE NONE NONE NONE NONE
Annual Fund Operating Expenses
(as a percentage of average
net assets)
Management Fees . . . . . . . . 0.57% 0.47% 0.61% 0.63%^ 0.61% 0.58% 0.56% 0.56% 0.59% 0.55%
**12b-1 Fees . . . . . . . . . 0.07% 0.07% 0.07% 0.07% 0.07% 0.07% 0.07% 0.07% 0.07% 0.07%
Other Expenses:
Shareholder Servicing Costs . 0.02% 0.02% 0.02% 0.02% 0.02% 0.03% 0.02% 0.02% 0.02% 0.02%
Reports to Shareholders . . . 0.03% 0.02% 0.03% 0.03% 0.02% 0.03% 0.03% 0.02% 0.02% 0.03%
Other . . . . . . . . . . . . 0.04% 0.02% 0.04% 0.06 0.04% 0.03% 0.03% 0.04 0.04% 0.03%
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total other expenses . . . . . 0.09% 0.06% 0.09% 0.11% 0.08% 0.09% 0.08% 0.08% 0.08% 0.08%
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
**Total Fund Operating Expenses 0.73% 0.60% 0.77% 0.81%^ 0.76% 0.74% 0.71 0.71% 0.74% 0.70%
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
NORTH
ALABAMA FLORIDA GEORGIA LOUISIANA MARYLAND MISSOURI CAROLINA TEXAS VIRGINIA
FUND FUND FUND FUND FUND FUND FUND FUND FUND
Class II Class II Class II Class II Class II Class II Class II Class II Class II
--------------------------------------------------------------------------------------------------
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% 1.00%
++Deferred Sales Charge . . . 1.00% 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 . . . . . . . . 0.57% 0.47% 0.61% 0.61% 0.58% 0.56 0.56% 0.59% 0.55%
**Maximum 12b-1 Fees . . . . . 0.65% 0.65% 0.65% 0.65% 0.65% 0.65% 0.65% 0.65% 0.65%
Other Expenses:
Shareholder Servicing Costs . 0.02% 0.02% 0.02% 0.02% 0.03% 0.02% 0.02% 0.02% 0.02%
Reports to Shareholders . . . 0.03% 0.02% 0.03% 0.02% 0.03% 0.03% 0.02% 0.02% 0.02%
Other . . . . . . . . . . . . 0.04% 0.02% 0.04% 0.04% 0.03% 0.03% 0.04% 0.04% 0.03%
----- ----- ----- ----- ----- ----- ----- ----- -----
+++Total Other Expenses . . . 0.09 0.06% 0.09 0.08% 0.09% 0.08% 0.08% 0.08% 0.08%
----- ----- ----- ----- ----- ----- ----- ----- -----
**Total Fund Operating Expenses 0.31% 1.18% 1.35% 1.34% 1.32% 1.29% 1.29% 1.32% 1.28%
===== ===== ===== ===== ===== ===== ===== ===== =====
</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 following such investments. See "How to Sell Shares of a Fund -
Contingent Deferred Sales Charge."
**Rule 12b-1 fees for Class I shares reflect an annualized rate. Actual
Rule 12b-1 fees incurred by Class I shares of each Fund for the ten-month
period ended February 28, 1995, were 0.06%. Rule 12b-1 fees for Class II
shares reflect the maximum amount allowed pursuant to such class' plan of
distribution. Class I's plan was effective May 1, 1994, and Class II's plan
is effective May 1, 1995. 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.
^Represents the amounts that would have been payable to the investment
manager, absent a fee reduction by the investment manager. The investment
manager, however, has voluntarily agreed to limit its management fees and
assume responsibility for making payments to offset certain operating
expenses otherwise payable by the Franklin Kentucky Tax-Free Income Fund.
With this reduction, management fees and total operating expenses
represented 0.12% and 0.29%, respectively. This arrangement may be
terminated at any time.
+Although Class II shares have a lower front-end sales charge than Class
I shares, over time the higher Rule 12b-1 fees for Class II shares 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 less than 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.
++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 a Fund -
Contingent Deferred Sales Charge."
+++These figures are estimates based on actual expenses incurred by Class I
shares for the fiscal year ended February 28, 1995.
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 that an investor in
the classes will bear directly or indirectly. 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 and
applicable contingent deferred sales charges, 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.
One Three Five Ten
Name of Fund Year Years Years Years
Alabama Fund, Class I $50 $65 $81 $129
Alabama Fund, Class II $33 $51 $81 $166
Florida Fund, Class I $48 $61 $75 $114
Florida Fund, Class II $32 $47 $74 $152
Georgia Fund, Class I $50 $66 $83 $134
Georgia Fund, Class II $33 $52 $83 $171
Kentucky Fund, Class I $50 $67 $86 $138
Louisiana Fund, Class I $50 $66 $83 $133
Louisiana Fund, Class II $33 $52 $83 $170
Maryland Fund, Class I $50 $65 $82 $130
Maryland Fund, Class II $33 $52 $82 $168
Missouri Fund, Class I $49 $64 $80 $127
Missouri Fund, Class II $33 $51 $80 $164
North Carolina Fund, Class I $49 $64 $80 $127
North Carolina Fund, Class II $33 $50 $80 $164
Texas Fund, Class I $50 $65 $82 $130
Texas Fund, Class II $33 $52 $82 $168
Virgina Fund, Class I $49 $64 $80 $126
Virginia Fund, Class II $33 $50 $79 $163
The examples are based on the aggregate annual operating expenses
(before fee waivers or 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 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 a 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 Class I
share 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 Trust's Annual Report to
Shareholders dated February 28, 1995. The remaining figures, which are also
audited are not covered by the auditor's current report. Information regarding
Class II shares of each Fund will be included in this table after such shares
have been offered to the public for a reasonable period of time. See also
"General Information - Reports to Shareholders."
<TABLE>
<CAPTION>
PERIOD NET ASSET NET REALIZED DISTRIBUTIONS NET ASSET
ENDED VALUE NET &UNREALIZED TOTAL FROM FROM NET DISTRIBUTIONS VALUE
FEBRUARY BEGINNING INVESTMENT GAINS(LOSSES) INVESTMENT INVESTMENT FROM CAPITAL TOTAL AT END TOTAL
28 OF PERIOD INCOME ON SECURITIES OPERATIONS INCOME GAINS DISTRIBUTIONS OF PERIOD RETURN+
- ----- --------- ------ ------------- ---------- ------ ----- ------------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FRANKLIN ALABAMA TAX-FREE INCOME FUND:
1988(1) $10.00 $0.44 $(0.210 $0.650 $(0.110) $ -- $(0.110) $10.54 11.26%*
1989 10.54 0.79 0.005 0.795 (0.723) (0.022) (0.745) 10.59 7.59
1990 10.59 0.75 0.168 0.918 (0.768) -- (0.768) 10.74 8.61
1991 10.74 0.71 0.068 0.778 (0.768) -- (0.768) 10.75 7.27
1992 10.75 0.66 0.346 1.006 (0.756) -- (0.756) 11.00 9.51
1993 11.00 0.68 0.714 1.394 (0.684) -- (0.684) 11.71 12.84
1994 11.71 0.66 0.094 0.754 (0.664) -- (0.664) 11.80 6.35
1995 11.80 .66 (.500) 0.160 (0.650) -- (0.650) 11.31 1.54
FRANKLIN FLORIDA TAX-FREE INCOME FUND:
1988(1) 10.00 0.46 0.333 0.793 (0.183) -- (0.183) 10.61 14.36*
1989 10.61 0.81 (0.041) 0.769 (0.781) (0.008) (0.789) 10.59 7.28
1990 10.59 0.73 0.226 0.956 (0.816) -- (0.816) 10.73 8.98
1991 10.73 0.73 0.091 0.821 (0.801) -- (0.801) 10.75 7.69
1992 10.75 0.71 0.348 1.058 (0.768) -- (0.768) 11.04 10.02
1993 11.04 0.71 0.647 1.357 (0.717) -- (0.717) 11.68 12.45
1994 11.68 0.70 0.086 0.786 (0.696) -- (0.696) 11.77 6.65
1995 11.77 0.69 (.436) 0.254 (.674) -- (.674) 11.35 2.36
FRANKLIN GEORGIA TAX-FREE INCOME FUND:
1988(1) 10.00 0.44 0.230 0.670 (0.120) -- (0.120) 10.55 11.46*
1989 10.55 0.80 (0.034) 0.766 (0.720) (0.006) (0.726) 10.59 7.32
1990 10.59 0.79 0.264 1.054 (0.744) -- (0.744) 10.90 9.94
1991 10.90 0.72 0.098 0.818 (0.778) -- (0.778) 10.94 7.53
1992 10.94 0.65 0.349 0.999 (0.759) -- (0.759) 11.18 9.32
1993 11.18 0.68 0.658 1.338 (0.668) -- (0.668) 11.85 12.09
1994 11.85 0.66 0.154 0.814 (0.664) -- (0.664) 12.00 6.77
1995 12.00 0.66 (.458) .202 (.662) -- (.662) 11.54 1.87
FRANKLIN KENTUCKY TAX-FREE INCOME FUND:
1992(3) 10.00 0.15 0.164 0.314 (0.014) -- (0.014) 10.30 8.37*
1993 10.30 0.57 0.832 1.402 (0.652) -- (0.652) 11.05 13.81
1994 11.05 0.63 0.164 0.794 (0.664) -- (0.664) 11.18 7.07
1995 11.18 .61 (.625) (.015) (.625) -- (.625) 10.54 .11
FRANKLIN LOUISIANA TAX-FREE INCOME FUND:
1988(1) 10.00 0.46 0.136 0.596 (0.186) -- (0.186) 10.41 10.22*
1989 10.41 0.78 (0.028) 0.752 (0.772) -- (0.772) 10.39 7.27
1990 10.39 0.78 0.202 0.982 (0.792) -- (0.792) 10.58 9.41
1991 10.58 0.71 0.182 0.892 (0.792) -- (0.792) 10.68 8.50
1992 10.68 0.67 0.326 0.996 (0.776) -- (0.776) 10.90 9.49
1993 10.90 0.69 0.668 1.358 (0.688) -- (0.688) 11.57 12.61
1994 11.57 0.67 (0.005) 0.665 (0.675) -- (0.675) 11.56 5.63
1995 11.56 .66 (.549) .111 (.641) -- (.641) 11.03 1.14
</TABLE>
<TABLE>
<CAPTION>
RATIO OF RATIO OF
NET ASSETS EXPENSES NET INCOME PORTFOLIO
AT END AVERAGE TO AVERAGE TURNOVER
OF PERIOD NET ASSETS** NET ASSETS RATE
--------- ------------ ---------- ----
<S> <C> <C> <C> <C>
FRANKLIN ALABAMA TAX-FREE INCOME FUND:
1988(1) $2,472,150 -- % 5.64%* 54.25%
1989 6,079,209 -- 7.33 12.70
1990 21,685,469 0.42% 6.69 4.97
1991 50,181,717 0.70 6.45 28.36
1992 96,254,463 0.71 6.21 1.21
1993 144,479,529 0.68 6.04 11.27
1994 178,414,459 0.64 5.62 14.87
1995 170,051 0.72 5.88 19.85
FRANKLIN FLORIDA TAX-FREE INCOME FUND:
1988(1) 2,410,874 -- 6.22* 40.02
1989 33,752,190 0.24 6.42 8.64
1990 302,487,803 0.66 6.40 8.50
1991 605,720,260 0.57 6.76 10.80
1992 886,109,987 0.54 6.60 16.69
1993 1,164,827,366 0.54 6.30 11.72
1994 1,361,582,695 0.52 5.90 11.99
1995 1,265,018 0.59 6.16 14.34
FRANKLIN GEORGIA TAX-FREE INCOME FUND:
1988(1) 1,780,084 -- 5.98* 22.93
1989 5,640,334 -- 7.31 12.23
1990 13,876,530 0.09 7.07 14.43
1991 32,010,902 0.56 6.53 1.20
1992 68,546,388 0.72 6.11 6.18
1993 91,017,484 0.71 5.91 17.10
1994 120,882,389 0.69 5.48 16.75
1995 116.771 0.76 5.76 36.17
FRANKLIN KENTUCKY TAX-FREE INCOME FUND:
1992(3) 3,032,496 -- 3.52* 53.90
1993 11,678,098 -- 6.11 18.41
1994 28,057,237 -- 5.73 13.22
1995 32,831 .29 5.94 32.92
FRANKLIN LOUISIANA TAX-FREE INCOME FUND:
1988(1) 1,247,045 -- 6.21* 18.12
1989 4,257,203 -- 7.33 5.91
1990 17,695,533 0.04 7.10 16.65
1991 35,861,506 0.56 6.60 .76
1992 72,922,717 0.70 6.33 10.51
1993 95,367,808 0.70 6.18 23.37
1994 115,971,134 0.68 5.70 17.63
1995 104,980 0.75 5.98 32.28
</TABLE>
<TABLE>
<CAPTION>
NET ASSET NET REALIZED DISTRIBUTIONS NET ASSET
VALUE NET & UNREALIZED TOTAL FROM FROM NET DISTRIBUTIONS VALUE
PERIOD BEGINNING INVESTMENT GAINS(LOSSES) INVESTMENT INVESTMENT FROM CAPITAL TOTAL AT END TOTAL
ENDED OF PERIOD INCOME ON SECURITIES OPERATIONS INCOME GAINS DISTRIBUTIONS OF PERIOD RETURN
- ----- --------- ------ ------------- ---------- ------ ----- ------------- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FRANKLIN MARYLAND TAX-FREE INCOME FUND:
1989(2) $10.00 $0.18 $(0.054) $0.126 $(0.056) $ -- $(0.056) $10.07 2.98%*
1990 10.07 0.72 0.192 0.912 (0.672) -- (0.672) 10.31 9.01
1991 10.31 0.68 0.096 0.776 (0.716) -- (0.716) 10.37 7.57
1992 10.37 0.64 0.300 0.940 (0.710) -- (0.710) 10.60 9.21
1993 10.60 0.65 0.672 1.322 (0.652) -- (0.652) 11.27 12.64
1994 11.27 0.64 0.092 0.732 (0.642) -- (0.642) 11.36 6.40
1995 11.36 .63 (.453) 0.177 (.617) -- (0.617) 10.92 1.78
FRANKLIN MISSOURI TAX-FREE INCOME FUND:
1988(1) 10.00 0.46 0.058 0.518 (0.168) -- (0.168) 10.35 8.26*
1989 10.35 0.78 0.017 0.797 (0.707) -- (0.707) 10.44 7.74
1990 10.44 0.74 0.198 0.938 (0.738) -- (0.738) 10.64 8.94
1991 10.64 0.69 0.154 0.844 (0.744) -- (0.744) 10.74 7.96
1992 10.74 0.65 0.409 1.059 (0.729) -- (0.729) 11.07 10.04
1993 11.07 0.68 0.676 1.356 (0.676) -- (0.676) 11.75 12.40
1994 11.75 0.66 0.206 0.866 (0.676) -- (0.676) 11.94 7.29
1995 11.94 0.65 (.501) 0.149 (.649) -- (.649) 11.44 1.44
FRANKLIN NORTH CAROLINA TAX-FREE INCOME FUND:
1988(1) 10.00 0.43 0.206 0.636 (0.176) -- (0.176) 10.46 2.28*
1989 10.46 0.77 0.056 0.826 (0.715) (0.021) (0.736) 10.55 7.98
1990 10.55 0.74 0.221 0.961 (0.720) (0.001) (0.721) 10.79 9.06
1991 10.79 0.70 0.124 0.824 (0.742) (0.012) (0.754) 10.86 7.66
1992 10.86 0.64 0.352 0.992 (0.732) -- (0.732) 11.12 9.28
1993 11.12 0.67 0.754 1.424 (0.664) -- (0.664) 11.88 12.97
1994 11.88 0.65 0.054 0.704 (0.664) -- (0.664) 11.92 5.81
1995 11.92 0.65 (.550) .10 (.650) -- (0.650) 11.37 1.06
FRANKLIN TEXAS TAX-FREE INCOME FUND:
1988(1) 10.00 0.50 0.255 0.755 (0.195) -- (0.195) 10.56 12.72*
1989 10.56 0.78 0.044 0.824 (0.794) -- (0.794) 10.59 7.88
1990 10.59 0.84 0.114 0.954 (0.804) -- (0.804) 10.74 8.95
1991 10.74 0.73 0.104 0.834 (0.804) -- (0.804) 10.77 7.81
1992 10.77 0.67 0.370 1.040 (0.780) -- (0.780) 11.03 9.84
1993 11.03 0.69 0.661 1.351 (0.691) -- (0.691) 11.69 12.41
1994 11.69 0.69 0.032 0.722 (0.692) -- (0.692) 11.72 6.09
1995 11.72 .68 (.487) 0.193 (.663) -- (.663) 11.25 1.80
FRANKLIN VIRGINIA TAX-FREE INCOME FUND:
1988(1) 10.00 0.44 0.199 0.639 (0.189) -- (0.189) 10.45 11.90*
1989 10.45 0.77 (0.034) 0.736 (0.756) -- (0.756) 10.43 7.09
1990 10.43 0.73 0.226 0.956 (0.756) -- (0.756) 10.63 9.12
1991 10.63 0.69 0.136 0.826 (0.756) -- (0.756) 10.70 7.82
1992 10.70 0.66 0.362 1.022 (0.742) -- (0.742) 10.98 9.71
1993 10.98 0.67 0.704 1.374 (0.664) -- (0.664) 11.69 12.67
1994 11.69 0.67 0.136 0.806 (0.676) -- (0.676) 11.82 6.80
1995 11.82 0.66 (.499) 0.161 (.651) -- (0.651) 11.33 1.56
</TABLE>
<TABLE>
<CAPTION>
RATIO OF RATIO OF
NET ASSETS EXPENSES NET INCOME PORTFOLIO
AT END AVERAGE TO AVERAGE TURNOVER
OF PERIOD NET ASSETS** NET ASSETS RATE
--------- ------------ ---------- ----
<S> <C> <C> <C> <C>
FRANKLIN MARYLAND TAX-FREE INCOME FUND:
1989(2) $ 3,313,120 -- % 4.26%* 11.78%
1990 14,003,958 0.07 6.84 6.03
1991 33,420,583 0.54 6.50 12.14
1992 71,538,272 0.71 6.15 16.65
1993 115,872,984 0.71 6.00 14.73
1994 156,682,944 0.66 5.58 18.38
1995 153,145 0.73 5.86 20.30
FRANKLIN MISSOURI TAX-FREE INCOME FUND:
1988(1) 2,059,706 -- 6.27* 28.32
1989 7,995,789 -- 7.30 7.15
1990 28,479,088 0.40 6.66 8.69
1991 55,559,697 0.72 6.4 240.08
1992 110,940,345 0.71 6.21 16.40
1993 164,122,332 0.67 6.03 10.28
1994 228,148,50 80.64 5.55 11.02
1995 227,442 0.70 5.75 19.84
FRANKLIN NORTH CAROLINA TAX-FREE INCOME FUND:
1988(1) 1,650,297 -- 5.89* 10.34
1989 10,345,833 -- 7.09 12.35
1990 24,745,552 0.50 6.68 11.80
1991 50,328,348 0.74 6.37 7.99
1992 106,959,646 0.71 6.03 3.16
1993 156,517,172 0.67 5.86 8.48
1994 215,539,507 0.63 5.44 3.86
1995 216,263 0.70 5.75 25.05
FRANKLIN TEXAS TAX-FREE INCOME FUND:
1988(1) 1,140,685 -- 6.61* 41.50
1989 2,355,949 -- 7.65 6.95
1990 6,093,673 -- 7.26 3.53
1991 29,035,793 0.40 6.4 6.55
1992 123,721,525 0.70 6.14 6.44
1993 139,389,088 0.66 6.15 12.33
1994 148,683,984 0.65 5.85 20.18
1995 130,684 .73 6.05 6.36
FRANKLIN VIRGINIA TAX-FREE INCOME FUND:
1988(1) 2,621,061 -- 5.48* 65.51
1989 13,885,354 0.16 6.89 3.92
1990 38,572,122 0.60 6.55 1.06
1991 82,661,536 0.72 6.38 2.56
1992 152,615,121 0.68 6.17 4.33
1993 211,170,641 0.65 5.98 5.74
1994 260,913,071 0.62 5.65 6.86
1995 255,965 0.69 5.86 21.73
</TABLE>
* Annualized
(1) For the period September 1, 1987 (effective date of registration) to
February 29, 1988.
(2) For the period October 3, 1988 (effective date of registration) to February
28, 1989.
(3) For the period September 10, 1991 (effective date of registration) to
February 29, 1992.
+ Total return measures the change in value of an investment over the
periods indicated. It does not include the maximum initial sales charge
and assumes reinvestment of dividends and capital gains, if any, at net
asset value.
**During the periods indicated below, Franklin Advisers, Inc., the investment
manager, reduced its management fees and reimbursed other expenses incurred by
the Funds. Had such action not been taken, the ratio of operating expenses to
average net assets would have been as follows:
<TABLE>
<CAPTION>
RATIO OF RATIO OF
EXPENSES EXPENSES
TO AVERAGE TO AVERAGE
NET ASSETS NET ASSETS
---------- ----------
<S> <C> <C> <C>
Franklin Alabama Tax-Free Income Fund: Franklin Maryland Tax-Free Income Fund:
1988(1) . . . . . . . . . . . . . . . . . . 0.86%* 1989(2) . . . . . . . . . . . . . . . . . . . . . 0.65%*
1989 . . . . . . . . . . . . . . . . . . . 0.74 1990 . . . . . . . . . . . . . . . . . . . . . . 0.73
1990 . . . . . . . . . . . . . . . . . . . 0.72 1991 . . . . . . . . . . . . . . . . . . . . . . 0.73
1991 . . . . . . . . . . . . . . . . . . . 0.72 Franklin Missouri Tax-Free Income Fund:
Franklin Florida Tax-Free Income Fund: 1988(1) . . . . . . . . . . . . . . . . . . . . . 0.87*
1988(1) . . . . . . . . . . . . . . . . . . 0.88* 1989 . . . . . . . . . . . . . . . . . . . . . . 0.77
1989 . . . . . . . . . . . . . . . . . . . 0.74 1990 . . . . . . . . . . . . . . . . . . . . . . 0.72
1990 . . . . . . . . . . . . . . . . . . . 0.66 Franklin North Carolina Tax-Free Income Fund:
Franklin Georgia Tax-Free Income Fund: 1988(1) . . . . . . . . . . . . . . . . . . . . . 0.87*
1988(1) . . . . . . . . . . . . . . . . . . 0.87* 1989 . . . . . . . . . . . . . . . . . . . . . . 0.74
1989 . . . . . . . . . . . . . . . . . . . 0.76 1990 . . . . . . . . . . . . . . . . . . . . . . 0.71
1990 . . . . . . . . . . . . . . . . . . . 0.74 Franklin Texas Tax-Free Income Fund:
1991 . . . . . . . . . . . . . . . . . . . 0.74 1988(1) . . . . . . . . . . . . . . . . . . . . . 0.89*
Franklin Kentucky Tax-Free Income Fund: 1989 . . . . . . . . . . . . . . . . . . . . . . 0.76
1992(3) . . . . . . . . . . . . . . . . . . 0.82* 1990 . . . . . . . . . . . . . . . . . . . . . . 0.71
1993 . . . . . . . . . . . . . . . . . . . 0.81 1991 . . . . . . . . . . . . . . . . . . . . . . 0.75
1994 . . . . . . . . . . . . . . . . . . . 0.71 Franklin Virginia Tax-Free Income Fund:
1995 . . . . . . . . . . . . . . . . . . . 0.80
Franklin Louisiana Tax-Free Income Fund: 1988(1) . . . . . . . . . . . . . . . . . . . . . 0.87*
1988(1) . . . . . . . . . . . . . . . . . . 0.88* 1989 . . . . . . . . . . . . . . . . . . . . . . 0.75
1989 . . . . . . . . . . . . . . . . . . . 0.73 1990 . . . . . . . . . . . . . . . . . . . . . . 0.72
1990 . . . . . . . . . . . . . . . . . . . 0.70
1991 . . . . . . . . . . . . . . . . . . . 0.72
</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 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 only to
the ten series shown on the cover, of which only the Maryland
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 a Fund's
Shares"), 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 a Fund.")
Investment Objective
and Policies of Each Fund
Each Fund seeks to maximize income exempt from federal income
taxes and from the personal income taxes, if any, for resident
shareholders of the named state to the extent consistent with
prudent investing and the preservation of shareholders' capital.
Each Fund's objective is a fundamental policy and may not be
changed without shareholder approval. There is, of course, no
assurance that each Fund's objective will be achieved.
Each Fund will invest primarily in municipal securities of its
respective state and its municipalities, other political
subdivisions and public authorities, the interest on which is
exempt from federal income taxes and the personal income taxes,
if any, of its respective state.
Each 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, of its
respective state. Thus it is possible, although not anticipated,
that up to 20% of a Fund's net assets could be in municipal
securities from another state and/or in taxable obligations,
including municipal obligations such as "private activity bonds"
the interest on which may be subject to the alternative minimum
tax. To the extent that a state requires that a Fund consist of a
specified amount of obligations of such state or of the United
States government, or its agencies, instrumentalities,
commissions, possessions or territories which are exempt from
taxation under the laws of such state in order for any portion of
the distributions from such Fund to be exempt from income
taxation, a Fund will attempt to invest at least the minimum of
such amount in such securities. See "Taxation of the Funds and
Their Shareholders" for additional information.
Each 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 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 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 to have some speculative characteristics.
A description of the ratings is contained in Appendix A to 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 a 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
portfolio value, (i) each 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,
and (ii) a 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 that 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 in the highest quality commercial paper
rated A-1 by S&P or P-1 by Moody's. To the extent that a Fund is
restricted in its ability to take advantage of defensive steps
when necessary, such Fund's portfolio and the value of its shares
may be subject to greater risk than those of the other Funds
which retain this flexibility.
A 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 and (ii) lend up to 10% of
its portfolio securities to qualified securities dealers,
although each Fund currently intends to limit its lending of
securities to no more than 5% of its total assets. A complete
description of each Fund's investment restrictions is included
under "Investment Restrictions" in the SAI.
As a condition of doing business in the State of Texas, the Texas
Fund will limit its investments in securities that are not
readily marketable to 15% of average net assets at the time of
purchase and lend portfolio securities only if the securities
loaned are "marked to market" daily.
It is the policy of each Fund that illiquid securities (including
securities with legal or contractual restrictions on resale, or
other instruments which are not readily marketable or have no
readily ascertainable market value) may not constitute, at the
time of the purchase more than 10% of the value of the total net
assets of a 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
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 a 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 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 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 objectives, a Fund may
acquire private activity bonds if, in the investment manager's
opinion, such bonds represent the most attractive investment
opportunity then available to a Fund. For the 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
Alabama Fund 5.03%
Florida Fund 12.78%
Georgia Fund 9.95%
Kentucky Fund 12.42%
Louisiana Fund 12.24%
Maryland Fund 10.55%
Missouri Fund 6.38%
North Carolina Fund 7.54%
Texas Fund 15.92%
Virginia Fund 6.68%
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 prevailing market rates
on predesignated dates. The Funds may also invest in variable or
floating rate demand notes ("VRDNs"), which carry a demand
feature that permits a 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 a 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. A 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.
Although it is not a put option in the usual sense, such a demand
feature is sometimes known as a "put." Except for the Maryland
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 such 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. Because of the "put"
feature, the prices of the securities may be hgiher and the
yields lower than they otherwise would be for the same security.
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, they 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.
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 Moody's, S&P, or Fitch, 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 cancelled; (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, the following Funds held more than five percent of the
total face amount of the securities in their portfolios in COPs
and other municipal leases: (a) Kentucky, 19.0%; (b) Maryland,
5.1%; (c) Missouri, 28.0%; and (c) North Carolina, 12.8%.
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. Except for the Trust's Maryland
Fund, which is a non-diversified fund under the 1940 Act, the
Trust attempts to minimize the impact of individual credit risks
by diversifying each Fund's portfolio investments.
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 a 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 Fund generally will invest primarily in the
securities of its respective state, there are certain specific
factors and considerations concerning each state which may affect
the credit and market risk of the municipal securities which each
Fund purchases. These factors are described in Appendix B to this
Prospectus and in greater detail in the SAI.
As a fundamental policy, with respect to 75% of its net assets,
each Fund, except as stated below, 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 issuer
diversification.
The Maryland 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
Maryland 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 Maryland Fund were more broadly diversified. The Maryland
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 on its income 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 Maryland 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 Maryland Fund's total assets would be invested in
the securities of a single issuer or, with respect to 50% of its
total assets, more than 5% of such assets would be invested in
the securities of a single issuer.
How Shareholders Participate
in the Results of a Fund's 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 such Fund which the shareholder owns will increase.
If the securities owned by a Fund decrease in value, the value of
the shareholder's shares in such Fund will also decline. In this
way, shareholders participate in any change in the value of the
securities owned by a 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 a Fund's shares will fluctuate
with movements in the broader bond markets and changes in
interest rates will affect the value of a Fund's portfolio and
thus its share price. In particular, changes in interest rates
will affect the value of a Fund's portfolio and thus its 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 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 Funds
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 Class II shares to those Funds not currently offering
them.
Franklin Advisers, Inc. ("Advisers" or "Manager") serves as each
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 33 U.S. registered investment companies (111
separate series) with aggregate assets of over $73 billion,
approximately $40.2 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 Class I of each Fund was obligated to
pay to the Manager, as well as the fees actually paid, during the
fiscal year ended February 28, 1995 (as a percentage of average
net assets) were as follows:
Contractual Management
Management Fees Paid by
Fund Fees the Fund
Alabama Fund 0.57% 0.57%
Florida Fund 0.47% 0.47%
Georgia Fund 0.61% 0.61%
Kentucky Fund 0.63%* 0.12%*
Louisiana Fund 0.61% 0.61%
Maryland Fund 0.58% 0.58%
Missouri Fund 0.56% 0.56%
North Carolina Fund 0.56% 0.56%
Texas Fund 0.59% 0.59%
Virginia Fund 0.55% 0.55%
During the fiscal year ended February 28, 1995, total operating
expenses borne by Class I shares of a Fund, including fees paid
to the Manager and Investor Services, were as follows:
Total
Operating
Fund Expenses
Alabama Fund 0.72%
Florida Fund 0.59%
Georgia Fund 0.76%
Kentucky Fund 0.29%*
Louisiana Fund 0.75%
Maryland Fund 0.73%
Missouri Fund 0.70%
North Carolina Fund 0.70%
Texas Fund 0.73%
Virginia Fund 0.69%
*During the fiscal year ended February 28, 1995, management fees
totaling 0.63% of the average net assets of the Class I shares of
the Kentucky Fund would have accrued to Advisers. Total operating
expenses, including management fees, would have represented 0.80%
of the average net assets of such Fund. Pursuant to an agreement
by Advisers to limit its fees, Class I shares of the Kentucky
Fund paid management fees totaling 0.12% of the average net
assets of such Fund and operating expenses totaling 0.29%.
It is not anticipated that any of the Funds will incur a
significant amount of brokerage expenses because municipal
securities are generally traded on a "net" basis, that is, in
principal transactions without the addition or deduction of
brokerage commissions or transfer taxes. In the event that a 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 would 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 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.
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
"Plans") pursuant to Rule 12b-1 under the 1940 Act. The Rule 12b-
1 fees charged to each class will be based solely on the
distribution and servicing fees attributable to that particular
class. Any portion of fees remaining from either Plan after
distribution to securities dealers up to the maximum amount
permitted under each Plan may be used by the class to reimburse
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 a Fund's 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 Funds, Distributors or its affiliates.
The maximum amount which each Fund may pay 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 on a quarterly basis. All expenses of distribution and
marketing 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 Fund's
Class II shares' 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 Fund's Class II shares' 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 customers, or
similar activities related to furnishing personal services and/or
maintaining shareholder accounts.
During the first year after the purchase of Class II shares,
Distributors will keep a portion of the Plan fees assessed on
each Fund's Class II shares to partially recoup fees Distributors
pays to securities dealers. Distributors, or 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.
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 of the Funds.
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
dividends 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 such 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. Because ongoing
Rule 12b-1 expenses will be lower for Class I than Class II, the
per share dividends distributed to Class I shares will generally
be higher than those distributed to Class II shares.
Distribution Date
Although subject to change by the 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 front-end sales charge) on
the dividend reinvestment date. Dividend and capital gain
distributions are only eligible for investment at net asset value
in the same class of shares of a Fund or the same class of
another of the Franklin Templeton Funds. Shareholders have the
right to change their election with respect to the receipt of
distributions by notifying the Funds, 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, 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 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 its
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 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 on "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. 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 a 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, a
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 paid by a 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 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.
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 a Fund
Shares of the Funds are continuously offered through securities
dealers which execute an agreement with Distributors, the
principal underwriter of each Fund's shares. The use of the term
"securities dealer" includes other financial institutions which,
pursuant to an agreement with Distributors (directly or through
affiliates), handle customer orders and accounts with the Funds.
Such reference, however, is for convenience only and does not
indicate a legal conclusion of capacity. Sales of the shares of
the Funds may be restricted to residents of their respective
states. 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 Kentucky Fund offers only Class I
shares.
Class I. All 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. Voting rights attributable to each class will,
however, be different. 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 the average daily net
assets of such shares. With this 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 a 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 a Fund" for more information.
Class II. The current public offering price of Class II shares is
equal to the net asset value, plus a 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% per annum of the 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 a
Fund."
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 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.
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 seven years or less
of investment should consider purchasing Class II shares. Over
time, however, the higher annual Rule 12b-1 fees on the Class II
shares will accumulate 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 should also consider
that the higher Rule 12b-1 fees for Class II shares will
generally result in lower dividends and consequently lower yields
for Class II shares. See "General Information" in the SAI for
more information regarding the calculation of dividends and
yields.
Investors who qualify to purchase Class I shares at reduced sales
charges definitely should consider purchasing Class I shares,
especially if they intend to hold their shares for more than
seven years. Investors who qualify to purchase Class I shares at
reduced sales charges but who intend to hold their shares less
than seven 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 will be precluded from purchasing
Class II shares. See "How to Buy Shares of a Fund."
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.
Each class also has a separate schedule for compensating
securities dealers for selling a Fund's 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 a Fund's Shares
Shares of both classes of the Funds are offered at the public
offering price, which is 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 a 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. On orders for 100,000 shares or more, the offering price
will be calculated to four decimal places. On orders for less
than 100,000 shares, 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 a Fund's Shares."
Set forth below is a table of total front-end sales charges or
underwriting commissions and dealer concessions for Class I
shares.
Class I Shares -- Total Sales Charge
Size of As a Percentage As a Percentage Dealer
Transaction at of Offering of Net Amount Concession as a
Offering Price Price Invested Percentage of
Offering
Price*,***
Less than 4.25% 4.44% 4.00%
$100,000
$100,000 but 3.50% 3.63% 3.25%
less than
$250,000
$250,000 but 2.75% 2.83% 2.50%
less than
$500,000
$500,000 but 2.15% 2.20% 2.00%
less than
$1,000,000
$1,000,000 or none none (see below)**
more
*Financial institutions or their affiliated brokers may receive
an agency transaction fee in the percentages set forth above.
**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.
***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 dealer may be deemed to be an
underwriter as that term is defined in the Securities Act of
1933, as amended.
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
a Fund - 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(Registered Trademark) 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 (although certain investments may not have the same
schedule of sales charges and/or may not be subject to reduction)
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.
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:
Class II Shares -- Total Sales Charge
Size of As a As a Dealer
Transaction Percentage of Percentage of Concession As
at Offering Net Offering Net Amount a Percentage
Price Price Invested of Offering
Price*
any amount 1.00% 1.01% 1.00%
(less than $1
million)
*During the first year after the purchase of Class II shares,
Distributors will keep a portion of the Plan fees assessed on
Class II shares to partially recoup fees Distributors pays to
securities dealers. Distributors or one of its affiliates may
make an additional payment to the securities dealer, from its
own resources, of up to 1% of the amount invested.
Class II shares redeemed within 18 months of their purchase will
be assessed a contingent deferred sales charge of 1% 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.
Other Payments to Securities Dealers. 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 in the Franklin Templeton Funds. Compensation may include
financial assistance to securities dealers 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 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 such shares. 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 a 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 a Fund's shares 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 discounts, any Franklin Templeton
Investments may be combined with those of the investor's spouse
and children under the age of 21. In addition, the aggregate
investments of a trustee or other fiduciary account (for an
account under exclusive investment authority) may be considered
in determining whether a reduced sales charge is available, even
though there may be a number of beneficiaries of the account. 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 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 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 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. For more information,
see "Additional Information Regarding Purchases" in the SAI.
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 a 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 payments by such parties after
cessation of employment; (2) companies exchanging shares with or
selling assets pursuant to a merger, acquisition or exchange
offer; (3) accounts managed by the Franklin Templeton Group; (4)
registered securities dealers and their affiliates, for their
investment account only, and (5) registered personnel and
employees of securities dealers and by their spouses and family
members, in accordance with the internal policies and procedures
of the employing securities dealer.
For either Class I or Class II, the same class of shares of a
Fund may be purchased at net asset value by persons who have
redeemed, within the previous 120 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. Credit will be
given for any contingent deferred sales charge paid on the shares
redeemed and subsequently repurchased, but the period for which
such shares may be subject to a contingent deferred sales charge
will begin as of the date the proceeds are reinvested. 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 Funds' Shareholder Services Agent within 120 days
after the redemption. The 120 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 a
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 120 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."
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 charged the investor a contingent deferred sales charge
upon redemption 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 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).
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 a 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 A FUND CONSTITUTE A LEGAL INVESTMENT 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. 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 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.
Purchasing Class I and Class II Shares
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. Initial purchases of $1 million or more in a
single payment will be invested in Class I shares. There are no
conversion features attached to either class of shares.
Investors who qualify to purchase Class I shares at net asset
value should purchase Class I rather than Class II shares. See
the section "Purchases at Net Asset Value" and "Description of
Special Net Asset Value Purchases" above for a discussion of when
shares may be purchased at net asset value.
General
Securities laws of states in which each Fund's shares are offered
for sale may differ from the interpretations of federal law, and
banks and financial institutions selling a Fund's shares may be
required to register as dealers pursuant to state law.
Other Programs and Privileges
Available to a Fund's Shareholders
Certain of the programs and privileges described in this section
may not be available directly from a 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 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 in writing by the shareholder or by
the securities dealer.
Confirmations
A confirmation statement will be sent to each shareholder
quarterly to reflect the dividends rein- vested 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 each class of a 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
a 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 another fund in 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.
Payments 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 the account maintained
an annual balance of $10,000, only $1,200 could be withdrawn
through a once-yearly Systematic Withdrawal Plan free of charge;
and any amount over that $1,200 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 such 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 a Fund available to institutional accounts.
For further information, contact Franklin's 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, a Fund's 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. 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, minimum holding
periods 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 a Fund by telephone by calling
Investor Services at 1-800/632-2301 or the automated Franklin
TeleFACTS system (day or night) at 1-800/247-1753. If the
shareholder does not wish this privilege extended to a particular
account, such 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 originally
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 on which no sales charge was paid was transferred in
from a fund on which the investor paid a sales charge. 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.
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 a Fund -
Contingent Deferred Sales Charge."
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.
There are differences among the many Franklin Templeton Funds.
Before making an exchange, a shareholder should obtain and review
a current prospectus of the fund into which the shareholder
wishes to transfer.
If a substantial portion of a Fund's shareholders should, within
a short period, elect to redeem their shares of a Fund pursuant
to the exchange privilege, such 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 a Fund
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 a 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 only 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 a 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, 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 the
Funds or to exchange into the Funds. 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 a Fund
A shareholder may at any time liquidate shares 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 being redeemed, properly endorsed and in order for
transfer. The shareholder will then receive from such Fund the
value of the class of shares redeemed based upon the net asset
value per share 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 time of the New York Stock
Exchange ("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) a Fund 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 a Fund, (c) a Fund has been notified
of an adverse claim, (d) the instructions received by a Fund are
given by an agent, not the actual registered owner, (e) a 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 a Fund.
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 (other than a retirement account) - 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 Funds 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 the 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 closing time 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, government entities, and
qualified retirement plans 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 Franklin's 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 a Fund receives the shareholder's written
request in proper form. These documents, as described in the
preceding section, are required even if the shareholder's
securities dealer has placed the repurchase order. After receipt
of a repurchase order from the dealer, a Fund will still require
a signed letter of instruction and all other documents set forth
above. A shareholder's letter should reference a Fund and 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 a 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
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 a Fund as
soon as possible. 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 those
investments within the contingency period of 12 months of the
calendar month following their purchase. The charge is 1% of the
lesser of the 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. See "Purchases at Net Asset Value" under "How
to Buy Shares of a Fund."
Class II. Class II shares redeemed within the contingency period
of 18 months of the calendar month following 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 of those 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; and
followed by any shares held less than the contingency period, 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 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); and 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.
Requests for redemptions for 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
A 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 a Fund.
Other
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 a 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: (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, and (iv) exchange shares of a Fund as described in this
Prospectus by telephone. In addition, shareholders who complete
and file an Agreement as described under "How to Sell Shares of a
Fund - Redemptions by Telephone" 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 a 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. A Fund and Investor Services may
be liable for any losses due to unauthorized or fraudulent
instructions only if 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 to send written instructions to
a Fund 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.
The telephone transaction privilege may be modified or
discontinued by a Fund at any time upon 60 days' written notice
to shareholders.
Valuation of a Fund's Shares
The net asset value per share of each class of a Fund is
determined separately as of the 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 sales charge of each Fund).
The net asset value per share for each class of a 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 respective class of a Fund outstanding at the time. For the
purpose of determining the aggregate net assets of each Fund,
cash and receivables are valued at their realizable amounts.
Interest is recorded as accrued. 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, a Fund may utilize a
pricing service, bank or securities dealer to perform any of the
above described functions.
Each of the Fund's classes will bear, pro-rata, all of the common
expenses of that Fund. The net asset value of all outstanding
shares of each class of such Fund will be computed on a pro-rata
basis for each outstanding share based on the proportionate
participation in the Fund 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 a Fund may vary.
How to Get Information
Regarding an Investment in a 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 system, Class I shareholders
may obtain current price, yield or other performance information
specific to a Franklin fund; process an exchange 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.
By calling the Templeton Star Service, shareholders may obtain
current price and yield information specific to a Templeton fund,
regardless of class, or Franklin Class II shares; obtain account
information, request duplicate confirmation or year-end
statements and money fund checks, if applicable.
Share prices and account information specific to Templeton Class
I or II shares and Franklin Class II shares may also be accessed
on TeleFACTS by Franklin Class I and Class II shareholders.
The TeleFACTS system is accessible by calling 1-800/247-1753. The
Star Service is accessible by calling 1-800/654-0123. Franklin
Class I and Class II share codes for the Funds, which will be
needed to access system information, are:
FUND CODE FUND NAME
164 ALABAMA FUND, CLASS I
264 ALABAMA FUND, CLASS II
165 FLORIDA FUND, CLASS I
265 FLORIDA FUND, CLASS II
128 GEORGIA FUND, CLASS I
228 GEORGIA FUND, CLASS II
172 KENTUCKY FUND, CLASS I
168 LOUISIANA FUND, CLASS I
268 LOUISIANA FUND, CLASS II
160 MISSOURI FUND, CLASS I
260 MISSOURI FUND, CLASS II
170 NORTH CAROLINA FUND, CLASS I
270 NORTH CAROLINA FUND, CLASS II
162 TEXAS FUND, CLASS I
262 TEXAS FUND, CLASS II
163 VIRGINIA FUND, CLASS I
263 VIRGINIA FUND, CLASS II
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
Department Name Telephone No. Operation(Pacific Time)
(Monday through Friday)
Shareholder 1-800/632-2301 6:00 a.m. to 5:00 p.m.
Services
Dealer Services 1-800/524-4040 6:00 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 6:00 a.m. to 8:00 p.m.
8:30 a.m. to 5:00 p.m.
(Saturday)
Retirement Plans 1-800/527-2020 6:00 a.m. to 5:00 p.m.
TDD (hearing 1-800/851-0637 6:00 a.m. to 5:00 p.m.
impaired)
In order to ensure that the highest quality of service is being
provided, telephone calls placed to or by representatives in all
of Franklin's 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 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. They 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 Fund may also furnish total return quotations
for each class 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 for each class reflects the income per share earned
by a 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 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 for each class by dividing that class' 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 a fund's yield.
Yield and tax equivalent yield for each class, 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 a Fund's shareholders. Dividends or
distributions paid to shareholders of a class 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
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
a 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 a class'
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 each
class, 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 these shares. After a
sufficient period of time has passed, Class II performance data
will be available. Except as noted, it is likely, that the
performance data relating to Class II shares will reflect lower
total return and yield figures than those for Class I shares
because Class II Rule 12b-1 fees are higher than Class I Rule 12b-
1 fees. During at least the first year of operation Class II
share performance will be higher than Class I in light of the
higher initial sales charge applicable to Class I shares.
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. 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
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
Voting Rights
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 such 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 corporation 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 a 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.
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.
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 dealers must have executed dealer agreements
on file with Distributors. Unless a dealer agreement has been
executed and is on file with Distributors, a 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. In the future it may
be possible to effect such transfers 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 a 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 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 a
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 a 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
Mr. Kenny is responsible for portfolio recommendations and
decisions of all 27 Funds of the Tax-Free Trust since August,
1994. He is Senior Vice President of the investment manager and
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 Pomeroy
Portfolio Manager
Mr. Pomeroy has been responsible for portfolio recommendations
and decisions for the Alabama Fund, Florida Fund, Georgia Fund,
Maryland Fund, and North Carolina Fund since their inception. He
joined Advisers in 1986. He received a Bachelor of Arts degree in
Business Administration from San Francisco State University in
1986 and is a member of industry related committees and
associations.
Stella Wong
Portfolio Manager
Ms. Wong has been responsible for portfolio recommendations and
decisions for the Alabama Fund, Georgia Fund, Louisiana Fund,
Maryland Fund, North Carolina Fund, Texas Fund and Virginia Fund
since their inception. 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. She joined Advisers in 1986.
Andrew Jennings, Sr.
Vice President and Senior Portfolio Manager
Mr. Jennings has been responsible for portfolio recommendations
and decisions of the Louisiana 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 and Senior Portfolio Manager
Mr. Duerson has been responsible for portfolio recommendations
and decisions of the Missouri Fund, Texas Fund and Virginia Fund
since their inception. He joined Advisers in 1986. 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.
Sheila Amoroso
Portfolio Manager
Ms. Amoroso has been responsible for portfolio recommendations
and decisions of the Florida Fund, Kentucky Fund, and Missouri
Fund since their 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.
Bernie Schroer
Vice President and Senior Portfolio Manager
Mr. Schroer has been responsible for portfolio recommendations
and decisions of the Kentucky Fund since its inception. He joined
Advisers in 1987. From 1974 to 1984, he was the manager of
trading at Kidder Peabody. He has a degree in Finance from Santa
Clara University and is currently a member of municipal
securities industry related committees and associations.
Appendix A
Description of State Tax Treatment
The following information on the state income tax treatment of
dividends from the Funds is based upon correspondence and sources
believed to be reliable. Except where otherwise noted, the
information pertains to individual state income taxation only.
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.
Alabama
Section 40-18-14(2)f of the Alabama Code provides that interest
on obligations of the state of Alabama and any county,
municipality or other political subdivision thereof is exempt
from personal income tax. Section 40-18-14(2)d provides similar
tax-exempt treatment for interest on exempt obligations of the
U.S. government or its possessions (including Puerto Rico, Guam
and the Virgin Islands). In addition, Regulation Section 810-3-14-
.02(4)(b)2 and an administrative ruling of the Alabama Department
of Revenue, dated March 1, 1990, extend the exemption for
obligations of the U.S. government or its possessions to
distributions from a regulated investment company, such as the
Alabama Fund, to the extent that they are paid out of interest
earned on such exempt obligations. The March 1, 1990 ruling also
indicates that the exemption would apply to Alabama municipal
obligations. Tax-exempt treatment is generally not available for
distributions attributable to income earned on indirect U.S.
government obligations (GNMAs, FNMAs, etc.), for repurchase
agreements collateralized by U.S. government obligations, or for
obligations of other states and their political subdivisions. To
the extent such investments are made by a Fund, such as for
temporary or defensive purposes, such distributions will
generally be taxable on a pro rata basis.
Any distributions of net short-term and net long-term capital
gains earned by the Fund are fully includable in each individual
shareholder's Alabama taxable income and are currently taxed at
ordinary income tax rates.
Florida
Florida does not have a personal income tax but does have an
intangible personal property tax for residents. According to
Florida Statute Section 199.185 and Technical Assistance
Advisement No. 90(C)2-003, issued by the Florida Department of
Revenue on August 8, 1990 (as subsequently revised), shares in
regulated investment companies organized as business trusts, such
as the Florida Fund, will not be subject to Florida's intangible
property tax to the extent that the Fund is invested in
obligations of the U.S. government, its agencies,
instrumentalities and territories (including Puerto Rico, Guam
and the Virgin Islands) at the close of business on the last
business day of the calendar year. If the Fund invests all of the
remaining portion of its net asset value in exempt obligations of
the state of Florida or its municipalities or political
subdivisions on such date, then that remaining portion of the net
asset value of the Fund (and corresponding value of Fund shares)
will also be exempt from Florida's intangibles tax. If the Fund
invests, such as for temporary or defensive purposes, any of the
remaining portion of its portfolio in any asset which is taxable
under Florida's intangible tax law, including investments in
indirect federal obligations (GNMAs, FNMAs, etc.), in repurchase
agreements collateralized by U.S. government securities or in any
obligations of other states, then that remaining portion of the
net asset value of the Fund (and the corresponding value of Fund
shares) will be taxable under Florida's intangible property tax.
Georgia
Under Section 48-7-27(b)(1)(A) of the Georgia Code, interest on
obligations of the state of Georgia and its political
subdivisions, which is not otherwise included in federal adjusted
gross income, is exempt from the state's individual income tax.
Likewise, under Section 48-7-27(b)(2) interest on exempt
obligations of the U.S. government, its territories and
possessions (including Puerto Rico, Guam and the Virgin Islands),
or of any authority, commission, or instrumentality of the U.S.
government is also exempt from the state's individual income tax.
Since distributions from the Georgia Fund attributable to
interest on obligations of the state of Georgia and its political
subdivisions is excluded from federal adjusted gross income, they
will likewise be excluded from the Georgia individual income tax.
Under the administrative authority of the Georgia Department of
Revenue, the exempt treatment for interest derived from such
exempt obligations is also extended to distributions of regulated
investment companies, such as the Georgia Fund. Tax-exempt
treatment is generally not available for distributions
attributable to income earned on indirect U.S. government
obligations (GNMAs, FNMAs, etc.), for repurchase agreements
collateralized by U.S. government obligations, or for obligations
of other states and their political subdivisions. To the extent
such investments are made by a Fund, such as for temporary or
defensive purposes, such distributions will generally be taxable
on a pro rata basis.
The state of Georgia also imposes an intangible property tax on
the fair market value of intangible assets owned by residents on
January 1 of each year. The Georgia Department of Revenue has
recently announced that it will provide an exemption from
intangible property taxation to mutual fund shareholders to the
extent that the portfolio of the fund consists of U.S. government
obligations, where such fund is formed as business trust. At this
time, the Georgia Department of Revenue has not issued any
guidance on whether it will provide an exemption for obligations
issued by the state of Georgia or any of its political
subdivisions. Therefore under current law, shares of a mutual
fund investing in obligations issued by the state of Georgia or
any of its political subdivisions, such as the Georgia Fund,
appear to be remain subject to intangibles taxation.
Any distributions of net short-term and net long-term capital
gains earned by the Fund are fully included in each individual
shareholder's Georgia taxable income as dividend income and long-
term capital gain, respectively, and are currently taxed at
ordinary income tax rates.
Kentucky
Pursuant to Kentucky Revised Statute 141.010(10)(a) and (12)(a),
interest earned on exempt obligations of the U.S. government, its
agencies and instrumentalities, or its territories (including
Puerto Rico, Guam and the Virgin Islands) and obligations issued
by the Commonwealth of Kentucky or its political subdivisions
will be exempt from Kentucky's personal income tax. Under
Kentucky Income Tax Revenue Policy 42P161 (as revised December 1,
1990) dividends from regulated investment companies, such as the
Kentucky Fund, which are derived from such exempt obligations,
will also be exempt from state income tax. Tax-exempt treatment
is generally not available for distributions attributable to
income earned on indirect U.S. government obligations (GNMAs,
FNMAs, etc.), for repurchase agreements collateralized by U.S.
government obligations, or for obligations of other states and
their political subdivisions. To the extent such investments are
made by a Fund, such as for temporary or defensive purposes, such
distributions will generally be taxable on a pro rata basis.
Kentucky Revenue Circular 40C003 states that Section 170 of the
Kentucky Constitution exempts from intangible property taxation
obligations of Kentucky, and its counties, municipalities, and
taxing and school districts. The Revenue Circular further states
that though neither the Kentucky Constitution nor the Kentucky
Revised Statutes contain specific language to exempt federal
obligations from the intangible property tax, the courts of
Kentucky have recognized the power of the U.S. Congress to
declare that obligations of federal instrumentalities are exempt
from state taxation. According to a Kentucky Revenue Cabnet Tax
Alert dated July 1988, shares of a regulated investment company,
such as the Kentucky Fund, will not be subject to the intangibles
tax to the extent that the value of the shares is attributable to
such exempt obligations.
Any distributions of net short-term and net long-term capital
gains earned by the Fund are includable in each shareholder's
Kentucky adjusted gross income and are taxed at ordinary income
tax rates. Kentucky Revenue Circular 40C003 also states that gain
on the sale of some U.S. government and Kentucky obligations may
be exempt from state income tax, but the availability of the
exemption depends upon the specific legislation authorizing the
bonds.
Louisiana
Under Section 293 of Louisiana's individual income tax law,
interest earned on obligations of the state of Louisiana or its
political subdivisions is exempt from individual and corporate
income tax. Under Section 293, interest earned on qualifying
obligations of the U.S. government or its agencies and
possessions (including Puerto Rico, Guam and the Virgin Islands)
is also exempt from individual and corporate income tax. Under
Section 293, distributions from a regulated investment company,
such as the Louisiana Fund, will also be exempt from individual
and corporate income tax to the extent that they are derived from
interest earned on such exempt obligations. Tax-exempt treatment
is generally not available for distributions attributable to
income earned on indirect U.S. government obligations (GNMAs,
FNMAs, etc.), for repurchase agreements collateralized by U.S.
government obligations, or for obligations of other states and
their political subdivisions. To the extent such investments are
made by a Fund, such as for temporary or defensive purposes, such
distributions will generally be taxable on a pro rata basis.
Any distributions of net short-term and net long-term capital
gains earned by the Fund are included in each shareholder's
Louisiana taxable income and are currently taxed at ordinary
income tax rates.
Maryland
Since distributions from the Maryland Fund attributable to
interest on obligations of the state of Maryland and its
political subdivisions is excluded from federal taxable income,
they will likewise be exempt from Maryland's personal income tax.
Under Section 10-207 of the Tax General Article, interest on
exempt obligations of the U.S. government and any authority,
commission, instrumentality, possession or territory of the U.S.
(including Puerto Rico, Guam and the Virgin Islands) is also
exempt from Maryland's personal income tax. Under Section 10-
207(c-1) and Administrative Release No. 11, this exemption is
extended to distributions from a regulated investment company,
such as the Maryland Fund, to the extent such distributions are
paid out of interest earned on exempt obligations of the U.S.
government or its agencies and possessions (including Puerto
Rico, Guam and the U.S. Virgin Islands). Tax-exempt treatment is
generally not available for distributions attributable to income
earned on indirect U.S. government obligations (GNMAs, FNMAs,
etc.), for repurchase agreements collateralized by U.S.
government obligations, or for obligations of other states and
their political subdivisions. To the extent such investments are
made by a Fund, such as for temporary or defensive purposes, such
distributions will generally be taxable on a pro rata basis.
Any distributions of capital gains by the Fund derived from gain
realized from the sale or exchange of obligations issued by the
state of Maryland or its subdivisions may also be tax-exempt to
the Fund's shareholders. Distributions of all net short-term
capital gain and net long-term capital gain earned by the Fund on
non-Maryland obligations are includable in each shareholder's
Maryland adjusted gross income and are taxed at ordinary income
tax rates.
Missouri
Under Section 143.121 of the Revised Statutes of Missouri,
interest earned on exempt obligations of the U.S. government, its
authorities, commissions, instrumentalities, possessions or
territories (including Puerto Rico, Guam and the Virgin Islands),
or the State of Missouri, its political subdivisions or
authorities are exempt from Missouri personal income tax. Under
Missouri's income tax regulations (Title 12, Section 10-2.155), a
regulated investment company, such as the Missouri Fund, may pass
the tax-exempt character of such interest through to its
shareholders. Tax-exempt treatment is generally not available for
distributions attributable to income earned on indirect U.S.
government obligations (GNMAs, FNMAs, etc.), for repurchase
agreements collateralized by U.S. government obligations, or for
obligations of other states and their political subdivisions. To
the extent such investments are made by a Fund, such as for
temporary or defensive purposes, such distributions will
generally be taxable on a pro rata basis.
Any distributions of net short-term and net long-term capital
gains earned by the Fund are included in each shareholder's
Missouri taxable income and are currently taxed at ordinary
income tax rates.
North Carolina
Section 105-134.6(b) of the North Carolina General Statutes
provides that interest on obligations of the U.S. government, its
possessions, or its territories (including Puerto Rico, Guam and
the Virgin Islands) and obligations of the state of North
Carolina or its political subdivisions are exempt from state
income tax. Pursuant to a North Carolina Department of Revenue
Information Release dated October 4, 1990, dividends received
from a regulated investment company, such as the North Carolina
Fund, are exempt from personal income tax to the extent that the
distributions are derived from interest on such exempt
obligations. Tax-exempt treatment is generally not available for
distributions attributable to income earned on indirect U.S.
government obligations (GNMAs, FNMAs, etc.), for repurchase
agreements collateralized by U.S. government obligations, or for
obligations of other states and their political subdivisions. To
the extent such investments are made by a Fund, such as for
temporary or defensive purposes, such distributions will
generally be taxable on a pro rata basis.
Pursuant to an administrative Revenue Memorandum, distributions
attributable to net realized long-term capital gains earned by
the Fund on the sale or exchange of certain obligations of the
state of North Carolina or its political subdivisions may also be
tax-exempt to the Fund's shareholders. Distributions of all net
short-term capital gain and of net long-term capital gain earned
by the Fund on other North Carolina obligations and on non-North
Carolina obligations are includable in each shareholder's North
Carolina taxable income and are currently taxed at ordinary
income rates.
Under Section 105-203 of the North Carolina General Statutes,
units of ownership in the North Carolina Fund will not be subject
to the intangibles personal property tax as long as the Fund, on
December 31 of each year, is composed entirely of obligations of
the U.S. government and North Carolina or its political
subdivisions, or provided that at least 80% of the fair market
value of the assets of the Fund were invested in obligations of
North Carolina or its political subdivisions. For all years in
which this requirement is met, the Fund will file with the state
of North Carolina a certification in order for shareholders to
qualify for this exemption.
Under Section 17.08.0605 of the North Carolina Administrative
Code, in any case in which a fund does not meet the above
requirement that its investments consist entirely of U.S.
government or North Carolina obligations, for intangibles
property tax purposes, the state will allow shareholders to
reduce the value of their investment in such fund in direct
proportion to the percentage of the fund's investment in exempt
U.S. government or North Carolina obligations.
Texas
Texas does not presently impose any income tax on individuals,
trusts, or estates.
Virginia
Section 58.1-322 of the Code of Virginia provides that interest
on obligations of the state of Virginia, its political
subdivisions, and instrumentalities or direct obligations of the
U.S. government or its authority, commission, instrumentality or
territories (including Puerto Rico, Guam and the Virgin Islands)
is exempt from personal income tax. Under Virginia Regulation
Section 630-2-322, distributions from a regulated investment
company, such as the Virginia Fund, will also be exempt from
personal income tax if the Fund invests in such exempt
obligations. Tax-exempt treatment is generally not available for
distributions attributable to income earned on indirect U.S.
government obligations (GNMAs, FNMAs, etc.), for repurchase
agreements collateralized by U.S. government obligations, or for
obligations of other states and their political subdivisions. To
the extent such investments are made by a Fund, such as for
temporary or defensive purposes, such distributions will
generally be taxable on a pro rata basis.
Any distributions of net short-term and net long-term capital
gains earned by the Fund are included in each shareholder's
Virginia taxable income and are currently taxed at ordinary
income tax rates.
Appendix B
Special Factors Affecting Each Fund
The following information is a brief summary of factors affecting
each of the individual 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.
Alabama
Over the past decade, Alabama's economic base has diversified
somewhat from its concentration in the early 1980s in the
manufacturing, construction and agricultural sectors. This
diversification has been fueled by the growth in high tech firms
located in the Huntsville area and health care and business
services firms located in the Birmingham area. Government
employment also has surged, primarily in higher education. State
unemployment has remained near 7%, slightly higher than the
national average.
Although Alabama's economy faltered somewhat during the spring
and summer of 1993, it generally has outperformed the national
and east south central region economies over the past three
years. Alabama has instituted various programs, including
infrastructure improvements, worker training and tax incentives,
to lure new and expanding industries to the state, such as
Mercedes-Benz's new sport utility vehicle assembly plant near
Birmingham, that have resulted in Alabama investing over $1
billion annually.
The state's strengths include a diversifying economic base; an
expanding service sector; and a low cost structure that is
attractive for new business investment. The state, together with
other east south central states, is positioned for economic
expansion, with continued gains in services and trade as well as
gains in manufacturing, especially the wood and paper products
industry that benefits from Alabama's abundant supply of lumber
and timber. Weaknesses may show in the state's apparel, textile
and transportation equipment industries, which are vulnerable to
significant employment reductions as a result of the North-
American Free Trade Agreement, as Mexico and Canada offer lower-
cost business environments. Cutbacks in the national defense
budget will continue to lead to job losses with the closure or
downsizing of some of the state's military installations.
Florida
Florida's economy is experiencing slow but steady economic growth
driven by one the nation's fastest growing populations. Florida
has an estimated population of nearly 14 million, an increase of
over 38% from 1980 levels, and ranks as the fourth most populous
state in the nation. While high population growth has
strengthened the state's economy, such growth, along with the
state's large and growing elderly population, has put pressure on
government funding for health and human services, corrections,
education and transportation.
The state's economy centers on a growing trade and services
sector, although agriculture and tourism remain important
influences. Tourism has stabilized from the effects of the early
1990s recession. Since that recession, Florida has outperformed
the nation and the east south central region in employment and
personal income growth. By 1994 personal income had climbed to
match the national average.
In November 1994 Forida voters adopted a proposal to cap the
amount of taxes and other revenues that can be raised by the
state in any fiscal year without a two-thirds vote of each house
of the legislature to raise the cap. However, the measure
exempts revenues that are pledged to pay bonds and Medicaid and
proceeds from the state lottery. Consequently, the measure does
not appear to repesent any major impediment for state financing
needs.
Georgia
Once dependent upon agriculture, Georgia's economy now has
diversified into the manufacturing (textiles, food products,
paper products, electronic equipment and aircraft), trade and
services sectors. Atlanta has become the focus of economic growth
in the state and is the trade, service and transportation center
for the southeast region. Manufacturing predominates throughout
the rest of the state.
The state's economy has grown rapidly since the recession of the
early 1990s, with steady gains in employment and personal income
relative to the national figures. In 1994, Georgia ranked 29th
in personal income per capita, at 93% of the national average,
considerably above the 1969 level of 83%.
In 1992, the services sector accounted for approximately 23% of
employment, with trade (22%), government (17%), and the
manufacturing (16%) sectors accounting for most of the rest. Job
growth has centered mainly in the wholesale and retail trade
while manufacturing has grown only slightly. In mid-1994,
Georgia's unemployment rate was 4.9% versus the 5.9% national
average.
In March 1989, the U.S. Supreme Court ruled the imposition of
state income taxes on federal retirement benefits
unconstitutional when state and local retiree's benefits are
exempted from state income taxes. After this decision, several
lawsuits were filed in Georgia, with the plaintiffs seeking state
income tax refunds retroactive to 1980. The maximum potential
liability is estimated at $591 million. However, under the
state's three-year statute of limitations, the maximum liability
is estimated at $104 million.
Kentucky
Since the early 1990s recession, Kentucky's economy has shown
moderate growth. Kentucky's low costs of living and low cost of
doing business, combined with the commonwealth's aggressive
business recruitment and business incentive programs, have
enabled the commonwealth to add a number of high profile
corporate expansions and relocations over the past several years.
Kentucky's economic makeup mirrors national averages in terms of
employment and income by source. Kentucky's personal income
level, however, still is only approximately four-fifths of the
national average. Despite the impact of early 1990s recession on
Kentucky's export-oriented industries, the state's job and wealth
base continues to grow and, to a limited extent, diversify.
Over the longer term, however, dramatic improvements are needed
in Kentucky's educational system for it to remain economically
competitive. The state, through an education reform statute
passed in 1990, has made education its primary economic
development initiative. Success at this task, however, will not
be easy. Rural poverty and illiteracy, which permeate the state's
eastern and western regions, mean that the initiative will likely
take years, if not decades, to noticeably take effect.
Most economic development in Kentucky has occurred in the region
of the state bounded by Cincinnati on the north, Louisville on
the west, and Lexington on the east. Because of air access
provided to the region by Delta Air Lines Inc.'s hub airport
operations in northern Kentucky, an excellent highway network
connecting the region with most major U.S. markets, and good
higher education systems in the three metropolitan areas,
Kentucky's "Golden Triangle" has experienced strong economic
growth. The remainder of the commonwealth, however, has not
prospered nearly as much.
Louisiana
With its energy-oriented economy, Louisiana's efforts at
diversification have been slow, and the state has experienced the
effects of reduced domestic oil production in recent years.
Louisiana is dependent on both production of oil and natural gas,
as well as petrochemicals. As the state's energy sector has
shrunk, services have replaced energy as the leading employment
sector.
Decreased population and labor force, combined with a modest
amount of job growth in recent years, has permitted Louisiana to
experience a modest recovery from the depths of its energy-
related downturn. Following losses in both population and labor
force from 1987-1990, modest labor force growth occurred in 1991,
with an increase of 3.1% over the prior year. Since then
employment has remained level. Louisiana's population reached its
peak of 4.5 million in 1986, after which it began to decline,
reaching 4.2 million only four years later.
Legalized gambling, both in New Orleans and on riverboats, is
seen by the state as a potential source of economic rejuvenation
in the tourism industry. The state also has realized that sectors
beyond tourism and energy need development in the long run for
the state to become insulated from their cyclical nature.
Unemployment in 1994 was 7.8%, above the national average. Recent
years have seen the mining industry experience sharp employment
declines, although this sector still employs some 46,000 people.
The service sector has shown the most growth in recent years and
by 1994 constituted approximately 25% of the employment base.
Some manufacturing growth continues to take place, mostly in the
defense and textile industires.
Louisiana's economic recovery is held back by an undereducated
work force, low income and limited wealth, and an economy that
largely exports raw materials and imports finished goods. Per
capita personal income reached its peak at 98.3% of national
levels in 1981 (during the oil boom years) but by 1994 had
slipped to only 79% of the national average.
The state constitution is a major obstacle to achieving financial
stability. It limits revenue raising capacity and has prevented
the state from replacing the revenues once generated by the
energy sector. It also limits spending flexibility and requires a
large share of revenues to go to constitutionally protected
functions, primarily education and transportation.
Maryland
Maryland's economic base is well diversified. Services, trade,
finance and government are the leading sectors of employment and
income. Compared to national averages, manufacturing as a source
of employment plays a less significant role (8.5%), and it is the
state's most volatile sector. Government employment (19.9%) and
income is much larger for Maryland than the nation, primarily
because of the state's close proximity to Washington, D.C.
Maryland still is recovering slowly from the early 1990s
recession, which was particularly severe in the mid-atlantic
region and which significantly affected Maryland's construction,
real estate, retail trade, and some services. The state
unemployment rate remains below the national average, but
employment growth has been relatively slow, averaging only 0.5%
annually since the end of 1991. The state expects only gradual
jobs growth averaging about 2% annually through 1996.
Maryland's 1993 $23,920 per capita income remains high at
approximately 115% of the national average. Maryland's total
personal income has grown annually over the past few years, but
at substantially slower rates than in prior years, primarly due
to declining federal defense spending and corporate
restructurings.
Missouri
Because Missouri is a manufacturing, financial and agricultural
state, its diverse economy mirrors and is closely linked to the
national economy. While both of the state's two largest
manufacturing industries, motor vehicles and defense-related
products, experienced significant layoffs in the early 1990s,
both have recovered and stabilized. Motor vehicles are even
poised for expansion, for automakers have announce plans for the
construction or expansion of several Missouri auto plants.
The construction sector, buoyed by flood damage reconstruction,
and the tourism sector grew in 1994, helping Missouri's
unemployment rate drop below 4% for the first time since 1979.
Employment is expected to be stable through 1996. However, the
defense industry remains vulnerable to military cost cutting and
base closures.
During the 1980s, Missouri's per capita personal income grew at a
compound annual growth rate of 6.5%, the same rate as the U.S.
Per capita income grew 5.5% from 1991 to 1992, lagging the
nation's rate of 6.2% and rose 4.0% in 1993. The state expects
personal income to grow 6.0% in fiscal 1995 and 5.5% in fiscal
1996.
North Carolina
North Carolina ranks among the top ten states in terms of
economic growth, as measured by job and personal income growth.
North Carolina's unemployment rate fell to near 4% near the end
of fiscal 1994, over 1.5% below the national rate. Job gains were
strongest in durable goods manufacturing, services government and
finance. The state expects future job growth will be strongest
in durable manufacturing, services and retail trade. Aggregate
personal income rose 5.6% in fiscal 1994, and North Carolina is
predicting a 4.5% increase for fiscal 1995, although wealth
levels remain below the national rate.
Diversification into finance, services, trade, research and high
technology manufacturing is reducing the state's historical
dependence on agriculture, textiles, and furniture manufacturing.
Tobacco remains the primary agricultural commodity, but the
industry faces some uncertainty following significant press and
congressional scruitiny and talks of additional cigarette taxes.
Population growth in the state has been strong, perhaps partly
reflecting its attraction to retirees. Continued corporate
relocation to the state, especially in the Research Triangle Area
near Raleigh/Durham, will be key to employment growth through the
1990s.
Texas
Since the oil price crash in the mid-1980s, the Texas economy has
stabilized and diversified away from energy-related industries
and now more closely resembles the national economy. As a result,
Texas was impacted more by the early 1990s national recession
than by the early 1980s recession, when the energy sector
provided insulation from national trends. Despite this adversity,
the state's economy still outperformed the national economy since
the latest recession.
By the end of calendar 1993, services accounted for nearly 26% of
employment, trade accounted for 24% of jobs and total
manufacturing exceeded 13%. Much of the new growth in the 1990s
has been in high-technology and related industries. Construction
experienced a near-banner year in 1994.
With a population of 18 million, Texas places second among
states, up 20% from the 1980 census. Good employment prospects
make the state a popular destination. The population is projected
to increase 1.4% annually from 1995 through 2000. The state
anticipates that personal income will increase 6.4% annually
through 1996.
The devaluation of the Mexican peso in December 1994 could have a
negative short-term impact on the Texas economy. State analysts
indicate that a significant slowdown in Mexican exports due to
the devaluation could reduce state economic growth by 0.5% in
1995. Retail sales along the Texas/Mexico border also could be
adversely affected.
Virginia
The Commonwealth's economy remains strong and diversified despite
the recent economic slowdown and some future uncertainties due to
expected defense-related cutbacks. Due to Virginia's diverse
economic base, however, the unemployment rate has remained
relatively low (5.1% for the last quarter in 1993). During
fiscal 1994, the commonwealth's recovery gained momentum with
employment growth occurring in business services, retail trade
and construction.
The commonwealth is made up of a variety of local economies, with
the northern Virginia area comprising the largest. In terms of
population and building activity, northern Virginia has been the
fastest-growing area in the commonwealth. Growth has been spurred
by employment opportunities provided for both civilian and
military personnel in, and directly related to, the federal
government. The prospect of a lower defense budget and fewer
defense contracts could lead to some structural changes in two of
Virginia's major local economies (northern Virginia and
Norfolk/Newport News) where defense and a substantial military
presence have played an important role. However, the commonwealth
continues to enjoy such advantages as its strategic mid-Atlantic
location, port facilities, proximity of its largest local economy
to Washington, D.C., and a major international airport in the
northern Virginia area.
The employment base, consisting primarily of trade, government,
and services sectors, showed substantial growth during the 1980s,
primarily in the services and trade sectors. Direct defense jobs,
including civilian, consituted approximately 14% of employment in
1991. Because of the impact of federal defense cutbacks, the
commonwealth is actively seeking economic diversification,
especially in high technology, trade and tourism. As the mix
shifts away from defense-related manufacturing, however, slower
annual personal income growth should be expected.
In March 1989, the U.S. Supreme Court ruled the imposition of
state income taxes on federal retirement benefits
unconstitutional when state and local retiree's benefits are
exempted from state income taxes. After this decision, several
lawsuits were filed in Virginia, with the plaintiffs seeking
state income tax refunds. The maximum potential liability was
estimated in February 1992 at $705 million. Pending further
litigation, Virginia passed a $340 million settlement for
retirees' claims, to paid out over five years. The settlement
will be void if total claims rejecting the settlement offer
exceed $20 million.
FRANKLIN TAX-FREE TRUST
PROSPECTUS
May 1, 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. As of May 1,
1995, most of the series offer two classes of shares 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 Class II
Franklin Arizona Tax-Free Franklin Arizona Tax-Free
Income Fund, Class I Income Fund, Class II
Franklin Colorado Tax-Free Franklin Colorado Tax-Free
Income Fund, Class I Income Fund, Class II
Franklin Connecticut Tax-Free Franklin Connecticut Tax-Free
Income Fund, Class I Income Fund, Class II
Franklin High Yield Tax-Free Franklin High Yield Tax-Free
Income Fund, Class I Income Fund, Class II
Franklin Indiana Tax-Free not available
Income Fund, Class I
Franklin New Jersey Tax-Free Franklin New Jersey Tax-Free
Income Fund, Class I Income Fund, Class II
Franklin Oregon Tax-Free Income Franklin Oregon Tax-Free Income
Fund, Class I Fund, Class II
Franklin Pennsylvania Tax-Free Franklin Pennsylvania Tax-Free
Income Fund, Class I Income Fund, Class II
Franklin Puerto Rico Tax-Free Franklin Puerto Rico Tax-Free
Income Fund, Class I Income Fund, Class I
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.
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.
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.
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 listed above.
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
Financial Highlights
About the Trust
Investment Objective and
Policies of Each Fund
Investment Risk Considerations
Management of the Trust
Distributions to Shareholders
Taxation of the Funds
and Their Shareholders
How to Buy Shares of the Funds
Other Programs and Privileges
Available to Shareholders of the Funds
Exchange Privilege
How to Sell Shares of a Fund
Telephone Transactions
Valuation of Shares of the Funds
How to Get Information Regarding
an Investment in a Fund
Performance
General Information
Account Registrations
Important Notice Regarding
Taxpayer IRS Certifications
Portfolio Operations
Appendix A -
Description of State Tax Treatment
Appendix B -
Special Factors Affecting Each State Fund
Appendix C -
Description of Municipal Securities Ratings
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>
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%
===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
<TABLE>
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>
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 following
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 five 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:
One Year Three Five Ten Years
Name of Fund Years 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
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
-----------------------------------------------------------------------------------------------------------------
NET ASSET NET REALIZED DISTRIBUTIONS NET ASSET
YEAR VALUE AT NET & UNREALIZED TOTAL FROM FROM NET DISTRIBUTIONS VALUE
ENDED BEGINNING INVESTMENT GAIN (LOSS) INVESTMENT INVESTMENT FROM CAPITAL TOTAL AT END
FEBRUARY 28 OF YEAR INCOME ON SECURITIES OPERATIONS INCOME GAINS DISTRIBUTIONS OF YEAR RETURN+
- ----------- --------- ---------- ------------- ---------- ------------- ------------- ------------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FRANKLIN ARIZONA TAX-FREE INCOME FUND:
1988(4) $10.00 $0.42 $ 0.170 $0.590 $(0.180) -- $(0.180) $10.41 9.88%*
1989 10.41 0.75 (0.040) 0.710 (0.748) $(0.002) (0.750) 10.37 6.86
1990 10.37 0.71 0.198 0.908 (0.768) -- (0.768) 10.51 8.70
1991 10.51 0.70 0.128 0.828 (0.768) -- (0.768) 10.57 7.92
1992 10.57 0.67 0.308 0.978 (0.728) -- (0.728) 10.82 9.45
1993 10.82 0.68 0.733 1.413 (0.663) -- (0.663) 11.57 13.22
1994 11.57 0.66 0.020 0.680 (0.670) -- (0.670) 11.58 5.76
1995 11.58 0.65 (0.481) 0.169 (0.639) -- (0.639) 11.11 1.63
<CAPTION>
RATIOS/SUPPLEMENTAL DATA
-----------------------------------------------------
RATIO OF RATIO OF NET
NET ASSETS EXPENSES INVESTMENT
YEAR AT END TO AVERAGE INCOME PORTFOLIO
ENDED OF YEAR NET ASSETS** TO AVERAGE TURNOVER
FEBRUARY 28 (IN 000'S) NET ASSETS RATE
- ----------- ---------- ------------ ------------ ---------
<S> <C> <C> <C> <C>
1988(4) $ 7,885 -- 6.20%* 24.07%
1989 65,710 0.51% 6.58 26.64
1990 214,606 0.68 6.53 20.82
1991 412,912 0.59 6.58 4.13
1992 585,986 0.56 6.37 1.56
1993 707,702 0.55 6.11 5.67
1994 796,838 0.54 5.65 14.17
1995 720,801 0.60 5.86 18.65
</TABLE>
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE
-----------------------------------------------------------------------------------------------------------------
NET ASSET NET REALIZED DISTRIBUTIONS NET ASSET
YEAR VALUE AT NET & UNREALIZED TOTAL FROM FROM NET DISTRIBUTIONS VALUE
ENDED BEGINNING INVESTMENT GAIN (LOSS) INVESTMENT INVESTMENT FROM CAPITAL TOTAL AT END
FEBRUARY 28 OF YEAR INCOME ON SECURITIES OPERATIONS INCOME GAINS DISTRIBUTIONS OF YEAR RETURN+
- ----------- --------- ---------- ------------- ---------- ------------- ------------- ------------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FRANKLIN COLORADO TAX-FREE INCOME FUND:
1988(4) $10.00 $0.46 $0.117 $0.577 $(0.177) -- $(0.177) $10.40 9.00%*
1989 10.40 0.79 0.076 0.866 (0.736) -- (0.736) 10.53 8.41
1990 10.53 0.73 0.196 0.926 (0.756) -- (0.756) 10.70 8.76
1991 10.70 0.70 0.056 0.756 (0.756) -- (0.756) 10.70 7.07
1992 10.70 0.68 0.361 1.041 (0.741) -- (0.741) 11.00 9.93
1993 11.00 0.70 0.845 1.545 (0.695) -- (0.695) 11.85 14.26
1994 11.85 0.68 0.100 0.780 (0.690) -- (0.690) 11.94 6.49
1995 11.94 0.67 (0.568) 0.102 (0.662) -- (0.662) 11.38 1.05
<CAPTION>
RATIOS/SUPPLEMENTAL DATA
-----------------------------------------------------
RATIO OF RATIO OF NET
NET ASSETS EXPENSES INVESTMENT
YEAR AT END TO AVERAGE INCOME PORTFOLIO
ENDED OF YEAR NET ASSETS** TO AVERAGE TURNOVER
FEBRUARY 28 (IN 000'S) NET ASSETS RATE
- ----------- ---------- ------------ ------------ ---------
<S> <C> <C> <C> <C>
1988(4) $ 1,969 -- 6.91%* 22.46%
1989 11,026 -- 7.25 7.83
1990 38,315 0.56% 6.63 0.82
1991 69,715 0.74 6.54 17.72
1992 110,085 0.70 6.44 21.46
1993 159,280 0.67 6.20 5.66
1994 202,158 0.64 5.69 10.85
1995 194,564 0.70 5.94 28.83
</TABLE>
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE
-----------------------------------------------------------------------------------------------------------------
NET ASSET NET REALIZED DISTRIBUTIONS NET ASSET
YEAR VALUE AT NET & UNREALIZED TOTAL FROM FROM NET DISTRIBUTIONS VALUE
ENDED BEGINNING INVESTMENT GAIN (LOSS) INVESTMENT INVESTMENT FROM CAPITAL TOTAL AT END
FEBRUARY 28 OF YEAR INCOME ON SECURITIES OPERATIONS INCOME GAINS DISTRIBUTIONS OF YEAR RETURN+
- ----------- --------- ---------- ------------- ---------- ------------- ------------- ------------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FRANKLIN CONNECTICUT TAX-FREE INCOME FUND:
1989(6) $10.00 $0.20 $0.017 $0.217 $(0.057) -- $(0.057) $10.16 5.16%*
1990 10.16 0.70 0.184 0.884 (0.684) -- (0.684) 10.36 8.65
1991 10.36 0.64 0.024 0.664 (0.684) -- (0.684) 10.34 6.39
1992 10.34 0.62 0.211 0.831 (0.681) -- (0.681) 10.49 8.16
1993 10.49 0.64 0.664 1.304 (0.634) -- (0.634) 11.16 12.60
1994 11.16 0.62 0.080 0.700 (0.630) -- (0.630) 11.23 6.16
1995 11.23 0.62 (0.597) 0.023 (0.613) -- (0.613) 10.64 .37
<CAPTION>
RATIOS/SUPPLEMENTAL DATA
-----------------------------------------------------
RATIO OF RATIO OF NET
NET ASSETS EXPENSES INVESTMENT
YEAR AT END TO AVERAGE INCOME PORTFOLIO
ENDED OF YEAR NET ASSETS** TO AVERAGE TURNOVER
FEBRUARY 28 (IN 000'S) NET ASSETS RATE
- ----------- ---------- ------------ ------------ ---------
<S> <C> <C> <C> <C>
1989(6) $ 5,637 -- 4.68%* 5.21
1990 22,793 0.36% 6.37 3.69
1991 48,035 0.71 6.10 8.65
1992 88,184 0.71 6.11 28.28
1993 126,816 0.69 5.97 28.52
1994 163,050 0.65 5.54 5.54
1995 155,623 0.71 5.83 75.72
</TABLE>
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE
--------------------------------------------------------------------------------------------------------
NET ASSET NET REALIZED DISTRIBUTIONS NET ASSET
YEAR VALUE AT NET & UNREALIZED TOTAL FROM FROM NET DISTRIBUTIONS VALUE
ENDED BEGINNING INVESTMENT GAIN (LOSS) INVESTMENT INVESTMENT FROM CAPITAL TOTAL AT END TOTAL
FEBRUARY 28 OF YEAR INCOME ON SECURITIES OPERATIONS INCOME GAINS DISTRIBUTIONS OF YEAR RETURN+
- ----------- --------- ---------- ------------- ---------- ------------- ------------- ------------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FRANKLIN INDIANA TAX-FREE INCOME FUND:
1988(4) $10.00 $0.45 $ 0.209 $0.659 $(0.189) -- $(0.189) $10.47 11.28%*
1989 10.47 0.79 (0.014) 0.776 (0.756) -- (0.756) 10.49 7.47
1990 10.49 0.80 0.236 1.036 (0.756) -- (0.756) 10.77 9.86
1991 10.77 0.74 0.096 0.836 (0.776) -- (0.776) 10.83 7.78
1992 10.83 0.69 0.325 1.015 (0.775) -- (0.775) 11.07 9.53
1993 11.07 0.71 0.828 1.538 (0.708) -- (0.708) 11.90 14.10
1994 11.90 0.68 0.108 0.788 (0.678) -- (0.678) 12.01 6.53
1995 12.01 0.66 (0.608) 0.052 (0.662) -- (0.662) 11.40 .58
<CAPTION>
RATIOS/SUPPLEMENTAL DATA
-----------------------------------------------------
RATIO OF RATIO OF NET
NET ASSETS EXPENSES INVESTMENT
YEAR AT END TO AVERAGE INCOME PORTFOLIO
ENDED OF YEAR NET ASSETS** TO AVERAGE TURNOVER
FEBRUARY 28 (IN 000'S) NET ASSETS RATE
- ----------- ---------- ------------ ------------ ---------
<S> <C> <C> <C> <C>
1988(4) $ 1,693 -- 6.70%* -- %
1989 5,875 -- 7.41 10.67
1990 11,310 0.06% 7.34 0.06
1991 14,946 0.51 6.91 24.60
1992 23,914 0.50 6.60 0.03
1993 37,367 0.59 6.16 7.98
1994 47,870 0.71 5.62 16.12
1995 46,583 0.81 5.84 26.49
</TABLE>
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE
--------------------------------------------------------------------------------------------------------
NET ASSET NET REALIZED DISTRIBUTIONS NET ASSET
YEAR VALUE AT NET & UNREALIZED TOTAL FROM FROM NET DISTRIBUTIONS VALUE
ENDED BEGINNING INVESTMENT GAIN (LOSS) INVESTMENT INVESTMENT FROM CAPITAL TOTAL AT END TOTAL
FEBRUARY 28 OF YEAR INCOME ON SECURITIES OPERATIONS INCOME GAINS DISTRIBUTIONS OF YEAR RETURN+
- ----------- --------- ---------- ------------- ---------- ------------- ------------- ------------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FRANKLIN NEW JERSEY TAX-FREE INCOME FUND:
1989(5) $10.00 $0.58 $ 0.317 $0.897 $(0.375) $(0.002) $(0.377) $10.52 11.20%*
1990 10.52 0.71 0.230 0.940 (0.780) -- (0.780) 10.68 8.87
1991 10.68 0.69 0.238 0.928 (0.768) -- (0.768) 10.84 8.79
1992 10.84 0.68 0.348 1.028 (0.708) -- (0.708) 11.16 9.65
1993 11.16 0.69 0.694 1.384 (0.688) (0.006) (0.694) 11.85 12.55
1994 11.85 0.67 (0.016) 0.654 (0.684) -- (0.684) 11.82 5.39
1995 11.82 0.66 (.55) 0.11 (0.65) -- (0.65) 11.28 1.12
<CAPTION>
RATIOS/SUPPLEMENTAL DATA
-----------------------------------------------------
RATIO OF RATIO OF NET
NET ASSETS EXPENSES INVESTMENT
YEAR AT END TO AVERAGE INCOME PORTFOLIO
ENDED OF YEAR NET ASSETS** TO AVERAGE TURNOVER
FEBRUARY 28 (IN 000'S) NET ASSETS RATE
- ----------- ---------- ------------ ------------ ---------
<S> <C> <C> <C> <C>
1989(3) $ 19,973 0.25% 6.09%* 7.44%
1990 99,299 0.73 6.41 10.86
1991 258,514 0.65 6.40 1.84
1992 332,536 0.60 6.30 3.66
1993 433,702 0.59 6.06 14.12
1994 561,130 0.57 5.60 4.16
1995 533,937 0.63 5.86 31.05
</TABLE>
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE
--------------------------------------------------------------------------------------------------------
NET ASSET NET REALIZED DISTRIBUTIONS NET ASSET
YEAR VALUE AT NET & UNREALIZED TOTAL FROM FROM NET DISTRIBUTIONS VALUE
ENDED BEGINNING INVESTMENT GAIN (LOSS) INVESTMENT INVESTMENT FROM CAPITAL TOTAL AT END TOTAL
FEBRUARY 28 OF YEAR INCOME ON SECURITIES OPERATIONS INCOME GAINS DISTRIBUTIONS OF YEAR RETURN+
- ----------- --------- ---------- ------------- ---------- ------------- ------------- ------------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FRANKLIN OREGON TAX-FREE INCOME FUND:
1988(4) $10.00 $0.44 $ 0.046 $0.486 $(0.116) -- $(0.116) $10.37 6.56%*
1989 10.37 0.72 0.046 0.766 (0.696) -- (0.696) 10.44 7.44
1990 10.44 0.69 0.165 0.855 (0.705) -- (0.705) 10.59 8.11
1991 10.59 0.68 0.148 0.828 (0.708) -- (0.708) 10.71 7.87
1992 10.71 0.63 0.384 1.014 (0.704) -- (0.704) 11.02 9.61
1993 11.02 0.66 0.702 1.362 (0.652) -- (0.652) 11.73 12.52
1994 11.73 0.64 (0.021) 0.619 (0.649) -- (0.649) 11.70 5.15
1995 11.70 0.63 (0.493) 0.137 (0.617) -- (0.617) 11.22 1.36
<CAPTION>
RATIOS/SUPPLEMENTAL DATA
-----------------------------------------------------
RATIO OF RATIO OF NET
NET ASSETS EXPENSES INVESTMENT
YEAR AT END TO AVERAGE INCOME PORTFOLIO
ENDED OF YEAR NET ASSETS** TO AVERAGE TURNOVER
FEBRUARY 28 (IN 000'S) NET ASSETS RATE
- ----------- ---------- ------------ ------------ ---------
<S> <C> <C> <C> <C>
1988(4) $ 5,436 -- 6.16%* 14.49%
1989 24,453 0.45% 6.72 15.08
1990 73,798 0.70 6.28 12.58
1991 123,486 0.70 6.40 10.74
1992 208,972 0.65 6.09 4.65
1993 303,719 0.62 5.87 7.78
1994 375,684 0.58 5.47 9.42
1995 349,458 0.65 5.71 26.44
</TABLE>
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE
--------------------------------------------------------------------------------------------------------
NET ASSET NET REALIZED DISTRIBUTIONS ET ASSET
YEAR VALUE AT NET & UNREALIZED TOTAL FROM FROM NET DISTRIBUTIONS VALUE
ENDED BEGINNING INVESTMENT GAIN (LOSS) INVESTMENT INVESTMENT FROM CAPITAL TOTAL AT END TOTAL
FEBRUARY 28 OF YEAR INCOME ON SECURITIES OPERATIONS INCOME GAINS DISTRIBUTIONS OF YEAR RETURN+
- ----------- --------- ---------- ------------- ---------- ------------- ------------- ------------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FRANKLIN PENNSYLVANIA TAX-FREE INCOME FUND:
1987(3) $10.00 $0.17 $ 0.060 $ 0.230 -- -- $ 0.000 $10.23 9.20%*
1988 10.23 0.72 (0.799) (0.079) $(0.660) $(0.001) (0.661) 9.49 (0.53)
1989 9.49 0.69 0.060 0.750 (0.720) -- (0.720) 9.52 7.97
1990 9.52 0.66 0.190 0.850 (0.720) -- (0.720) 9.65 8.86
1991 9.65 0.65 (0.090) 0.560 (0.720) -- (0.720) 9.49 5.76
1992 9.49 0.64 0.380 1.020 (0.670) -- (0.670) 9.84 10.99
1993 9.84 0.64 0.703 1.343 (0.633) -- (0.633) 10.55 13.84
1994 10.55 0.63 0.014 0.644 (0.634) -- (0.634) 10.56 5.99
1995 10.56 0.62 (0.406) 0.214 (0.614) -- (0.614) 10.16 2.22
<CAPTION>
RATIOS/SUPPLEMENTAL DATA
-----------------------------------------------------
RATIO OF RATIO OF NET
NET ASSETS EXPENSES INVESTMENT
YEAR AT END TO AVERAGE INCOME PORTFOLIO
ENDED OF YEAR NET ASSETS** TO AVERAGE TURNOVER
FEBRUARY 28 (IN 000'S) NET ASSETS RATE
- ----------- ---------- ------------ ------------ ---------
<S> <C> <C> <C> <C>
1987(3) $ 1,706 -- 3.95%* 3.80%
1988 20,663 0.24% 7.21 18.69
1989 73,851 0.59 6.97 1.56
1990 180,720 0.73 6.66 6.31
1991 305,592 0.62 6.82 5.23
1992 391,301 0.59 6.71 4.44
1993 505,845 0.58 6.34 5.87
1994 615,546 0.56 5.90 4.73
1995 587,366 0.63 6.15 12.91
</TABLE>
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE
--------------------------------------------------------------------------------------------------------
NET ASSET NET REALIZED DISTRIBUTIONS NET ASSET
YEAR VALUE AT NET & UNREALIZED TOTAL FROM FROM NET DISTRIBUTIONS VALUE
ENDED BEGINNING INVESTMENT GAIN (LOSS) INVESTMENT INVESTMENT FROM CAPITAL TOTAL AT END TOTAL
FEBRUARY 28 OF YEAR INCOME ON SECURITIES OPERATIONS INCOME GAINS DISTRIBUTIONS OF YEAR RETURN+
- ----------- --------- ---------- ------------- ---------- ------------- ------------- ------------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FRANKLIN PUERTO RICO TAX-FREE INCOME FUND:
1986(1) $10.00 $0.62 $ 0.925 $1.545 $(0.355) -- $(0.355) $11.19 16.92%*
1987 11.19 0.85 0.139 0.989 (0.872) $(0.017) (0.889) 11.29 8.92
1988 11.29 0.72 (0.588) 0.132 (0.852) -- (0.852) 10.57 1.29
1989 10.57 0.70 0.042 0.742 (0.772) -- (0.772) 10.54 7.06
1990 10.54 0.71 0.235 0.945 (0.725) -- (0.725) 10.76 8.91
1991 10.76 0.76 0.040 0.800 (0.720) -- (0.720) 10.84 7.45
1992 10.84 0.69 0.301 0.991 (0.711) -- (0.711) 11.12 9.31
1993 11.12 0.70 0.673 1.373 (0.683) -- (0.683) 11.81 12.48
1994 11.81 0.68 0.034 0.714 (0.694) -- (0.694) 11.83 5.95
1995 11.83 0.67 (.504) 0.166 (0.686) -- (0.686) 11.31 1.60
<CAPTION>
RATIOS/SUPPLEMENTAL DATA
-----------------------------------------------------
RATIO OF RATIO OF NET
NET ASSETS EXPENSES INVESTMENT
YEAR AT END TO AVERAGE INCOME PORTFOLIO
ENDED OF YEAR NET ASSETS** TO AVERAGE TURNOVER
FEBRUARY 28 (IN 000'S) NET ASSETS RATE
- ----------- ---------- ------------ ------------ ---------
<S> <C> <C> <C> <C>
1986(1) $ 1,638 -- 6.55%* 26.52%
1987 22,913 0.28% 5.83 1.68
1988 66,598 0.75 6.67 41.98
1989 80,431 0.72 6.76 50.57
1990 82,819 0.70 6.65 14.12
1991 91,601 0.70 7.08 6.09
1992 112,714 0.70 6.45 15.01
1993 144,806 0.69 6.18 10.37
1994 175,036 0.66 5.77 5.10
1995 176,888 0.73 5.95 18.30
</TABLE>
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE
-----------------------------------------------------------------------------------------------------------------
NET ASSET NET REALIZED DISTRIBUTIONS NET ASSET
YEAR VALUE AT NET & UNREALIZED TOTAL FROM FROM NET DISTRIBUTIONS VALUE
ENDED BEGINNING INVESTMENT GAIN (LOSS) INVESTMENT INVESTMENT FROM CAPITAL TOTAL AT END TOTAL
FEBRUARY 28 OF YEAR INCOME ON SECURITIES OPERATIONS INCOME GAINS DISTRIBUTIONS OF YEAR RETURN+
- ----------- --------- ---------- ------------- ---------- ------------- ------------- ------------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND:
1987(2) $10.00 $0.62 $ 0.222 $0.842 $(0.142) -- $(0.142) $10.70 8.73%*
1988 10.70 1.00 (0.409) 0.591 (0.951) -- (0.951) 10.34 5.70
1989 10.34 0.79 0.240 1.030 (0.870) -- (0.870) 10.50 10.87
1990 10.50 0.81 0.120 0.930 (0.890) -- (0.890) 10.54 8.80
1991 10.54 0.82 (0.210) 0.610 (0.840) -- (0.840) 10.31 5.71
1992 10.31 0.78 0.230 1.010 (0.840) -- (0.840) 10.48 9.97
1993 10.48 0.79 0.624 1.414 (0.784) $(0.100) (0.794) 11.10 13.72
1994 11.10 0.76 0.169 0.929 (0.779) -- (0.779) 11.25 8.33
1995 11.25 0.74 (0.509) 0.231 (0.741) -- (0.741) 10.74 2.28
<CAPTION>
RATIOS/SUPPLEMENTAL DATA
------------------------------------------------------
RATIO OF RATIO OF NET
NET ASSETS EXPENSES INVESTMENT
YEAR AT END TO AVERAGE INCOME PORTFOLIO
ENDED OF YEAR NET ASSETS** TO AVERAGE TURNOVER
FEBRUARY 28 (IN 000'S) NET ASSETS RATE
- ----------- ----------- ------------ ------------ ---------
<S> <C> <C> <C> <C>
1987(2) $ 2,604 -- 7.10%* 118.29%
1988 103,807 0.65% 7.79 26.65
1989 746,018 0.61 7.68 2.02
1990 1,575,016 0.54 7.52 23.41
1991 1,718,082 0.52 7.90 70.60
1992 2,110,055 0.53 7.73 102.57
1993 2,742,765 0.54 7.45 33.46
1994 3,372,533 0.53 6.79 16.09
1995 3,287,270 0.60 6.92 15.89
</TABLE>
(1) For the period April 3, 1985 (Effective date of registration) to February
28, 1986.
(2) For the period March 1, 1986 (Effective date of registration) to February
28, 1987.
(3) For the period December 1, 1986 (Effective date of registration) to February
28, 1987.
(4) For the period September 1, 1987 (Effective date of registration) to
February 29, 1988.
(5) For the period April 23, 1988 (Effective date of registration) to February
28, 1989.
(6) For 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:
<TABLE>
<CAPTION>
RATIO OF
EXPENSES
TO AVERAGE
NET ASSETS
----------
<S> <C>
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
1989(6)................................... 0.65%*
1990...................................... 0.72%
1991...................................... 0.72%
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:
1989(5)................................... 0.66%*
Franklin Oregon Tax-Free Income Fund:
1989...................................... 0.73%
Franklin Pennsylvania Tax-Free Income Fund:
1989...................................... 0.75%
</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 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
NRSR0s.
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 a Fund's total assets.
More details in these types of transactions as well as a complete
description of each 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
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.
Moody's and/or Average Weighted
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 amount 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 (112
separate series) with aggregate assets of over $74 billion,
approximately $40.2 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:
Class I Fund Name Management Fees Paid
Arizona Fund 0. %
Colorado Fund 0. %
Connecticut Fund 0. %
High Yield Fund 0. %
Indiana Fund 0. %
New Jersey Fund 0. %
Oregon Fund 0. %
Pennsylvania Fund 0. %
Puerto Rico Fund 0. %
It is not anticipated that any of the Funds will incur a
significant amount of brokerage expenses because municipal
securities are generally traded on a "net" basis, that is, in
principal transactions without the addition or deduction of
brokerage commissions or transfer taxes. 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 triy 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:
Fund Name Total Operating Expenses
Arizona Fund 0. %
Colorado Fund 0. %
Connecticut Fund 0. %
High Yield Fund 0. %
Indiana Fund 0. %
New Jersey Fund 0. %
Oregon Fund 0. %
Pennsylvania Fund 0. %
Puerto Rico Fund 0. %
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
"Plans") pursuant to Rule 12b-1 under the 1940 Act. The Rule 12b-
1 fees charged to each class will be based solely on the
distribution and servicing fees attributable to that particular
class. Any portion of fees remaining from either Plan after
distribution to securities dealers up to the maximum amount
permitted under each Plan may be used by the class to reimburse
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, 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 Funds, Distributors or its affiliates.
The maximum amount which each Fund may pay 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 on a quarterly basis. All expenses of distribution and
marketing 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 on a quarterly basis. 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.
Distributors, or 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 after the purchase
of Class II shares, Distributors will keep a portion of the Plan
fees assessed on each Class II shares to partially recoup fees
Distributors pays to securities dealers.
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 of the Funds.
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 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.
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. Because ongoing
Rule 12b-1 expenses will be lower for Class I than Class II, the
per share dividends distributed to Class I shares will generally
be higher than those distributed to Class II shares.
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 requested otherwise in writing or on the Shareholder
Application, 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 front-end sales charge) on the
dividend reinvestment date. Dividend and capital gain
distributions are only eligible for investment 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 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, 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
principal underwriter of each Fund's shares. The use of the term
"securities dealer" includes other financial institutions which,
pursuant to an agreement with Distributors (directly or through
affiliates), 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. Voting rights attributable to each class will,
however, be different. 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 .10% of average daily net
assets of such shares. With this 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 a 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 sales charge of 1% of
the amount invested. Class II shares are also subject to a
contingent deferred sales charge of 1.0% 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."
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 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.
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 seven years or less
of investment should consider purchasing Class II shares. Over
time, however, the higher annual Rule 12b-1 fees on the Class II
shares will accumulate and 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 should also consider
that the higher Rule 12b-1 fees for Class II shares will
generally result in lower dividends and consequently lower yields
for Class II shares. See "General Information" in the SAI for
more information regarding the calculation of dividends and
yields.
Investors who qualify to purchase Class I shares at reduced sales
charges definitely should consider purchasing Class I shares,
especially if they intend to hold their shares for more than
seven years. Investors who qualify to purchase Class I shares at
reduced sales charges but who intend to hold their shares less
than seven 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 will be precluded from purchasing
Class II shares. See "How to Buy Shares of the Funds."
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.
Each class also has a separate schedule for compensating
securities dealers for selling shares of the Funds. 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
Shares of both classes are offered at the public offering price,
which is 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. 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 of total front-end sales charges or
underwriting commissions and dealer concessions for Class I
shares.
Class I Shares Total Sales Charge
Size of As a Percentage As a Percentage Dealer
Transaction at of Offering of Net Amount Concession as a
Offering Price Price Invested Percentage of
Offering Price*
Less than 4.25% 4.44% 4.00%
$100,000
$100,000 but 3.50% 3.63% 3.25%
less than
$250,000
$250,000 but 2.75% 2.83% 2.50%
less than
$500,000
$500,000 but 2.15% 2.20% 2.00%
less than
$1,000,000
$1,000,000 none none (see below)**
or more
*Financial institutions or their affiliated brokers may receive
an agency transaction fee in the percentages set forth above.
**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.
***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 dealer may be deemed to be an
underwriter as that term is defined in the Securities Act of
1933, as amended.
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(Registered Trademark) 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 (although certain investments may not have the same
schedule of sales charges and/or may not be subject to reduction)
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.
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:
Class II Shares Total Sales Charge
Size of As a As a Dealer
Transaction Percentage of Percentage of Concession As
at Offering Net Offering Net Amount a Percentage
Price Price Invested of Offering
Price*
any amount 1.00% 1.01% 1.00%
(less than $1
million)
*During the first year after the purchase of Class II shares,
Distributors will keep a portion of the Plan fees assessed on
Class II shares to partially recoup fees Distributors pays to
securities dealers. Distributors or one of its affiliates may
make an additional payment to the securities dealer, from its own
resources, of up to 1% of the amount invested.
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.
Other Payments to Securities Dealers. 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 in the Franklin Templeton Funds. Compensation may include
financial assistance to securities dealers 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 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 such shares. 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 discounts, any Franklin Templeton
Investments may be combined with those of the investor's spouse
and children under the age of 21. In addition, the aggregate
investments of a trustee or other fiduciary account (for an
account under exclusive investment authority) may be considered
in determining whether a reduced sales charge is available, even
though there may be a number of beneficiaries of the account. 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 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 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 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. For more information,
see "Additional Information Regarding Purchases" in the SAI.
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 payments by such parties after
cessation of employment; (2) companies exchanging shares with or
selling assets pursuant to a merger, acquisition or exchange
offer; (3) registered securities dealers and their affiliates,
for their investment account only, and (4) registered personnel
and employees of securities dealers and by their spouses and
family members, in accordance with the internal policies and
procedures of the employing securities dealer.
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 120 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. Credit will be
given for any contingent deferred sales charge paid on the shares
redeemed and subsequently repurchased, but the period for which
such shares may be subject to a contingent deferred sales charge
will begin as of the date the proceeds are reinvested. 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 120 days
after the redemption. The 120 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 120 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."
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
which charged the investor a contingent deferred sales charge
upon redemption 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. 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 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.
Purchasing Class I and Class II Shares
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. Initial purchases of $1 million or more in a
single payment will be invested in Class I shares. There are no
conversion features attached to either class of shares.
Investors who qualify to purchase Class I shares at net asset
value should purchase Class I rather than Class II shares. See
the section "Purchases at Net Asset Value" and "Description of
Special Net Asset Value Purchases" above for a discussion of when
shares may be purchased at net asset value.
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 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 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 in writing 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 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 another fund in 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.
Payments 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 the account maintained
an annual balance of $1,000, only $120 could be withdrawn through
a once-yearly Systematic Withdrawal Plan free of charge; and
amount over that $120 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 Franklin's
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. 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, minimum holding
periods 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 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 originally
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 on which no sales charge was paid was transferred in
from a fund on which the investor paid a sales charge. 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.
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 Funds -
Contingent Deferred Sales Charge."
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.
There are differences among the many Franklin Templeton Funds.
Before making an exchange, a shareholder should obtain and review
a current prospectus of the fund into which the shareholder
wishes to transfer.
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 only 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 for purposes of exchanging or redeeming shares.
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, 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 of the Funds or to exchange into the Funds. 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 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 (generally 1:00 p.m. Pacific time) each day that the
New York Stock Exchange (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 (other than a retirement account) - 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 the 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 prior to the 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, government entities, and
qualified retirement plans 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 Franklin's 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, as described in
the preceding section, are required even if the shareholder's
securities dealer has placed the repurchase order. 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 redemption proceeds will not earn
dividends or interest during the time between receipt of the
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 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 those
investments within the contingency period of 12 months of the
calendar month following their purchase. The charge is 1% of the
lesser of the 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. See "Purchases at Net Asset Value" under "How
to Buy Shares of the Fund."
Class II. Class II shares redeemed within the contingency period
of 18 months of the calendar month following 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 of those 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; and
followed by any shares held less than the contingency period, 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 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); and redemptions initiated by a Fund due to a
shareholder's account falling below the minimum specified account
size.
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 for 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 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
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: (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, and (iv) exchange shares of a Fund 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 Fund - Redemptions by Telephone" 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 Fund and Investor Services
may be liable for any losses due to unauthorized or fraudulent
instructions only if 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 to 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.
The telephone transaction privilege may be modified or
discontinued by the Funds at any time upon 60 days' written
notice to shareholders.
Valuation of Shares of the Funds
The net asset value per share of each Fund (and each class) is
determined separately as of the 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 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
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 of the Fund 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, shareholders may access the automated
Franklin TeleFACTS system (day or night) at 1-800/247-1753 to
obtain current price, yield or other performance information
specific to a fund in the Franklin Funds, process an exchange as
discussed under the "Exchange Privilege", and request duplicate
confirmation or year-end statements, money fund checks, if
applicable, and deposit slips. Current prices for the Templeton
Funds are also available through TeleFACTS.. The Funds' code
numbers, which will be needed to access system information, are
listed below. 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.
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
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, CLASS II
*Follow the Fund code by the # sign
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:
Department Name Telephone No. Hours of Operation
(Pacific time) (Monday
through Friday)
Shareholder Services 1-800/632-2301 6:00 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 6:00 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 6:00 a.m. to 8:00 p.m.,
8:30 a.m. to 5:00 p.m.
(Saturday)
Retirement Plans 1-800/527-2020 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 6:00 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's 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 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 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 a Fund's
portfolio investments; it is calculated by dividing the net
investment income per share for each class of the Funds during a
recent 30-day period by the class' 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 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 of a class of the Funds. 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. A taxable equivalent distribution rate
demonstrates the taxable distribution rate necessary to produce
an after tax distribution rate equivalent to a class'
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 a class'
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 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. Except as noted, it is likely that the
performance data relating to Class II of each Fund will reflect
lower total return and yield figures than those for Class I
shares because Class II Plan fees are higher than Class I Plan
fees, for periods of five years or less, in light of the higher
initial sales charge applicable to Class I shares.
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. Copies may be obtained by investors or
shareholders, 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
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.
Voting Rights
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 business trust 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.
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.
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. In the future it may
be possible to effect such transfers 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 in 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 tax-exempt bonds and the equity trading
desk for 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. The Puerto Rico Fund has received a ruling
from the Commonwealth of Puerto Rico indicating that income
distributions from the Fund are not subject to the Puerto Rico
income tax for individuals or corporations, to the extent that
such distributions are derived from Puerto Rico obligations.
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.
May 1, 1995
Franklin Tax-Free Trust
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo, California 94403-7777
Investment Manager
Franklin Advisers, Inc.
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo, California 94403-7777
Principal Underwriter
Franklin/Templeton Distributors, Inc.
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo, California 94403-7777
Shareholder Services Agent
Franklin/Templeton Investor Services, Inc.
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo, California 94403-7777
Legal Counsel
Stradley, Ronon, Stevens & Young
2600 One Commerce Square
Philadelphia, Pennsylvania 19103
Independent Auditors
Coopers & Lybrand L.L.P.
333 Market Street
San Francisco, California 94105
Custodian
Bank of America
555 California Street, 4th Floor
San Francisco, California 94104
For an enlarged version of this prospectus please call 1-800/DIAL
BEN.
Your Representative Is:
MAY 1, 1995
Franklin Tax-Free Trust
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo, California 94403-7777
Investment Manager
Franklin Advisers, Inc.
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo, California 94403-7777
Principal Underwriter
Franklin/Templeton Distributors, Inc.
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo, California 94403-7777
Shareholder Services Agent
Franklin/Templeton Investor Services, Inc.
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo, California 94403-7777
Legal Counsel
Stradley, Ronon, Stevens & Young
2600 One Commerce Square
Philadelphia, Pennsylvania 19103
Independent Auditors
Coopers & Lybrand L.L.P.
333 Market Street
San Francisco, California 94105
Custodian
Bank of America
555 California Street, 4th Floor
San Francisco, California 94104
For an enlarged version of this prospectus please call 1-800/DIAL
BEN.
Your Representative Is:
Franklin Federal Intermediate-Term Tax-Free Income Fund
Franklin Tax-Free Trust
PROSPECTUS May 1, 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
Financial Highlights
About the Trust
Investment Objective
and Policies of the Fund
Management of the Fund
Distributions to Shareholders
Taxation of the Fund
and Its Shareholders
How to Buy Shares of the Fund
Other Programs and Privileges
Available to Fund Shareholders
Exchange Privilege
How to Sell Shares of the Fund
Telephone Transactions
Valuation of Fund Shares
How to Get Information Regarding
an Investment in the Fund
Performance
General Information
Account Registrations
Important Notice Regarding
Taxpayer IRS Certifications
Portfolio Operations
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 2.25%
(as a percentage of offering price)
Deferred Sales Charge NONE*
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%**
*Investments of $1 million or more are not subject to a front-end
sales charge; however, a contingent deferred sales charge of 1%
is imposed on certain redemptions within 12 months of the
calendar month following such investments. See "How to Sell
Shares of the Fund - Contingent Deferred Sales Charge."
**Represents the amount that would have been payable to the
investment manager, absent a fee reduction by the investment
manager. The investment manager, however, 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. With this reduction, management fees and total
operating expenses represented 0.35% and 0.56%, respectively, of
the average net assets of the Fund. This arrangement may be
terminated by the investment manager at any time.
***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 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
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 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
------------------------------------------------------------------------------------------------------------------
NET ASSETS NET REALIZED DISTRIBUTIONS NET ASSETS
YEAR VALUES AT NET & UNREALIZED TOTAL FROM FROM NET DISTRIBUTIONS VALUES
ENDED BEGINNING INVESTMENT GAIN (LOSS) INVESTMENT INVESTMENT FROM CAPITAL TOTAL AT END
FEBRUARY 28 OF YEAR INCOME ON SECURITIES OPERATIONS INCOME GAINS DISTRIBUTIONS OF YEAR
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1993(1) $10.00 $0.14 $0.499 $0.639 $(0.099) $ - $(0.099) $10.54
1994 10.54 0.52 0.289 0.809 (0.549) - (0.549) 10.80
1995 10.80 0.54 (0.331) 0.209 (0.529) - (0.529) 10.48
</TABLE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA
------------------------------------------------------
RATIO OF NET
NET ASSETS RATIO OF INVESTMENT
YEAR AT END EXPENSES INCOME PORTFOLIO
ENDED TOTAL OF YEAR TO AVERAGE TO AVERAGE TURNOVER
FEBRUARY 28 RETURN+ (IN 000'S) NET ASSETS** NET ASSETS RATE
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1993(1) 14.77%* $ 9,192 - % 5.49% 22.54%
1994 7.82 67,603 0.30 4.93 28.76
1995 (0.20) 73,977 0.56 5.25 38.46
</TABLE>
*Annualized
*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%.
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.
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 therafter 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 to
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 (112
separate series) with aggregate assets of over $75 billion,
approximately $40 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, fees totaling
0.63% of the average net assets of the Fund would have accrued to
Advisers. Total operating expenses, including management fees,
would have represented 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%.
It is not anticipated that the Fund will incur a significant
amount of brokerage expenses because municipal securities are
generally traded on a "net" basis, that is, in principal
transactions without the addition or deduction of brokerage
commissions or transfer taxes. 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
The Fund has adopted a distribution plan pursuant to Rule 12b-1
under the 1940 Act (the "Plan"). 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 pay 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 and marketing 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 sales charge) on the
dividend reinvestment date. 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 another fund in the Franklin Group of Funds(Registered
Trademark) or the Templeton Group, 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. Dividend and
capital gain distributions are eligible for investment in another
fund in the Franklin Group of Funds or the Templeton Group at net
asset value. See "Purchases at Net Asset Value" under "How to Buy
Shares of the Fund."
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, pursuant to an agreement with Distributors (directly or
through affiliates), 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 the net asset value per share plus a 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 of total sales charges or underwriting
commissions and dealer concessions.
Total Sales Charge
Size of Dealer Concession
Transaction As a Percentage As a Percentage As a Percentage of
at Offering of Offering of Net Amount Offering
Price Price Invested Price*,***
Less than 2.25% 2.30% 2.00%
$100,000
$100,000 but 1.75% 1.78% 1.50%
less than
250,000
$250,000 but 1.25% 1.26% 1.00%
less than
500,000
$500,000 but 1.00% 1.01% 0.85%
less than
1,000,000
$1,000,000 none none (see below)**
or more
*Financial institutions or their affiliated brokers may receive
an agency transaction fee in the percentages set forth above.
**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.
***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
an underwriter as that term is defined in the Securities Act of
1933, as amended.
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 an investment 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(Registered Trademark) 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 (although certain investments may not have the same
schedule of sales charges and/or may not be subject to
reduction), and (c) the U.S. 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.
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 dealers in connection
with sales of shares of the Fund and other funds in the Franklin
Templeton Funds. Compensation may include financial assistance to
securities dealers 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 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. 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 any of the discounts, investments in any Franklin
Templeton Investments may be combined with those of the
investor's spouse and children under the age of 21. In addition,
the aggregate investments of a trustee or other fiduciary account
(for an account under exclusive investment authority) may be
considered in determining whether a reduced sales charge is
available, even though there may be a number of beneficiaries of
the account.
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, 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, and 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.
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 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
either a front-end sales charge ("net asset value") or 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 subsequent payments 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) registered securities dealers and their affiliates,
for their investment account only; and (5) registered personnel
and employees of securities dealers and by their spouses and
family members, in accordance with the internal policies and
procedures of the employing securities dealer.
Shares of the Fund may be purchased at net asset value by persons
who have redeemed, within the previous 120 days, their shares of
the 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. 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 of the 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 the
Fund must be received by the Fund or the Fund's Shareholder
Services Agent within 120 days after the redemption. The 120
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 or another of the Franklin Templeton Funds may
be purchased at net asset value and without the imposition of a
contingent deferred sales charge by persons who have received
dividends and capital gain distributions in cash from investments
in the Fund within 120 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, which charged the investor a contingent deferred
sales charge upon redemption and which has an investment
objective similar to that 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 advisers
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 Franklin's Institutional Sales 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 the 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 securities 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 in writing 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 dealer 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 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. 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. 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 Franklin's
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, Fund shares may be exchanged for
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. 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, minimum holding periods 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(Registered Trademark) 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 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 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 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
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 the contingency
period, a contingent deferred sales charge will be imposed. The
contingency period will be tolled (or stopped) for the period
such 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 investment on
which no sales charge was paid was transferred in from a fund on
which the investor paid a sales charge. 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.
There are differences among the Franklin Templeton Funds. Before
making an exchange, a shareholder should obtain and review a
current prospectus of the fund into which the shareholder wishes
to transfer.
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 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, after the scheduled
close of the New York Stock Exchange (the "Exchange"), (generally
1:00 p.m. Pacific time) on 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 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 Franklin's Institutional Services Department by telephoning
1-800/321-8563.
Redeeming Shares Through Securities Dealers
The Fund will accept redemption orders by telephone or other
means of electronic transmission from securities dealers who have
entered into a dealer or similar 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 securities 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. These
documents, as described in the preceding section, are required
even if the shareholder's securities dealer has placed the
repurchase order. After receipt of a repurchase order from the
securities 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 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 on
investments of $1 million or more, a contingent deferred sales
charge of 1% applies to redemptions of those investments within
the contingency period of 12 months of the calendar month
following their purchase. The charge is 1% of the lesser of the
value of the shares redeemed (exclusive of reinvested dividends
and capital gain distributions) or the total cost of such shares,
and is retained by Distributors. In determining if a 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
of those shares held less than 12 months; (ii) shares purchased
with reinvested dividends and capital gain distributions; and
(iii) other shares held longer than 12 months; and followed by
any shares held less than 12 months, on a "first in, first out"
basis.
The contingent deferred sales charge is waived 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%
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.
Requests for redemptions for 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 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
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: (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,
and (iv) exchange Fund shares as described in this Prospectus by
telephone. In addition, shareholders who complete and file the
Agreement as described under "How to Sell Shares of the Fund -
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 only if 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 to 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.
The telephone transaction privilege may be modified or
discontinued by the Fund at any time upon 60 days' written notice
to shareholders.
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, shareholders may access an automated
system (day or night) which offers the following features. By
calling the Franklin TeleFACTS(Registered Trademark) system at 1-
800/247-1753, shareholders may obtain current price, yield or
other performance information specific to a Franklin fund;
process an exchange 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. Share prices and account
information specific to a Templeton fund may also be accessed on
TeleFACTS by Franklin shareholders. Information about the Fund
may be accessed by entering Fund Code 74 followed by the # sign,
when requested to do so by the automated operator. 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
Department Name Telephone No. Operation(Pacific Time)
(Monday through Friday)
Shareholder 1-800/632-2301 6:00 a.m. to 5:00 p.m.
Services
Dealer Services 1-800/524-4040 6:00 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 6:00 a.m. to 8:00 p.m.,
8:30 a.m. to 5:00 p.m.
(Saturday)
Retirement Plans 1-800/527-2020 6:00 a.m. to 5:00 p.m.
TDD (hearing 1-800/851-0637 6:00 a.m. to 5:00 p.m.
impaired)
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.
Performance
Advertisements, sales literature and communications to
shareholders may contain various 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 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 semiannual reports containing unaudited
financial statements are automatically sent to shareholders.
Copies may be obtained by investors or shareholders, 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
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.
Voting Rights
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.
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.
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. In the future it may
be possible to effect such transfers 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
STATEMENT OF
ADDITIONAL INFORMATION 777 Mariners Island Blvd., P.O. Box 7777
May 1, 1995 San Mateo, CA 94403-7777 1-800/DIAL BEN
Franklin Tax-Free Trust (the "Trust") is an open-end investment
company consisting of 27 separate series. This Statement of
Additional Information ("SAI") relates to the seven series listed
below, five of which, as noted, are currently offering two
classes of shares:
Class I Class II
Franklin Arizona Insured Tax- not available
Free Income Fund, Class I
Franklin Florida Insured Tax- not available
Free Income Fund, Class I
Franklin Insured Tax-Free Franklin Insured Tax-Free
Income Fund, Class I Income Fund, Class II
Franklin Massachusetts Insured Franklin Massachusetts Insured
Tax-Free Income Fund, Class I Tax-Free Income Fund, Class II
Franklin Michigan Insured Tax- Franklin Michigan Insured Tax-
Free Income Fund, Class I Free Income Fund, Class II
Franklin Minnesota Insured Tax- Franklin Minnesota Insured Tax-
Free Income Fund, Class I Free Income Fund, Class II
Franklin Ohio Insured Tax-Free Franklin Ohio Tax-Free Income
Income Fund, Class I Fund, Class II
The new dual class structure ("multiclass") allows investors to
consider, among other features, the differing front-end sales
charges and ongoing distribution fees ("Rule 12b-1 fees") on
their investments in the Funds.
Each Fund may, separately or collectively, be referred to as a
"Fund," the "Funds," or the "State Funds" (except for the Insured
Tax-Free Income Fund, the "Insured Fund")or individually by the
state or policy included as part of its name. The Arizona and
Florida Insured Funds will be included in all discussions
pertaining to Class I in this SAI.
The principal investment objective of each Fund is to provide
investors with as high a level of income exempt from federal
income taxes as is consistent with prudent investing, while
seeking preservation of shareholders' capital. The investment
objective of each Fund is a fundamental policy. Each Fund, other
than the Insured Fund, also seeks to provide a maximum level of
income exempt from state personal income taxes, if any, to
shareholders resident in the named state. The Arizona and Florida
Insured Funds are non-diversified; the other series of the Trust
discussed in this SAI are diversified.
Generally, the Insured 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. Each Insured Fund invests in municipal
securities which are covered by insurance guaranteeing the
scheduled payment of principal and interest or backed by or
subject to an escrow account invested in securities backed by the
full faith and credit of the U.S. government, or in short-term
obligations of issuers with the highest rating from Moody's
Investors Service ("Moody's"), Standard & Poor's Corporation
("S&P") or Fitch Investors Service, Inc. ("Fitch"). All insured
securities not insured through the issuer will be insured by a
qualified municipal bond insurer.
Separate prospectuses for the Funds dated May 1, 1995, as may be
amended from time to time, provide the basic information a
prospective investor should know before investing in the Funds
and may be obtained without charge from the Trust or its
principal underwriter, Franklin/Templeton Distributors, Inc.
("Distributors"), at the address shown above.
This SAI is not a prospectus. It contains information in addition
to and in more detail than set forth in the Prospectuses. This
SAI is intended to provide investors with additional information
regarding the activities and operations of the Trust and each
Fund and should be read in conjunction with the Funds'
Prospectuses.
Contents Page
About the Trust
The Trust's Investment Objectives
and Policies
Description of Municipal and
Other Securities
Insurance
Investment Restrictions
Trustees and Officers
Investment Advisory and Other Services
The Trust's Policies Regarding Brokers
Used on Portfolio Transactions
Additional Information Regarding Purchases
and Redemptions of Trust Shares
The Trust's Underwriter
Plans of Distribution
Additional Information Regarding
Taxation
Performance
Miscellaneous Information
Appendices
Financial Statements
About the Trust
The Trust is an open-end management investment company, commonly
called a "mutual fund," and has registered as such under the
Investment Company Act of 1940 (the "1940 Act"). The Trust was
organized as a Massachusetts business trust in September 1984.
The Trust issues its shares of beneficial interest with no par
value in several series. The Trust currently has 27 separate
series, each of which maintains a totally separate investment
portfolio. This SAI discusses only the seven series listed on the
cover.
The Trust's Investment
Objectives and Policies
As noted in the Prospectus, the Insured Fund seeks to provide
investors with as high a level of income exempt from federal
income taxes as is consistent with prudent investment management,
while seeking preservation of shareholders' capital. Each Insured
State Fund seeks to maximize income exempt from federal income
taxes and from the personal income taxes for shareholders
resident in the named state, consistent with prudent investing,
and the preservation of shareholders' capital. The state of
Florida currently imposes no state personal income tax.
Although each Fund seeks to invest all its assets in a manner
designed to accomplish its objective, there may be times when
market conditions limit the availability of appropriate municipal
securities or, in the investment manager's opinion, there exist
uncertain economic, market, political, or legal conditions which
may jeopardize the value of municipal securities. 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 regular federal income taxes but not that
state's personal income taxes. To the extent that the state of
Minnesota requires dividends to be derived exclusively from
interest on obligations of the state of Minnesota or of the
United States ("U.S.") and its territories in order to be tax-
exempt, the Trust will endeavor to meet such requirements. The
policy followed by this Fund of attempting to meet this state
requirement in order to distribute tax-exempt income is not a
fundamental policy with respect to the Fund and may be changed
without notification to shareholders. If, due to unusual market
or political conditions, investments in securities as described
above would be advisable, in the investment manager's opinion, in
order to protect the value of the Funds' shares or their net
yield, such investments may be made, notwithstanding the
potential state income tax effects.
It is the policy of each Fund that illiquid securities (including
illiquid securities with contractual or other restrictions on
resale or instruments which are not readily marketable or have no
readily ascertainable market value) may not constitute, at the
time of the purchase or at any time, more than 10% of the value
of the total net assets of the Fund.
Description of Municipal
and Other Securities
The Prospectus describes the general categories and nature of
municipal securities. Discussed below are the major attributes of
the various municipal and other securities in which each of the
Funds may invest.
Municipal Notes
Tax Anticipation Notes are used to finance working capital needs
of municipalities and are issued in anticipation of various
seasonal tax revenues, which will be used to pay the notes. They
are usually general obligations of the issuer, secured by the
taxing power for the payment of principal and interest.
Revenue Anticipation Notes are issued in expectation of receipt
of other kinds of revenue, such as federal revenues available
under the Federal Revenue Sharing Program. They are usually
general obligations of the issuer.
Bond Anticipation Notes are normally issued to provide interim
financing until long-term financing can be arranged. Long-term
bonds then provide the money for the repayment of the notes.
Construction Loan Notes are sold to provide construction
financing for specific projects. After successful completion and
acceptance, many projects receive permanent financing through the
Federal Housing Administration under the Federal National
Mortgage Association or the Government National Mortgage
Association.
Tax-Exempt Commercial Paper typically represents a short-term
obligation (270 days or less) issued by a municipality to meet
working capital needs.
Municipal Bonds, which meet longer-term capital needs and
generally have maturities of more than one year when issued, have
two principal classifications: general obligation bonds and
revenue bonds.
1. General Obligation Bonds. Issuers of general obligation bonds
include states, counties, cities, towns and regional districts.
The proceeds of these obligations are used to fund a wide range
of public projects, including construction or improvement of
schools, highways and roads, and water and sewer systems. The
basic security behind general obligation bonds is the issuer's
pledge of its full faith, credit and taxing power for the payment
of principal and interest. The taxes that can be levied for the
payment of debt service may be limited or unlimited as to the
rate or amount of special assessments.
2. Revenue Bonds. A revenue bond is not secured by the full
faith, credit and taxing power of an issuer. Rather, the
principal security for a revenue bond is generally the net
revenue derived from a particular facility, group of facilities
or, in some cases, the proceeds of a special excise tax or other
specific revenue source. Revenue bonds are issued to finance a
wide variety of capital projects including: electric, gas, water,
and sewer systems; highways, bridges and tunnels; port and
airport facilities; colleges and universities; and hospitals. The
principal security behind these bonds may vary. Housing finance
authorities have a wide range of security, including partially or
fully insured mortgages, rent subsidized and/or collateralized
mortgages, and/or the net revenues from housing or other public
projects. Many bonds provide additional security in the form of a
debt service reserve fund, from which money may be used to make
principal and interest payments on the issuer's obligations. Some
authorities are provided with further security in the form of
state assurance (although without obligation) to make up
deficiencies in the debt service reserve fund.
Industrial Development Bonds which pay tax-exempt interest are in
most cases revenue bonds and are issued by or on behalf of public
authorities to raise money for the financing of various privately
operated facilities for business manufacturing, housing, sports,
and pollution control. These bonds are also used to finance
public facilities such as airports, mass transit systems, ports,
and parking. The payment of the principal and interest on such
bonds is solely dependent on the ability of the facilities user
to meet its financial obligations and the pledge, if any, of the
real and personal property so financed as security for such
payments.
Variable or Floating Rate Demand Notes ("VRDNs"). As stated in
the Prospectus, VRDNs are tax-exempt obligations which contain a
floating or variable interest rate and a right of demand, which
may be unconditional, to receive payment of the unpaid principal
balance plus accrued interest upon a short notice period
(generally up to 30 days) prior to specified dates, either from
the issuer or by drawing on a bank letter of credit, a guarantee
or insurance issued with respect to such instrument. The interest
rates are adjustable at intervals ranging from daily up to
monthly, and are calculated to maintain the market value of the
VRDN at approximately its par value on the adjustment date.
When-Issued Purchases. New issues of municipal securities are
frequently offered on a when-issued basis; that is, payment for
and delivery of the securities (the "settlement date") normally
take place after the date that the offer is accepted. The
purchase price and the yield that will be received on the
securities are fixed at the time the buyer enters into the
commitment. While the Trust will always make commitments to
purchase such securities with the intention of actually acquiring
the securities, it may nevertheless sell these securities before
the settlement date if it is deemed advisable as a matter of
investment strategy. To the extent that assets of a Fund are held
in cash pending the settlement of a purchase of securities, that
Fund would earn no income; however, it is the Trust's intention
to have each Fund fully invested to the extent practicable and
subject to the policies stated in the Prospectus. At the time a
Fund makes the commitment to purchase a municipal bond on a when-
issued basis, it will record the transaction and reflect the
value of the security in determining its net asset value. The
Trust does not believe that any Fund's net asset value or income
will be adversely affected by the purchase of municipal bonds on
a when-issued basis. Each Fund will establish a segregated
account in which it will maintain cash and marketable securities
equal in value to commitments for when-issued securities.
Municipal Securities may also be sold in "stripped" form.
Stripped Municipal Securities represent separate ownership of
interest and principal payments on municipal obligations.
Callable Bonds. These are municipal bonds which are issued with
provisions which prevent them from being called, typically for
periods of 5 to 10 years. During times of generally declining
interest rates, if the call-protection on callable bonds expires,
there is an increased likelihood that a number of such bonds may,
in fact, be called away by the issuers. Based on a number of
factors, including certain portfolio management strategies used
by the Funds' investment manager, the Funds believe they have
reduced the risk of adverse impact on net asset value based on
calls of callable bonds. The investment manager may dispose of
such bonds in the years prior to their call date if the
investment manager believes such bonds are at their maximum
premium potential. In pricing such bonds in each Fund's
portfolio, each callable bond is marked to the market daily based
on the bond's call date. Thus, the call of some or all of each
Fund's callable bonds may have an impact on such Fund's net asset
value. In light of each Fund's pricing policies and because the
Funds follow certain amortization procedures required by the
Internal Revenue Service, the Funds are not expected to suffer
any material adverse impact related to the value at which the
Fund has carried the bonds in connection with calls of bonds
purchased at a premium. Notwithstanding such policies, however,
the re-investment of the proceeds of any called bond may be in
bonds which pay a higher or lower rate of return than the called
bonds; and as with any investment strategy, there is no guarantee
that a call may not have a more substantial impact than
anticipated or that the Funds' objectives will be achieved.
Certificates of Participation. As stated in the Prospectus, each
Fund may also invest in municipal lease obligations, primarily
through Certificates of Participation ("COPs"). COPs are
distinguishable from municipal debt in that the lease which is
the subject of the transaction typically 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.
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 insured COPs. The Board of Trustees has
determined that COPs held in each Fund's portfolio 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; (b) the size of the municipal securities
market for each Fund, 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. There is no limit as to the amount of assets
which each Fund may invest in COPs.
Escrow-Secured Bonds or Defeased Bonds are created when an issuer
refunds in advance of maturity (or pre-refunds) an outstanding
bond issue which is not immediately callable, and it becomes
necessary or desirable to set aside funds for redemption of the
bonds at a future date. In an advance refunding, the issuer will
use the proceeds of a new bond issue to purchase high grade,
interest bearing debt securities which are then deposited in an
irrevocable escrow account held by a trustee bank to secure all
future payments of principal and interest of the advance refunded
bond. Escrow-secured bonds will often receive a triple-A rating
from S&P and Moody's. The Insured Funds will purchase escrow
secured bonds without additional insurance only where the escrow
is invested in U.S. government securities backed by the full
faith and credit of the U.S. government.
U.S. Government Obligations which may be owned by a Fund are
issued by the U.S. Treasury and include bills, certificates of
indebtedness, notes and bonds, or are issued by agencies and
instrumentalities of the U.S. government and backed by the full
faith and credit of the U.S. government.
Commercial Paper refers to promissory notes issued by
corporations in order to finance their short-term credit needs.
Lending Portfolio Securities. Consistent with procedures approved
by the Board of Trustees and subject to the following conditions,
a 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 a Fund's total assets at
the time of the most recent loan. The borrower must deposit with
a Fund's custodian collateral with an initial market value of at
least 102% of the initial market value of the securities loaned,
including any accrued interest, with the value of the collateral
and loaned securities marked-to-market daily to maintain
collateral coverage of at least 102%. Such collateral shall
consist of cash. The lending of securities is a common practice
in the securities industry. A Fund may engage in security loan
arrangements with the primary objective of increasing such Fund's
income either through investing the cash collateral in short-term
interest bearing obligations or by receiving a loan premium from
the borrower. Under the securities loan agreement, a Fund
continues to be entitled to all dividends or interest on any
loaned securities. As with any extension of credit, there are
risks of delay in recovery and loss of rights in the collateral
should the borrower of the security fail financially. While such
securities are on loan, the borrower will pay such Fund any
income accruing thereo, and such Fund may invest the cash
collateral in portfolio securities, thereby earning additional
income. A Fund will not lend its portfolio securities if such
loans are not permitted by the laws or regulations of any state
in which its shares are qualified for sale. Loans are typically
subject to termination by a Fund in the normal settlement time or
returned when the loan is terminated. Any gain or loss in the
market price of the borrowed securities which occurs during the
term of the loan inures to such Fund and its shareholders. A Fund
may pay reasonable finders' borrowers', administrative and
custodial fees in connection with a loan of its securities.
Income derived by a Fund from securities lending transactions and
investments in commercial paper, bankers' acceptances and
certificates of deposit will be taxable for federal income tax
purposes when distributed to shareholders. Income derived by a
Fund from interest on direct obligations of the U.S. government
will be taxable for federal income tax purposes when distributed
to shareholders.
There may, of course, be other types of municipal securities that
become available which are similar to the foregoing described
municipal securities in which the Funds may also invest, to the
extent such investments would be consistent with the foregoing
objective and policies.
Insurance
Except for certain temporary short-term investments, U.S.
government guaranteed securities or escrow-secured bonds, the
investment in municipal securities by each of the Insured Funds
is covered by insurance guaranteeing the scheduled payment of
principal and interest thereon.
As described in the Prospectus, an Insured Fund will receive
payments of insurance for any installment of interest and
principal due for payment but which shall be unpaid by reason of
nonpayment by the issuer. The term "due for payment," in
reference to the principal of a security, means its stated
maturity date or the date on which it shall have been called for
mandatory sinking fund redemption and does not refer to any
earlier date on which payment is due by reason of call for
redemption (other than by mandatory sinking fund redemption),
acceleration or other advancement of maturity; when referring to
interest on a security, the term means the stated date for
payment of interest. However, when the interest on the security
shall have been determined, as provided in the underlying
documentation relating to such security, to be subject to federal
income taxation, due for payment, when referring to the principal
of such security, also means the date on which it has been called
for mandatory redemption as a result of such determination of
taxability; when referring to interest on such security, the term
means the accrued interest at the rate provided in such
documentation to the date on which it has been called for such
mandatory redemption, together with any applicable redemption
premium. The insurance feature insures the scheduled payment of
interest and principal and does not guarantee the market value of
the insured municipal securities nor the value of the shares of
the Insured Funds.
As stated in the Prospectus, each insured municipal security in
an Insured Fund's portfolio will be covered by either a "New
Issue Insurance Policy" obtained by the issuer of the security at
the time of its original issuance or a "Secondary Insurance
Policy" or a "Portfolio Insurance Policy" issued by a qualified
municipal bond insurer.
Under the provisions of the Portfolio Insurance Policy, the
insurer unconditionally and irrevocably agrees to pay to the
appointed trustee or its successor and its agent (the "Trustee")
that portion of the principal of and interest on the securities
which shall become due for payment but shall be unpaid by reason
of nonpayment by the issuer. The insurer will make such payments
to the Trustee on the date such principal or interest becomes due
for payment or on the business day next following the day on
which the insurer shall have received notice of nonpayment,
whichever is later. The Trustee will disburse to an Insured Fund
the face amount of principal and interest which is then due for
payment but is unpaid by reason of nonpayment by the issuer but
only upon receipt by the Trustee of (i) evidence of an Insured
Fund's right to receive payment of the principal or interest due
for payment and (ii) evidence, including any appropriate
instruments of assignment, that all of the rights to payment of
such principal or interest due for payment shall thereupon vest
in the insurer. Upon such disbursement, the insurer shall become
the owner of the security, appurtenant coupon or right to payment
of principal or interest on such security and shall be fully
subrogated to all of the Insured Fund's rights thereunder,
including the right to payment thereof.
Bond insurers are often referred to as "monolines" in that they
only write financial guarantees as opposed to "multiline"
insurers who write several different types of insurance policies,
such as life insurance, auto and home insurance, and are exposed
to many types of risk. Additionally, bond insurers are not
exposed to "run risk" (which occurs when too many policyholders
rush to cash in their policies), because they only guarantee
payment when due. Also, in order to maintain AAA status by the
recognized national securities ratings agencies (which is
required by the Fund), the bond insurers invest their assets
mainly in high quality municipal and corporate bonds rated AA or
better and U.S. government obligations.
Neither the Insured Funds nor their investment manager make any
representations as to the ability of any insurance company to
meet its obligation to the Insured Funds if called upon to do so.
Investment Restrictions
The Trust has adopted the following restrictions as additional
fundamental policies of each Fund. These policies may not be
changed with respect to any Fund without the approval of a
majority of the outstanding voting securities of such Fund. Under
the 1940 Act, a "vote of a majority of the outstanding voting
securities" of the Trust or of a particular Fund means the
affirmative vote of the lesser of (1) more than 50% of the
outstanding shares of the Trust or of such Fund or (2) 67% or
more of the shares of the Trust or of such Fund present at a
shareholders meeting if more than 50% of the outstanding shares
of the Trust or of such Fund are represented at the meeting in
person or by proxy. A Fund may not:
1. Borrow money or mortgage or pledge any of its assets, except
that borrowings (and a pledge of assets therefore) for temporary
or emergency purposes may be made from banks in any amount up to
5% of the total asset value.
2. Buy any securities on "margin" or sell any securities
"short," except that it may use such short-term credits as are
necessary for the clearance of transactions.
3. Make loans, except through the purchase of readily
marketable debt securities which are either publicly distributed
or customarily purchased by institutional investors. Although
such loans are not presently intended, this prohibition will not
preclude a Fund from loaning portfolio securities to
broker/dealers or other institutional investors if at least 102%
cash collateral is pledged and maintained by the borrower;
provided such portfolio security loans may not be made if, as a
result, the aggregate of such loans exceeds 10% of the value of
the Fund's total assets at the time of the most recent loan.
4. Act as underwriter of securities issued by other persons,
except insofar as the Fund may be technically deemed an
underwriter under the federal securities laws in connection with
the disposition of portfolio securities.
5. Purchase the securities of any issuer which would result in
owning more than 10% of the voting securities of such issuer,
except with respect to the Trust's non-diversified Funds, which
Funds will not purchase a security, if as a result: i) more than
25% of its total assets would be invested in the securities of a
single issuer or ii) with respect to 50% of its total assets,
more than 5% of its assets would be invested in the securities of
a single issuer.
6. Purchase securities from or sell to the Trust's officers and
trustees, or any firm of which any officer or trustee is a
member, as principal, or retain securities of any issuer if, to
the knowledge of the Trust, one or more of the Trust's officers,
trustees, or investment adviser own beneficially more than 1/2 of
1% of the securities of such issuer and all such officers and
trustees together own beneficially more than 5% of such
securities.
7. Acquire, lease or hold real estate, except such as may be
necessary or advisable for the maintenance of its offices and
provided that this limitation shall not prohibit the purchase of
municipal and other debt securities secured by real estate or
interests therein.
8. Invest in commodities and commodity contracts, puts, calls,
straddles, spreads or any combination thereof, or interests in
oil, gas, or other mineral exploration or development programs,
except that it may purchase, hold and dispose of "obligations
with puts attached" in accordance with its investment policies.
9. Invest in companies for the purpose of exercising control or
management.
10. Purchase securities of other investment companies, except in
connection with a merger, consolidation, acquisition or
reorganization, except to the extent permitted by exemptions
which may be granted under the 1940 Act, which allows the Funds
to invest in shares of one or more investment companies, of the
type generally referred to as money market funds, managed by
Franklin Advisers, Inc. or its affiliates.
11. In the case of the Franklin Arizona Insured Tax-Free Income
Fund and Franklin Florida Insured Tax-Free Income Fund purchase
securities, in private placements or in other transactions, for
which there are legal or contractual restrictions on resale.
12. Invest more than 25% of its assets in securities of any
industry; although for purposes of this limitation, tax-exempt
securities and U.S. government obligations are not considered to
be part of any industry.
Portfolio Turnover: The portfolio turnover of each Fund for the
two fiscal years, if applicable, in the period ended February 28,
1995, was as follows:
Fiscal Year
1994 1995
Arizona Insured Fund 62.88%* 44.61%
Florida Insured Fund 28.72* 43.71
Insured Fund 6.85 14.42
Massachusetts Insured Fund 13.82 16.90
Michigan Insured Fund 3.21 9.12
Minnesota Insured Fund 13.42 17.59
Ohio Insured Fund 7.29 11.76
*For the period April 30, 1993 (effective date of registration)
to February 28, 1994.
Trustees and Officers
The trustees have the responsibility for the overall management
of the Trust, including general supervision and review of its
investment activities. The trustees elect the officers of the
Trust who are responsible for administering the day-to-day
operations of the Trust. The affiliations of the officers and
trustees and their principal occupations for the past five years
are listed below. Trustees who are deemed to be "interested
persons" of the Trust, as defined in the 1940 Act, are indicated
by an asterisk (*).
Positions
and Offices
Name, Age and with the Principal Occupation
Address Trust During Past Five Years
Frank H. Abbott, III Trustee President and Director, Abbott
Age 74 Corporation (an investment
1045 Sansome St. company); and director, trustee
San Francisco, CA or managing general partner, as
94111 the case may be, of 30 of the
investment companies in the
Franklin Group of Funds.
Harris J. Ashton Trustee President, Chief Executive
Age 62 Officer and Chairman of the
General Host Board, General Host Corporation
Corporation (nursery and craft centers);
Metro Center, 1 Director, RBC Holdings, Inc. (a
Station Place bank holding company) and Bar-S
Stamford, CT 06904- Foods; and director, trustee or
2045 managing general partner, as the
case may be, of 54 of the
investment companies in the
Franklin Templeton Group of
Funds.
S. Joseph Fortunato Trustee Member of the law firm of
Age 62 Pitney, Hardin, Kipp & Szuch;
Park Avenue at Director of General Host
Morris County Corporation; director, trustee
P. O. Box 1945 or managing general partner, as
Morristown, NJ 07962- the case may be, of 56 of the
1945 investment companies in the
Franklin Templeton Group of
Funds.
David W. Garbellano Trustee Private Investor; Assistant
Age 80 Secretary/Treasurer and
111 New Montgomery Director, Berkeley Science
St., #402 Corporation (a venture capital
San Francisco, CA company); and director, trustee
94105 or managing general partner, as
the case may be, of 29 of the
investment companies in the
Franklin Group of Funds.
*Charles B. Johnson Chairman President and Director,
Age 62 of the Franklin Resources, Inc.;
777 Mariners Island Board and Chairman of the Board and
Blvd. Trustee Director, Franklin Advisers,
San Mateo, CA 94404 Inc. and Franklin Templeton
Distributors, Inc.; Director,
Franklin/Templeton Investor
Services, Inc. and General
Host Corporation; and officer
and/or director, trustee or
managing general partner, as
the case may be, of most
other subsidiaries of
Franklin Resources, Inc. and
of 55 of the investment
companies in the Franklin
Templeton Group of Funds.
*Rupert H. Johnson, President Executive Vice President and
Jr. and Director, Franklin Resources,
Age 54 Trustee Inc. and Franklin Templeton
777 Mariners Island Distributors, Inc.; President
Blvd. and Director, Franklin
San Mateo, CA 94404 Advisers, Inc.; Director,
Franklin/Templeton Investor
Services, Inc.; and officer
and/or director, trustee or
managing general partner, as
the case may be, of most other
subsidiaries of Franklin
Resources, Inc. and of 42 of
the investment companies in the
Franklin Templeton Group of
Funds.
Frank W. T. LaHaye Trustee General Partner, Peregrine
Age 66 Associates and Miller & LaHaye,
20833 Stevens Creek which are General Partners of
Blvd. Peregrine Ventures and Peregrine
Suite 102 Ventures II (venture capital
Cupertino, CA 95014 firms); Chairman of the Board
and Director, Quarterdeck Office
Systems, Inc.; Director,
FischerImaging Corporation; and
director or trustee, as the case
may be, of 25 of the investment
companies in the Franklin Group
of Funds.
Gordon S. Macklin Trustee Chairman, White River
Age 66 Corporation (information
8212 Burning Tree services); Director, Fund
Road American Enterprises Holdings,
Bethesda, MD 20817 Inc., Martin Marietta
Corporation, MCI Communications
Corporation, MedImmune, Inc.
(biotechnology), Infovest
Corporation (information
services), and Fusion Systems
Corporation (industrial
technology); and director,
trustee or managing general
partner, as the case may be, of
51 of the investment companies
in the Franklin Templeton Group
of Funds; formerly, Chairman,
Hambrecht and Quist Group;
formerly, Director, H & Q
Healthcare Investors; and
formerly, President, National
Association of Securities
Dealers, Inc.
Harmon E. Burns Vice Executive Vice President,
Age 50 President Secretary and Director, Franklin
777 Mariners Island Resources, Inc.; Executive Vice
Blvd. President and Director, Franklin
San Mateo, CA 94404 Templeton Distributors, Inc.;
Executive Vice President,
Franklin Advisers, Inc.;
Director, Franklin/Templeton
Investor Services, Inc.; officer
and/or director, as the case may
be, of other subsidiaries of
Franklin Resources, Inc.; and
officer and/or director or
trustee of 41 of the investment
companies in the Franklin
Templeton Group of Funds.
Kenneth V. Domingues Vice Senior Vice President, Franklin
Age 62 President - Resources, Inc., Franklin
777 Mariners Island Financial Advisers, Inc., and Franklin
Blvd. Reporting Templeton Distributors, Inc.;
San Mateo, CA 94404 and officer and/or director, as the
Accounting case may be, of other
Standards subsidiaries of Franklin
Resources, Inc.; and Officer
and/or managing general partner,
as the case may be, of 36 of the
investment companies in the
Franklin Group of Funds.
Don Duerson Vice Employee of Franklin Resources,
Age 62 President Inc. and its subsidiaries in
777 Mariners Island senior portfolio management
Blvd. capacities.
San Mateo, CA 94404
Martin L. Flanagan Vice Senior Vice President, Chief
Age 34 President Financial Officer and Treasurer,
777 Mariners Island and Chief Franklin Resources, Inc.;
Blvd. Financial Executive Vice President,
San Mateo, CA 94404 Officer Templeton Worldwide, Inc.;
Senior Vice President and
Treasurer, Franklin Advisers,
Inc. and Franklin Templeton
Distributors, Inc.; Senior Vice
President, Franklin/Templeton
Investor Services, Inc.; officer
of most other subsidiaries of
Franklin Resources, Inc.; and
officer of 60 of the investment
companies in the Franklin
Templeton Group of Funds.
Deborah R. Gatzek Vice Senior Vice President - Legal,
Age 46 President Franklin Resources, Inc. and
777 Mariners Island and Franklin Templeton Distributors,
Blvd. Secretary Inc.; Vice President, Franklin
San Mateo, CA 94404 Advisers, Inc. and officer of 36
of the investment companies in
the Franklin Group of Funds.
Thomas J. Kenny Vice Senior Vice President, Franklin
Age 32 President Advisers, Inc. and officer of
777 Mariners Island eight of the investment
Blvd. companies in the Franklin Group
San Mateo, CA 94404 of Funds.
Diomedes Loo-Tam Treasurer Employee of Franklin Advisers,
Age 56 and Inc.; and officer of 36 of the
777 Mariners Island Principal investment companies in the
Blvd. Accounting Franklin Group of Funds.
San Mateo, CA 94404 Officer
Edward V. McVey Vice Senior Vice President/National
Age 57 President Sales Manager, Franklin
777 Mariners Island Templeton Distributors, Inc.;
Blvd. and officer of 31 of the
San Mateo, CA 94404 investment companies in the
Franklin Group of Funds.
Trustees not affiliated with the investment manager
("nonaffiliated trustees") are currently paid fees of $1,300 per
month plus $1,300 per meeting attended and are reimbursed for
expenses incurred in connection with attending such meetings.
During the fiscal year ended February 28, 1995, fees totaling
$188,500 were paid to non affiliated trustees of the Trust. As
indicated above, certain of the trustees and officers hold
positions with other companies in the Franklin Group of
Funds(Registered Trademark) and the Templeton Funds("Franklin
Templeton Funds"). The following table shows the fees paid by the
Trust to its non affiliated trustees and the total fees paid to
such trustees by the Trust and other Franklin Templeton Funds for
which they serve as directors, trustees or managing general
partners
Total
Compensation
from
Number of Franklin
Franklin Templeton
Aggregate Templeton Funds Funds,
Compensation Boards on Which including
Name from Trust * Each Serves the Trust **
Frank H. Abbott, III $32,500 30 $176,870
Harris J. Ashton 31,200 54 319,925
S. Joseph Fortunato 31,200 56 336,065
David W. Garbellano 31,200 29 153,300
Frank W.T. LaHaye 31,200 25 150,817
Gordon S. Macklin 31,200 51 303,685
* For the fiscal year ended February 1, 1995
** For the calendar year ended December 31, 1994.
Nonaffiliated trustees are also reimbursed for expenses incurred
in connection with attending Board meetings, paid pro rata by
each Franklin Templeton fund in which they serve. No officer or
trustee received any other compensation directly from the Trust.
As of April 7, 1995, the officers and trustees, as a group, owned
of record and beneficially 22,640 shares of the New Jersey Fund,
which shares are less than 1% of the total outstanding shares of
the Fund. In addition, some trustees own shares in various other
Franklin Templeton Funds. Certain officers or trustees who are
shareholders of Franklin Resources, Inc. may be deemed to receive
indirect remuneration by virtue of their participation, if any,
in the fees paid to its subsidiaries. Charles B. Johnson and
Rupert H. Johnson, Jr. are brothers.
Investment Advisory and Other Services
The investment manager for each Fund is Franklin Advisers, Inc.
("Advisers" or "Manager"). Advisers is a wholly-owned subsidiary
of Franklin Resources, Inc. ("Resources"), a publicly owned
holding company whose shares are listed on the New York Stock
Exchange (the "Exchange"). Resources owns several other
subsidiaries which are involved in investment management and
shareholder services. The Manager and other subsidiary companies
of Resources currently manage over $118 billion in assets for
more than 3.8 million shareholders. The preceding table indicates
those officers and trustees who are also affiliated persons of
Distributors and Advisers.
Pursuant to the management agreement, the Manager provides
investment research and portfolio management services, including
the selection of securities for the Funds to purchase, hold or
sell and the selection of brokers through whom the portfolio
transactions of each Fund are executed. The Manager's extensive
research activities include, as appropriate, traveling to meet
with issuers and to review project sites. The Manager's
activities are subject to the review and supervision of the
trustees to whom the Manager renders periodic reports of the
Trust's investment activities. The Manager, at its own expense,
furnishes the Trust with office space and furnishings, facilities
and equipment required for managing the business affairs of the
Trust; maintains all internal bookkeeping, clerical, secretarial
and administrative personnel and services; and provides certain
telephone and other mechanical services. The Manager is covered
by fidelity insurance on its officers, directors and employees
for the protection of the Fund. Each Fund bears all of its
expenses not assumed by the Manager. Details of these expenses
are included in the Trust's Annual Report to Shareholders dated
February 28, 1995.
Pursuant to the management agreement, each Fund is obligated to
pay the Manager a fee computed at the close of business on the
last business day of each month equal to a monthly rate of 5/96
of 1% (approximately 5/8 of 1% per year) for the first $100
million of average monthly net assets of the Fund; 1/24 of 1%
(approximately 1/2 of 1% per year) of average monthly net assets
of the Fund in excess of $100 million up to $250 million; and
9/240 of 1% (approximately 45/100 of 1% per year) of average
monthly net assets of the Fund in excess of $250 million.
Advisers may, however, limit or may not impose its management
fees and may also assume responsibility for making payments, if
necessary, to offset certain operating expenses otherwise payable
by such Fund(s). This action by Advisers to limit its management
fees and assume responsibility for payment of the expenses
related to the operations of any Fund may be terminated by
Advisers at any time.
The management agreement specifies that the management fee be
reduced to the extent necessary to comply with the most stringent
limits on the expenses which may be borne by a Fund prescribed by
any state in which a Fund's shares are offered for sale. The most
stringent current limit requires the Manager to reduce or
eliminate its fee to the extent that aggregate operating expenses
of each Fund (excluding interest, taxes, brokerage commissions,
and extraordinary expenses such as litigation costs) would
otherwise exceed in any fiscal year 2.5% of the first $30 million
of average annual net assets of each Fund, 2% of the next $70
million of average annual net assets of each Fund, and 1.5% of
average annual net assets of each Fund in excess of $100 million.
Expense reductions have not been necessary based on state
limitation requirements.
The table below sets forth on a per Fund basis (for those Funds
in operation during the periods indicated) the management fees
which Class I of each Fund was obligated to pay to Advisers and
the management fees actually paid by Class I of each Fund.
Fiscal Year Ended February 28, 1995:
Contractual Management
Management Fees Paid
Fund Fees by the Fund
Arizona Insured Fund $ 102,744 $ 0
Florida Insured Fund 239,908 43,007
Insured Fund 7,903,871 7,903,871
Massachusetts Insured
Fund 1,540,886 1,540,886
Michigan Insured Fund 4,846,714 4,846,714
Minnesota Insured Fund 2,401,351 2,401,351
Ohio Insured Fund 3,181,729 3,181,729
Fiscal Year Ended February 28, 1994:
Contractual Management
Management Fees Paid
Fund Fees by the Fund
Arizona Insured Fund $ 43,672 $ 0
Florida Insured Fund 94,989 0
Insured Fund 7,938,004 7,938,004
Massachusetts Insured
Fund 1,592,310 1,592,310
Michigan Insured Fund 4,738,911 4,738,911
Minnesota Insured Fund 2,422,894 2,422,894
Ohio Insured Fund 3,143,227 3,143,227
Fiscal Year Ended February 28, 1993:
Contractual Management
Management Fees Paid
Fund Fees by the Fund
Insured Fund $ 6,293,042 $ 6,293,042
Massachusetts Insured
Fund 1,347,680 1,347,680
Michigan Insured Fund 3,740,226 3,740,226
Minnesota Insured Fund 2,044,917 2,044,917
Ohio Insured Fund 2,448,983 2,448,983
The management agreement is in effect until March 31, 1996.
Thereafter, it may continue in effect for successive annual
periods provided such continuance is specifically approved at
least annually by a vote of the Trust's Board of Trustees or as
to each Fund by a vote of the holders of a majority of the
outstanding voting securities of such Fund, and in either event
by a majority vote of the trustees who are not parties to the
management agreement or interested persons of any such party
(other than as trustees), cast in person at a meeting called for
that purpose. The management agreement may be terminated without
penalty at any time by the Trust or one or more of its Funds or
by the Manager on 30 days' written notice and will automatically
terminate in the event of its assignment, as defined in the 1940
Act.
Other Services
Franklin/Templeton Investor Services, Inc. ("Investor Services"
or "Shareholder Services Agent"), a wholly-owned subsidiary of
Resources, is the shareholder servicing agent for the Trust and
acts as the Trust's transfer agent and dividend-paying agent.
Investor Services is compensated by each Fund on the basis of a
fixed fee per account.
Bank of America NT & SA, 555 California Street, 4th Floor, San
Francisco, California 94104, acts as custodian of the securities
and other assets of each Fund. Citibank Delaware, One Penn's Way,
New Castle, Delaware 19720, acts as custodian in connection with
transfer services through bank automated clearing houses. The
custodians do not participate in decisions relating to the
purchase and sale of portfolio securities.
Coopers & Lybrand L.L.P., 333 Market Street, San Francisco,
California 94105, is the Trust's independent auditors. During the
fiscal year ended February 28, 1995, its auditing services
consisted of rendering an opinion on the financial statements of
the Trust included in the Trust's Annual Report to Shareholders
dated February 28, 1995.
The Trust's Policies Regarding
Brokers Used on Portfolio Transactions
Since most purchases made by the Trust are principal transactions
at net prices, the Trust incurs little or no brokerage costs. The
Trust deals directly with the selling or purchasing principal or
market maker without incurring charges for the services of a
broker on its behalf, unless it is determined that a better price
or execution may be obtained by utilizing the services of a
broker. Purchases of portfolio securities from underwriters
include a commission or concession paid by the issuer to the
underwriter, and purchases from dealers include a spread between
the bid and ask price. As a general rule, the Funds do not
purchase bonds in underwritings where they are not given any
choice, or only limited choice, in the designation of dealers to
receive the commission. The Trust seeks to obtain prompt
execution of orders at the most favorable net price. Transactions
may be directed to dealers in return for research and statistical
information, as well as for special services rendered by such
dealers in the execution of orders. It is not possible to place a
dollar value on the special executions or on the research
services received by Advisers from dealers effecting transactions
in portfolio securities. The allocations of transactions in order
to obtain additional research services permits Advisers to
supplement its own research and analysis activities and to
receive the views and information of individuals and research
staff of other securities firms. As long as it is lawful and
appropriate to do so, the Manager and its affiliates may use this
research data in their investment advisory capacities with other
clients. Provided that the Fund's officers are satisfied that the
best execution is obtained, the sale of shares of a Fund may also
be considered as a factor in the selection of securities dealers
to execute the Trust's portfolio transactions.
If purchases or sales of securities of a Fund and one or more
other investment companies or clients supervised by the Manager
are considered at or about the same time, transactions in such
securities will be allocated among the several investment
companies and clients in a manner deemed equitable to all by the
Manager, taking into account the respective sizes of the funds
and the amount of securities to be purchased or sold. It is
recognized that in some cases this procedure could possibly have
a detrimental effect on the price or volume of the security so
far as any Fund is concerned. In other cases, however, it is
possible that the ability to participate in volume transactions
and to negotiate lower broker commissions will be beneficial to a
Fund.
During each of the three fiscal years ended February 28, 1993,
1994 and 1995, the Funds did not incur any brokerage commissions.
As of February 28, 1995, the Funds did not own any securities of
their regular broker-dealers.
Additional Information
Regarding Purchases and
Redemptions of Trust Shares
All checks, drafts, wires and other payment mediums used for
purchasing or redeeming shares of the Funds must be denominated
in U.S. dollars. Each Fund reserves the right, in its sole
discretion, to either (a) reject any order for the purchase or
sale of shares denominated in any other currency or (b) honor the
transaction or make adjustments to a shareholder's account for
the transaction as of a date and with a foreign currency exchange
factor determined by the drawee bank.
Shares are eligible to receive dividends beginning on the first
business day following settlement of the purchase transaction
through the date on which a Fund writes a check or sends a wire
on redemption transactions.
Dividend checks which are returned to the Funds marked "unable to
forward" by the postal service will be deemed to be a request by
the shareholder to change the dividend option and the proceeds
will be reinvested in additional shares at net asset value until
new instructions are received.
The Funds may impose a $10 charge for each returned item, against
any shareholder account which, in connection with the purchase of
a Fund's shares, submits a check or a draft which is returned
unpaid to the Fund.
Each Fund may deduct from a shareholder's account the costs of
its efforts to locate a shareholder if mail to that shareholder
is returned as undeliverable or the Fund is otherwise unable to
locate the shareholder or verify the current mailing address.
These costs may include a percentage of the account when a search
company charges a percentage fee in exchange for its location
services.
Under agreements with certain banks in Taiwan, Republic of China,
the Funds' shares are available to such banks' discretionary
trust funds at net asset value. The banks may charge service fees
to their customers who participate in the discretionary trusts.
Pursuant to agreements, a portion of such service fees may be
paid to Distributors, or an affiliate of Distributors, to help
defray expenses of maintaining a service office in Taiwan,
including expenses related to local literature fulfillment and
communication facilities.
Shares of the Funds may be offered to investors in Taiwan through
securities firms known locally as Securities Investment
Consulting Enterprises. In conformity with local business
practices in Taiwan, shares of the Funds will be offered with the
following schedule of sales charges:
Sales
Size of Purchase Charge
Up to U. S. $100,000 3%
U.S. $100,000 to U.S. $1,000,000 2%
Over U.S. $1,000,000 1%
Purchases and Redemptions
Through Securities Dealers
Orders for the purchase of shares of each Fund received in proper
form prior to the scheduled close of the Exchange (generally 1:00
p.m. Pacific time) any business day that the Exchange is open for
trading and promptly transmitted to the Fund will be based upon
the public offering price determined that day. Purchase orders
received by securities dealers or other financial institutions
after the scheduled close of the Exchange will be effected at
each class' public offering price on the day it is next
calculated. The use of the term "securities dealer" herein shall
include other financial institutions which, pursuant to an
agreement with Distributors (directly or through affiliates),
handle customer orders and accounts with each Fund. Such
reference, however, is for convenience only and does not indicate
a legal conclusion of capacity.
Orders for the redemption of shares are effected at net asset
value subject to the same conditions concerning time of receipt
in proper form. It is the securities dealer's responsibility to
transmit the order in a timely fashion and any loss to the
customer resulting from failure to do so must be settled between
the customer and the securities dealer. Any applicable contingent
deferred sales charge will be deducted from the redemption
proceeds.
Special Net Asset Value Purchases - Class I Shares
As discussed in the Prospectus under "How to Buy Shares of the
Funds - Description of Special Net Asset Value Purchases,"
certain categories of investors may purchase Class I shares
without a front-end sales charge ("net asset value") or a
contingent deferred sales charge. Distributors or one of its
affiliates may make payments, out of its own resources, to
securities dealers who initiate and are responsible for such
purchases, as indicated below. Distributors may make these
payments in the form of contingent advance payments, which may be
recovered from the securities dealer, or set off against other
payments due to the securities dealer, in the even of investor
redemptions made within 12 months of the calendar month following
purchase. Other conditions may apply. All terms and conditions
may be imposed by an agreement between Distributors, or its
affiliates, and the securities dealer.
With respect to purchases made at net asset value by certain
trust companies and trust departments of banks, Distributors, or
one of its affiliates, out of its own resources, may pay up to 1%
of the amount invested.
Letter of Intent. An investor may qualify for a reduced sales
charge on the purchase of Class I shares of the Funds, as
described in the prospectus. At any time within 90 days after the
first investment which the investor wants to qualify for the
reduced sales charge, a signed Shareholder Application, with the
Letter of Intent section completed, may be filed with the Fund.
After the Letter of Intent is filed, each additional investment
will be entitled to the sales charge applicable to the level of
investment indicated on the Letter. Sales charge reductions based
upon purchases in more than one of the Franklin Templeton Funds
will be effective only after notification to Distributors that
the investment qualifies for a discount. The shareholder's
holdings in the Franklin Templeton Funds, including Class II
shares, acquired more than 90 days before the Letter of Intent is
filed will be counted towards completion of the Letter of Intent
but will not be entitled to a retroactive downward adjustment in
the sales charge. Any redemptions made by the shareholder during
the 13-month period will be subtracted from the amount of the
purchases for purposes of determining whether the terms of the
Letter of Intent have been completed. If the Letter of Intent is
not completed within the 13-month period, there will be an upward
adjustment of the sales charge, depending upon the amount
actually purchased (less redemptions) during the period. An
investor who executes a Letter of Intent prior to a change in the
sales charge structure for a Fund will be entitled to complete
the Letter of Intent at the lower of (i) the new sales charge
structure; or (ii) the sales charge structure in effect at the
time the Letter of Intent was filed with the Fund.
As mentioned in the Prospectus, 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. If the total purchases,
less redemptions, equal the amount specified under the Letter,
the reserved shares will be deposited to an account in the name
of the investor or delivered to the investor or the investor's
order. If the total purchases, less redemptions, exceed the
amount specified under the Letter of Intent and is an amount
which would qualify for a further quantity discount, a
retroactive price adjustment will be made by Distributors and the
securities dealer through whom purchases were made pursuant to
the Letter of Intent (to reflect such further quantity discount)
on purchases made within 90 days before and on those made after
filing the Letter. The resulting difference in offering price
will be applied to the purchase of additional shares at the
offering price applicable to a single purchase or the dollar
amount of the total purchases. If the total purchases, less
redemptions, are less than the amount specified under the Letter,
the investor will remit to Distributors an amount equal to the
difference in the dollar amount of sales charge actually paid and
the amount of sales charge which would have applied to the
aggregate purchases if the total of such purchases had been made
at a single time. The shareholder will receive a written
notification from Distributors requesting the remittance. Upon
such remittance the reserved shares held for the investor's
account will be deposited to an account in the name of the
investor or delivered to the investor or to the investor's order.
If within 20 days after written request such difference in sales
charge is not paid, the redemption of an appropriate number of
reserved shares to realize such difference will be made. In the
event of a total redemption of the account prior to fulfillment
of the Letter of Intent, the additional sales charge due will be
deducted from the proceeds of the redemption, and the balance
will be forwarded to the investor.
Redemptions in Kind
Each Fund has committed itself to pay in cash (by check) all
requests for redemption by any shareholder of record, limited in
amount, however, during any 90-day period to the lesser of
$250,000 or 1% of the value of a Fund's net assets at the
beginning of such period. Such commitment is irrevocable without
the prior approval of the SEC. In the case of requests for
redemption in excess of such amounts, the trustees reserve the
right to make payments in whole or in part in securities or other
assets of such Fund in case of an emergency, or if the payment of
such a redemption in cash would be detrimental to the existing
shareholders of the Fund. In such circumstances, the securities
distributed would be valued at the price used to compute such
Fund's net assets. Should a Fund do so, a shareholder may incur
brokerage fees in converting the securities to cash. The Fund
does not intend to redeem illiquid securities in kind; however,
should it happen, shareholders may not be able to timely recover
their investment and may also incur brokerage costs in selling
such securities.
Redemptions by the Funds
Due to the relatively high cost of handling small investments,
the Fund reserves the right to redeem, involuntarily, at net
asset value, the shares of any shareholder whose account has a
value of less than one- half of the initial minimum investment
required for that shareholder, but only where the value of such
account has been reduced by the shareholder's prior voluntary
redemption of shares. Until further notice, it is the present
policy of the Fund not to exercise this right with respect to any
shareholder whose account has a value of $50 or more. In any
event, before the Fund redeems such shares and sends the proceeds
to the shareholder, it will notify the shareholder that the value
of the shares in the account is less than the minimum amount and
allow the shareholder 30 days to make an additional investment in
an amount which will increase the value of the account to at
least $100.
Calculation of Net Asset Value
As noted in the Prospectus, each Fund generally calculates net
asset value for each class, separately, as of the scheduled close
of the Exchange, (generally 1:00 p.m. Pacific time) each day
that the Exchange is open for trading. As of the date of this
SAI, the Trust is informed that the Exchange observes the
following holidays: New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
Each Fund's portfolio securities are valued as stated in the
Prospectus. Generally, trading in bonds, U.S. government
securities and money market instruments is substantially
completed each day at various times prior to the scheduled close
of the Exchange. The values of such securities used in computing
the net asset value of a Fund's shares are determined as of such
times. Occasionally, events affecting the values of such
securities may occur between the times at which they are
determined and at the scheduled close of the Exchange which will
not be reflected in the computation of a Fund's net asset value.
If events materially affecting the value of such securities occur
during such period, then these securities will be valued at their
fair value as determined in good faith by the Board of Trustees.
Special Services
The Trust and Institutional Services Division of Distributors
provides specialized services, including recordkeeping, for
institutional investors of the Funds. The cost of these services
is not borne by the Funds.
Investor Services or the Trust may pay certain financial
institutions which maintain omnibus accounts with the Funds on
behalf of numerous beneficial owners for recordkeeping operations
performed with respect to such beneficial owners. For each
beneficial owner in the omnibus account, the Funds may reimburse
Investor Services an amount not to exceed the per account fee
which the Funds normally pay Investor Services. Such financial
institutions may also charge a fee for their services directly to
their clients.
The Trust's Underwriter
Pursuant to an underwriting agreement in effect until March 31,
1996, Distributors acts as principal underwriter in a continuous
public offering for shares of each Fund.
Distributors pays the expenses of distribution of each Fund's
shares, including advertising expenses and the costs of printing
sales material and prospectuses used to offer shares to the
public. The Trust pays the expenses of preparing and printing
amendments to its registration statements and prospectuses (other
than those necessitated by the activities of Distributors) and of
sending prospectuses to existing shareholders.
The underwriting agreement will continue in effect for successive
annual periods, provided that its continuance is specifically
approved at least annually by a vote of the Trust's Board of
Trustees or by a vote of the holders of a majority of the
outstanding voting securities of each Fund, and in either event
by a majority of the Trust's trustees who are not parties to the
underwriting agreement or interested persons of any such party
(other than as trustees of the Trust), cast in person at a
meeting called for that purpose. The underwriting agreement
terminates automatically in the event of its assignment and may
be terminated by either party on 90 days' written notice.
Until April 30, 1994, income dividends for the Class I shares
were reinvested at the offering price (which includes the sales
charge) and Distributors allowed 50% of the entire commission to
the securities dealer of record, if any, on an account. Starting
with any income dividends paid after April 30, 1994, such
reinvestment is at net asset value.
Underwriting commissions received by Distributors for the Class I
shares and the amounts which were subsequently paid by
Distributors to other dealers for each of the three fiscal years
ending on February 28, 1993, February 29, 1994, and February 28,
1995 were as follows:
1995
Total
Commissions Paid to
Received Other Dealers
Arizona Insured Fund $ 249,896 227,255
Florida Insured Fund 508,390 461,083
Insured Fund 4,263,865 4,022,355
Massachusetts
Insured Fund 876,196 825,321
Michigan Insured
Fund 3,669,978 3,469,185
Minnesota Insured
Fund 1,317,567 1,235,404
Ohio Insured Fund 2,206,639 2,082,379
1994
Total
Commissions Paid to
Received Other Dealers
Arizona Insured Fund $ 399,345 $ 386,723
Florida Insured Fund 1,143,608 1,091,172
Insured Fund 12,230,430 11,605,428
Massachusetts
Insured Fund 2,068,206 1,950,867
Michigan Insured
Fund 8,310,641 7,870,421
Minnesota Insured
Fund 3,123,021 2,901,107
Ohio Insured Fund 5,867,852 5,590,312
1993
Total
Commissions Paid to
Received Other Dealers
Insured Fund $ 13,477,163 $ 12,959,925
Massachusetts
Insured Fund 2,051,442 1,952,607
Michigan Insured
Fund 7,736,890 7,388,482
Minnesota Insured
Fund 3,218,932 3,018,587
Ohio Insured Fund 5,636,686 5,409,668
Distributors may be entitled to reimbursement under the Rule 12b-
1 distribution plan relating to both classes. See "Plans of
Distribution" below. Except as noted, Distributors received no
other compensation from the Funds for acting as underwriter.
Plans of Distribution
Each class of the Funds have adopted a distribution plan ("Class
I Plan" and "Class II Plan," respectively, or "Plans") pursuant
to Rule 12b-1 under the 1940 Act.
The Class I Plan
Pursuant to the Class I Plan for each Fund except the Arizona
Insured and Florida Insured Funds, each Fund may pay up to a
maximum of 0.10% per annum (1/10 of 1%) of its average daily net
assets for expenses incurred in the promotion and distribution of
its shares. The Arizona Insured and Florida Insured Funds may pay
up to a maximum of 0.15% per annum (1/15 of 1%) of each Fund's
average daily net assets for these expenses.
In implementing the Class I Plan, the Board of Trustees
determined that the annual fees payable thereunder will be equal
to the sum of: (i) the amount obtained by multiplying 0.10% by
the average daily net assets represented by Class I shares of a
Fund that were acquired by investors on or after May 1, 1994
("New Assets"), and (ii) the amount obtained by multiplying 0.05%
by the average daily net assets represented by Class I shares of
a Fund that were acquired before May 1, 1994 ("Old Assets"). Such
fees will be paid to the current securities dealer of record on
the shareholder's account. In addition, until such time as the
maximum payment of 0.10% is reached on a yearly basis, up to an
additional 0.02% will be paid to Distributors under the Class I
Plan. The payments to be made to Distributors will be used by
Distributors to defray other marketing expenses that have been
incurred in accordance with the Class I Plan, such as
advertising.
The fee relating to the Class I Plan is an expense of Class I as
a whole, so that all Class I shareholders, regardless of when
they purchased their shares will bear Rule 12b-1 expenses at the
same rate. That rate initially will be at least 0.07% (0.05% plus
0.02%) of Class I's average daily net assets and, as Class I
shares are sold on or after May 1, 1994 (the "Effective Date"),
will increase over time. Thus, as the proportion of Class I
shares purchased on or after May 1, 1994 increases in relation to
outstanding Class I shares, the expenses attributable to payments
under the Class I Plan will also increase (but will not exceed
0.10% of average daily net assets). While this is the currently
anticipated calculation for fees payable under the Class I Plan,
the Class I Plan permits the Trust's trustees to allow each Fund
to pay a full 0.10% on all assets at any time. The approval of
the Board of Trustees would be required to change the calculation
of the payments to be made under the Class I Plan.
Pursuant to each Class I Plan, Distributors or others will be
entitled to be reimbursed each quarter (up to the maximum as
stated above) for all expenses incurred in the distribution and
promotion of each Fund's shares, including, but not limited to,
the printing of prospectuses and reports used for sales purposes,
expenses of preparation and distribution of sales literature and
related expenses, advertisements, and other distribution-related
expenses, including a prorated portion of Distributors' overhead
expenses attributable to the distribution of each Fund's 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.
For the fiscal year ended February 28, 1995, aggregate amounts
paid by Class I shares pursuant to the Class I Plan were as
follows:
Class I Rule 12b- Advertisi Printing Payments Payments
Fund 1 ng and to to
Fees Paid Mailing Underwrit Brokers
by Fund of ers or
Prospectu Dealers
ses*
Arizona
Insured
Fund $ 13,483 $0 $0 $0 $ 13,483
Florida
Insured
Fund 33,326 0 0 $0 33,326
Insured
Fund 989,559 158,329 79,165 49,478 702,587
Massachus
etts
Insured
Fund 168,597 21,917 16,860 8,430 121,390
Michigan
Insured
Fund 606,141 78,798 54,553 36,368 436,422
Minnesota
Insured
Fund 279,290 50,272 19,550 11,172 198,296
Ohio
Insured
Fund 386,625 54,127 30,930 23,198 278,370
The Class II Plan
Under the Class II Plan, each Fund is permitted to pay to
Distributors or others annual distribution fees, payable
quarterly, of .50% of Class II's average daily net assets, in
order to compensate Distributors or others for providing
distribution and related services and bearing certain expenses of
the Class. All expenses of distribution and marketing over that
amount will be borne by Distributors, or others who have incurred
them, without reimbursement by the Funds. In addition to this
amount, under the Class II Plan, each Fund shall pay .15% per
annum, payable quarterly of the Class' average daily net assets
as a servicing fee. This fee will be used to pay 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 a Fund on
behalf of the customers, and similar activities related to
furnishing personal services and maintaining shareholder
accounts. Distributors may pay the securities dealer, from its
own resources, a commission of up to 1% of the amount invested.
at the time of investment.
In General
In addition to the payments to which Distributors or others are
entitled under the Plans, each Plan also provides that to the
extent a Fund, the Manager or Distributors or other parties on
behalf of the Fund, the Manager or Distributors, make payments
that are deemed to be payments for the financing of any activity
primarily intended to result in the sale of shares of the Fund
within the context of Rule 12b-1 under the 1940 Act, then such
payments shall be deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges which
include payments made under a Plan, plus any other payments
deemed to be made pursuant to each Plan, exceed the amount
permitted to be paid pursuant to the Rules of Fair Practice of
the National Association of Securities Dealers, Inc., Article
III, Section 26(d)4.
The terms and provisions of the Plans relating to required
reports, term, and approval are consistent with Rule 12b-1. No
interested person or trustee of the Trust has a direct or
indirect financial interest in any such Plan. The Plans do not
permit unreimbursed expenses incurred in a particular year to be
carried over to or reimbursed in subsequent years.
To the extent fees are for distribution or marketing functions,
as distinguished from administrative servicing or agency
transactions, certain banks will not be entitled to participate
in each Plan as a result of applicable federal law prohibiting
certain banks from engaging in the distribution of mutual fund
shares. Such banking institutions, however, are permitted to
receive fees under each Plan for administrative servicing or for
agency transactions. If a bank were prohibited from providing
such services, its customers who are shareholders would be
permitted to remain shareholders of the Funds, and alternate
means for continuing the servicing of such shareholders would be
sought. In such an event, changes in the services provided might
occur and such shareholders might no longer be able to avail
themselves of any automatic investment or other services then
being provided by the bank. It is not expected that shareholders
would suffer any adverse financial consequences as a result of
any of these changes. Securities laws of states in which the
Funds' shares are offered for sale may differ from the
interpretations of federal law expressed herein, and banks and
financial institutions selling shares of the Funds may be
required to register as dealers pursuant to state law.
Each Plan has been approved by the trustees of the Trust,
including those trustees who are not interested persons, as
defined in the 1940 Act. The Class I Plans adopted by the Arizona
Insured and Florida Insured Funds were approved by Resources, the
initial shareholder of such Funds, and by the public shareholders
of the remaining Funds discussed herein, at a meeting held on
April 27 and 29, 1994. The Class II Plans of the other Funds were
approved by the sole initial shareholder prior to May 1, 1995,
the date as of which the Class II Plans became effective. The
Plans are effective through April 30, 1996 and renewable annually
thereafter by a vote of the Trust's Board of Trustees, including
a majority of the trustees who are non-interested persons of the
Trust and who have no direct or indirect financial interest in
the operation of each Plan, cast in person at a meeting called
for that purpose. It is also required that the selection and
nomination of such trustees be done by the non-interested
trustees. Each Plan and any related agreement may be terminated
at any time, without any penalty, by the trustees or by
Distributors on not more than 60 days' written notice, by any act
that terminates the underwriting agreement with Distributors, or,
as to each Fund, by vote of a majority of that Fund's outstanding
shares. Distributors or any dealer or other firm may also
terminate their respective distribution or service agreement at
any time upon written notice.
With respect to a Plan, the Plan and any related agreements may
not be amended to increase materially the amount to be spent for
distribution expenses without approval by a majority of the
affected Fund's outstanding shares, and all such material
amendments to the Plan or any distribution or service agreements
also shall be approved by a vote of the non-interested trustees,
cast in person at a meeting called for the purpose of voting on
any such amendment.
Distributors is required to report in writing to the Board of
Trustees at least quarterly on the amounts and purpose of any
payment made under a Plan and any related agreements, as well as
to furnish the Board of Trustees with such other information as
may reasonably be requested in order to enable the Board of
Trustees to make an informed determination of whether a Plan
should be continued.
Additional Information Regarding Taxation
As stated in the Prospectus, each Fund has elected to be treated
as a regulated investment company under Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"). The
trustees reserve the right not to maintain the qualification of
any Fund as a regulated investment company if they determine such
course of action to be beneficial to the shareholders. In such
case, a Fund will be subject to federal and possibly state
corporate taxes on its taxable income and gains, and to the
alternative minimum tax on a portion of its tax-exempt income,
and distributions (including tax-exempt interest dividends) to
shareholders will be taxable to the extent of a Fund's available
earnings and profits.
The Code requires all funds to distribute at least 98% of their
taxable ordinary income earned during the calendar year and at
least 98% of their capital gain net income earned during the
twelve-month period ending October 31 of each year (in addition
to amounts from the prior year that were neither distributed nor
taxed to the Fund) to shareholders by December 31 of each year in
order to avoid the imposition of a federal excise tax. Under
these rules, certain distributions which are declared in October,
November or December but which, for operational reasons, may not
be paid to the shareholders until the following January, will be
treated for tax purposes as if paid by the Funds and received by
the shareholders on December 31 of the calendar year in which
they are declared. The Funds intend as a matter of policy to
declare and pay such dividends, if any, in December to avoid the
imposition of this tax, but do not guarantee that the
distributions will be sufficient to avoid any or all federal
excise taxes.
Redemptions and exchanges of a Fund's shares are taxable
transactions for federal and state income tax purposes. For most
shareholders, gain or loss will be recognized in an amount equal
to the difference between the shareholder's basis in the shares
and the amount received, subject to the rules described below. If
such shares are a capital asset in the hands of the shareholder,
gain or loss will be capital gain or loss and will be long-term
for federal income tax purposes if the shares have been held for
more than one year.
All or a portion of the sales charge incurred in purchasing
shares of a Fund will not be included in the federal tax basis of
such shares sold or exchanged within ninety (90) days of their
purchase (for purposes of determining gain or loss with respect
to such shares) if the sales proceeds are reinvested in the Fund
or in another fund in the Franklin Group of Funds and the
Templeton Group and a sales charge which would otherwise apply to
the reinvestment is reduced or eliminated. Any portion of such
sales charge excluded from the tax basis of the shares sold will
be added to the tax basis of the shares acquired in the
reinvestment. Shareholders should consult with their tax advisors
concerning the tax rules applicable to the redemption or exchange
of a Fund's shares.
Since each Fund's income is derived from interest income and gain
on the sale of portfolio securities rather than dividend income,
no portion of the Funds' distributions will generally be eligible
for the corporate dividends-received deduction. None of the
distributions paid by any 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.
All or a portion of a loss realized upon a redemption of shares
will be disallowed to the extent other shares of such Fund are
purchased (through reinvestment of dividends or otherwise) within
30 days before or after such redemption. Any loss disallowed
under these rules will be added to the tax basis of the shares
purchased.
Many states grant tax-free status to dividends paid to
shareholders of mutual funds from interest income earned by a
fund from direct obligations of the U.S. government, subject in
some states to minimum investment requirements that must be met
by a fund. Investments in GNMA/FNMA securities and repurchase
agreements collateralized by U.S. government securities do not
generally qualify for tax-free treatment. While it is not the
primary investment objective of any Fund of the Trust to invest
in such obligations, the Funds are authorized to so invest for
temporary or defensive purposes. To the extent that such
investments are made, any affected Fund will provide shareholders
with the percentage of any dividends paid which may qualify for
such tax-free treatment at the end of each calendar year.
Shareholders should then consult with their own tax advisors with
respect to the application of their state and local laws to these
distributions and on the application of other state and local
laws on distributions and redemption proceeds received from the
Fund.
Persons who are defined in the Code as "substantial users" (or
related persons) of facilities financed by private activity bonds
should consult with their tax advisors before purchasing shares
of a Fund.
Performance
As noted in each Prospectus, a Fund may from time to time quote
various performance figures to illustrate its past performance.
Each Fund may occasionally cite statistics to reflect its
volatility or risk.
Performance quotations by investment companies are subject to
rules adopted by the SEC. These rules require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by a Fund be
accompanied by certain standardized performance information
computed as required by the SEC. Current yield and average annual
compounded total return quotations used by the Funds are based on
the standardized methods of computing performance mandated by the
SEC. An explanation of those and other methods used by the Funds
to compute or express performance follows.
Total Return
The average annual total return is determined by finding the
average annual compounded rates of return over one-, five-, and
ten-year periods, or fractional portion thereof, that would
equate an initial hypothetical $1,000 investment to its ending
redeemable value. The calculation assumes the maximum sales
charge is deducted from the initial $1,000 purchase order, and
that income dividends and capital gains are reinvested at net
asset value on the reinvestment dates during the period. The
quotation assumes the account was completely redeemed at the end
of each one-, five-, and ten-year period and the deduction of all
applicable charges and fees. If a change is made to the sales
charge structure, historical performance information will be
restated to reflect the maximum sales charge currently in effect.
In considering the quotations set forth below, investors should
remember that the maximum sales charge reflected in each
quotation is a one-time fee (charged on all direct purchases)
which will have its greatest impact during the early stages of an
investment in one of the Funds. The actual performance of an
investment will be affected less by this charge the longer an
investor retains the investment in such Fund. The average annual
compounded rates of return for Class I of each Fund for the
indicated periods ended on the date of the financial statements
included herein were as shown below.
Average Annual Total Return
Inception From
of the Fund One-Year Five-Year Inception
Arizona Insured
Fund 04/30/93 -3.38% -- 1.30%
Florida Insured
Fund 04/30/93 -4.08 -- -0.17
Insured Fund 04/03/85 -2.25 6.92% 8.42
Massachusetts
Insured Fund 04/03/85 -2.44 6.65 7.46
Michigan
Insured Fund 04/03/85 -2.40 6.77 7.91
Minnesota
Insured Fund 04/03/85 -2.21 6.38 8.04
Ohio Insured Fund 04/03/85 -2.55 6.81 7.94
The above figures were calculated according to the following SEC
formula:
n
P(1+T) = ERV
where:
P = hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the one-, five-, or ten-year periods at
the end of the one-, five-, or ten-year periods (or fractional
portion thereof)
As discussed in each Prospectus, a Fund may quote total rates of
return in addition to its average annual total return. Such
quotations are computed in the same manner as the average annual
compounded rate, except that such quotations will be based on the
actual return for a specified period instead of the average
return over one-, five-, and ten-year periods. The rates of total
return for each Fund (except those Funds that had not commenced
operations during the periods indicated) for the indicated
periods ended on February 28, 1995 were as follows:
Aggregate Total Return
Inception From
of the Fund One-Year Five-Year Inception
Arizona Insured
Fund 04/30/93 -3.38% -- 2.40%
Florida Insured
Fund 04/30/93 -4.08 -- -0.32
Insured Fund 04/03/85 -2.25 39.71 122.86
Massachusetts
Insured Fund 04/03/85 -2.44 37.99 104.12
Michigan
Insured Fund 04/03/85 -2.40 38.78 112.69
Minnesota
Insured Fund 04/03/85 -2.21 36.26 115.23
Ohio Insured Fund 04/03/85 -2.55 39.00 113.38
Yield
Current yield reflects the income per share earned by a Fund's
portfolio investments.
Current yield is determined by dividing the net investment income
per share earned during a 30-day base period by the maximum
offering price per share on the last day of the period and
annualizing the result. Expenses accrued for the period include
any fees charged to all shareholders during the base period. The
yield for Class I shares of each Fund for the 30-day period ended
on the date of the financial statements included herein were as
follows:
Current
30-Day
Yield
Arizona Insured Fund* 5.70%
Florida Insured Fund* 5.47
Insured Fund 5.15
Massachusetts Insured Fund 5.11
Michigan Insured Fund 5.03
Minnesota Insured Fund 5.04
Ohio Insured Fund 5.03
*includes expense waiver
These figures were obtained using the SEC formula:
6
Yield = 2 [( a-b + 1 ) - 1]
----
cd
where:
a = interest earned during the period
b = net expenses accrued for the period
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends
d = the maximum offering price per share on the last day of the
period
30-Day Tax Equivalent Yield
Each Fund may also quote a tax equivalent yield which
demonstrates the taxable yield necessary to produce an after-tax
yield equivalent to that of a fund which invests in tax-exempt
obligations. Such yield is computed by dividing that portion of
the yield of a Fund (computed as indicated above) which is tax-
exempt by one minus the highest applicable combined federal and
state income tax rate (and adding the product to that portion of
the yield of a Fund that is not tax-exempt, if any). The tax
equivalent yield for Class I shares of each Fund for the 30-day
period ended on the date of the financial statements included
herein was as follows:
30-Day Tax
Equivalent
Yield
Arizona Insured Fund* 10.15%
Florida Insured Fund* 9.06
Insured Fund 8.53
Massachusetts Insured Fund 9.61
Michigan Insured Fund 8.73
Minnesota Insured Fund 9.12
Ohio Insured Fund 9.00
*includes expense waiver
The following table lists for each state, the state and the
combined state and federal income tax rates upon which the
Trust's tax equivalent yield quotations are based. From time to
time, as any changes to such rates become effective, tax
equivalent yield quotations advertised by the Trust will be
updated to reflect such changes. The Trust expects updates will
be necessary as tax rates are frequently changed by federal,
state and local governments. The advantage of tax-free
investments, such as the Funds of the Trust, will be enhanced by
any tax rate increases. Therefore, the details of specific tax
increases may be used in sales material for any Fund.
State Combined
Arizona 6.90% 43.77
Florida 0.00 39.60
Massachusetts 12.00 46.85
Michigan 4.40 42.26
Minnesota 8.50 44.73
Ohio 7.50 44.13
*Based on the maximum combined state and federal tax rate in
effect as of the date of this SAI. The maximum federal tax rate
in effect as of the date of this SAI was 39.6%.
Quotations of taxable equivalent yield by the Funds in
advertisements may reflect assumed rates of return which are not
intended to represent historical or current distribution rates or
yields. Such quotations will be used in sales literature, such as
Franklin's Tax-Free Yield Calculator, to illustrate the general
principle of the impact taxes have on rates of return or to show
the taxable rate of return that would be needed to match a tax-
free rate of return.
Current Distribution Rate
Current yield and tax equivalent yield, which are calculated
according to a formula prescribed by the SEC, are not indicative
of the amounts which were or will be paid to a Fund's
shareholders. Amounts paid to shareholders are reflected in the
quoted current distribution rate or taxable equivalent
distribution rate. The current distribution rate is computed by
dividing the total amount of dividends per share paid by the Fund
during the past twelve months by a current maximum offering
price. A taxable equivalent distribution rate demonstrates the
taxable distribution rate equivalent to a Fund's current
distribution rate (calculated as indicated above). The advertised
taxable equivalent distribution rate will reflect the most
current federal and state tax rates available to a Fund.
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 over the period such policies were in effect,
rather than using the dividends during the past twelve months.
The current distribution rate differs from the current yield
computation because it may include distributions to shareholders
from additional sources (i.e., sources other than dividends and
interest), such as short-term capital gains, and is calculated
over a different period of time.
The current distribution rate for each Fund for the 12-month
period ended on the date of the financial statements included
herein was as follows:
Current
Distribution
Rate
Arizona Insured Fund* 5.40%
Florida Insured Fund* 5.31
Insured Fund 5.66
Massachusetts Insured Fund 5.57
Michigan Insured Fund 5.57
Minnesota Insured Fund 5.41
Ohio Insured Fund 5.50
Volatility
Occasionally statistics may be used to specify Fund volatility or
risk. Measures of volatility or risk are generally used to
compare a Fund's net asset value or performance relative to a
market index. One measure of volatility or risk is standard
deviation. Standard deviation is used to measure variability of
net asset value or total return around an average over a
specified period of time. The premise is that greater volatility
connotes greater risk undertaken in achieving performance.
Other Performance Quotations
With respect to those categories of investors who are permitted
to purchase shares of a Fund at net asset value, sales literature
pertaining to a Fund may quote a "Current Distribution Rate for
Net Asset Value Investments." This rate is computed by adding the
income dividends paid by a Fund during the last 12 months and
dividing that sum by a current net asset value. Figures for
yield, total return and other measures of performance for net
asset value investments may also be quoted. These will be derived
as described elsewhere in this SAI with the substitution of net
asset value for public offering price.
Regardless of the method used, past performance is not
necessarily indicative of future results, but is an indication of
the return to shareholders only for the limited historical period
used.
A Fund may include in its advertising or sales material
information relating to investment objectives and performance
results of funds and classes belonging to the Templeton Group of
Funds. Resources is the parent company of the advisers and
underwriter of both the Franklin Group of Funds and Templeton
Group of Funds.
Comparisons
To help investors better evaluate how an investment in a Fund
might satisfy their investment objective, advertisements and
other materials regarding the Funds may discuss various measures
of Fund performance as reported by various financial
publications. Materials may also compare performance (as
calculated above) to performance as reported by other
investments, indices, and averages. When advertising current
ratings or rankings, the Fund may advertise together or
separately the following past ratings and rankings, and such
information in those categories which may appear in the future:
Lipper Fixed-Income Fund Performance Analysis ranked the
Massachusetts Insured Fund number one in total return in the
Massachusetts Municipal Debt Funds Category for its one-year
total return for the year ended December 31, 1994, with a total
return of -3.61%. There were thirty-two funds in the category.
The Lipper Fixed-Income Fund Performance Analysis and Lipper
Mutual Fund Yield Survey for Industry Averages - measure total
return and average current yield for the mutual fund industry.
They rank individual mutual fund performance over specified time
periods, assuming reinvestment of all distributions, exclusive of
any applicable sales charges.
In addition to such reports by Lipper, the following publications
and indices may be used to discuss or compare Fund performance:
Lehman Brothers Municipal Bond Index (LMBI) or its component
indices - LMBI measures yield, price, and total return for the
municipal bond market.
Bond Buyer 20 Bond Index is an index of municipal bond yields
based on yields of 20 general obligation bonds maturing in 20
years.
Bond Buyer 40 Bond Index is an index of municipal bond yields
based on yields of 40 general obligation bonds maturing in 40
years.
Salomon Brothers Composite High Yield Index covers much of the
below-investment grade U.S. corporate bond market. It combines
previously published indices to create a broad index for the high-
yield market. To enter the index, an issue must be rated
speculative by S&P or Moody's.
Salomon Brothers Broad Investment Grade Index is representative
of the entire universe of taxable fixed-income investments. It
includes issues of U.S. government securities, and any agency
thereof; corporate issues of investment grade, mortgage backed
securities; and yankee bonds.
Lehman Brothers Aggregate Bond Index or its component indices -
The Aggregate Bond Index measures yield, price and total return
for Treasury, Agency, Corporate, Mortgage, and Yankee bonds.
Savings & Loan Historical Interest Rates as published by the U.S.
Savings & Loan League Fact Book.
Inflation as measured by the Consumer Price Index, published by
the U.S. Bureau of Labor Statistics.
CDA Mutual Fund Report, published by CDA Investment Technologies
Inc. - analyzes price, current yield, risk, total return, and
average rate of return (average annual compounded growth rate)
over specified time periods for the mutual fund industry.
Financial Publications: The Wall Street Journal, Business Week,
Changing Times, Financial World, Forbes, and Money magazines.
Standard & Poor's Bond Indices - measure yield and price of
corporate, municipal, and government bonds.
Advertisements or information may mention or discuss ratings or
rankings of the Insured Funds or their securities, issued by
securities rating agencies or other organizations.
From time to time, advertisements or information for a Fund may
include a discussion of certain attributes or benefits to be
derived by an investment in the Fund. Such advertisements or
information may include symbols, headlines, or other material
which highlight or summarize the information discussed in more
detail in the communication.
Advertisements or information may also compare a Fund's
performance to the return on certificates of deposit or other
investments. Investors should be aware, however, that an
investment in a Fund involves the risk of fluctuation of
principal value, a risk generally not present in an investment in
a certificate of deposit issued by a bank. For example, as the
general level of interest rates rise, the value of the Fund's
fixed-income investments, as well as the value of its shares
which are based upon the value of such portfolio investments, can
be expected to decrease. Conversely, when interest rates
decrease, the value of a Fund's shares can be expected to
increase. Certificates of deposit are frequently insured by an
agency of the U.S. government. An investment in any of the Funds
is not insured by any federal, state or private entity.
In assessing such comparisons of performance, an investor should
keep in mind that the composition of the investments in the
reported indices and averages is not identical to a Fund's
portfolio, that the indices and averages are generally unmanaged,
and that the items included in the calculations of such averages
may not be identical to the formula used by a Fund to calculate
its figures. In addition there can be no assurance that the Funds
will continue this performance as compared to such other
averages.
Franklin had the first single-state municipal bond funds in
California, Massachusetts, Michigan, Minnesota and Ohio.
Other Features and Benefits
Founded in 1947, Franklin is a leader in the tax-free mutual fund
industry, currently offering 42 tax-free funds, including 33
funds free from both federal and state personal income taxes, and
managing more than $40 billion in municipal bond assets for over
half a million investors.
Under current tax laws, municipal securities remain one of the
few investments offering the potential for tax-free income. In
1995, taxes could cost as much as $47 on every $100 earned from a
fully taxable investment (based on the maximum combined 39.6%
federal tax rate and the highest state tax rate of 12% for 1995.)
Franklin tax-free funds, however, offer tax relief through a
professionally managed portfolio of tax-free securities selected
based on their yield, quality and maturity. An investment in a
Franklin tax-free fund can provide an investor with the potential
to earn income free of federal taxes and, depending on the fund,
state and local taxes as well, while supporting state and local
public projects. Franklin tax-free funds may also provide tax-
free compounding, when dividends are reinvested. An investment in
Franklin's tax-free funds can grow more rapidly than similar
taxable investments.
Each Fund may help investors achieve various investment goals
such as accumulating money for retirement, saving for a down
payment on a home, college costs and/or other long-term goals.
The Franklin College Costs Planner may assist an investor in
determining how much money must be invested on a monthly basis in
order to have a projected amount available in the future to fund
a child's college education. (Projected college cost estimates
are based upon current costs published by the College Board.)
Each Fund is a member of the Franklin Templeton Group, one of the
largest mutual fund organizations in the United States and may be
considered in a program for diversification of assets. Franklin,
one of the oldest mutual fund organizations, has managed mutual
funds for over 45 years and now services more than 2.4 million
shareholder accounts. In 1992, Franklin, a leader in managing
fixed-income mutual funds and an innovator in creating domestic
equity funds, joined forces with Templeton Worldwide, Inc., a
pioneer in international investing. Together, the Franklin
Templeton Group has over $118 billion in assets under management
for more than 3.8 million shareholder accounts and offers 111
U.S.-based mutual funds. A Fund may identify itself by its NASDAQ
For CUSIP number.
The Dalbar Surveys, Inc. broker/dealer survey has ranked Franklin
number one in service quality by Dalbar for five of the past
seven years.
According to Research and Ratings Review, Volume II, dated
February 28, 1994, Franklin's municipal research team ranked 2
out of 1,000 investment advisory firms surveyed by TMS Holdings,
Inc. As of November 14, 1994, this ranking was unchanged.
According to Strategic Insight, dated November 30, 1994, the
Franklin Florida Tax-Free Income Fund is the largest municipal
bond fund.
From time to time, advertisements or sales material issued by a
Fund may discuss or be based upon information in a recent issue
of the Special Report on Tax Freedom Day published by the Tax
Foundation, a Washington, D.C.-based nonprofit, research and
public education organization. The report illustrates, among
other things, the amount of time, on an annual basis, the average
taxpayer works to satisfy his or her tax obligations to the
federal, state and local taxing authorities.
Miscellaneous Information
The Trust amortizes the organizational expenses attributable to a
Fund over a period of five years from the effective date of the
registration statement covering that Fund. New investors
purchasing shares of a Fund after the effective date of such
Fund's registration statement under the Securities Act of 1933
will bear such expenses during the amortization period.
The portfolio insurance of the Insured Funds may affect the value
of a Fund's shares under certain circumstances. As discussed in
the Prospectus, unless a Secondary Market Insurance Policy is
purchased with respect to the portfolio security, an Insured Fund
intends to hold any defaulted securities or securities for which
there is a significant risk of default in its portfolio until the
default has been cured or the principal and interest are paid by
the issuer or the insurer. In such circumstances, the Board of
Trustees has instructed the Manager to consider, in its
evaluation of these securities, the value of the insurance
guaranteeing the interest and principal payments, as well as the
market value of the portfolio securities and the market value of
securities of similar issuers whose securities carry similar
interest rates. Absent any unusual or unforeseen circumstances,
as a result of the Portfolio Insurance Policy, the Manager would
likely recommend that an Insured Fund value the defaulted
securities, or securities for which there is a significant risk
of default, at the same price as securities of a similar nature
which are not in default. A defaulted security covered by a
Secondary Market Insurance Policy would likely be valued at
market.
The shareholders of a Massachusetts business trust could, under
certain circumstances, be held personally liable as partners for
its obligations. The Trust's Declaration of Trust, however,
contains an express disclaimer of shareholder liability for acts
or obligations of the Trust. The Declaration of Trust also
provides for indemnification and reimbursement of expenses out of
Trust assets for any shareholder held personally liable for
obligations of the Trust. The Declaration of Trust provides that
the Trust shall, upon request, assume the defense of any claim
made against any shareholder for any act or obligation of the
Trust and satisfy any judgment thereon. All such rights are
limited to the assets of the Fund(s) of which a shareholder holds
shares. The Declaration of Trust further provides that the Trust
may maintain appropriate insurance (for example, fidelity bonding
and errors and omissions insurance) for the protection of the
Trust, its shareholders, Trustees, officers, employees and agents
to cover possible tort and other liabilities. Thus, the risk of a
shareholder incurring financial loss on account of shareholder
liability is limited to circumstances in which both inadequate
insurance exists and the Trust itself is unable to meet its
obligations.
From time to time, the number of Trust shares of beneficial
interest of any Fund held in the "street name" accounts of
various securities dealers for the benefit of their clients or in
centralized securities depositories may exceed 5% of the total
shares outstanding. To the best knowledge of the Funds, no other
person holds beneficially or of record, more than 5% of a Fund's
outstanding shares.
Access persons of the Franklin Templeton Group, as defined in SEC
Rule 17(j) under the 1940 Act, who are employees of Resources or
its subsidiaries, are permitted to engage in personal securities
transactions subject to the following general restrictions and
procedures: (1) The trade must receive advance clearance from a
Compliance Officer and must be completed within 24 hours after
this clearance; (2) Copies of all brokerage confirmations must be
sent to the Compliance Officer and within 10 days after the end
of each calendar quarter, a report of all securities transactions
must be provided to the Compliance Officer; (3) In addition to
items (1) and (2), access persons involved in preparing and
making investment decisions must file annual reports of their
securities holdings each January and also inform the Compliance
Officer (or other designated personnel) if they own a security
that is being considered for a fund or other client transaction
or if they are recommending a security in which they have an
ownership interest for purchase or sale by a fund or other
client.
Ownership and Authority Disputes
In the event of disputes involving multiple claims of ownership
or authority to control a shareholder's account, the Trust has
the right (but has no obligation) to: (a) freeze the account and
require the written agreement of all persons deemed by the Trust
to have a potential property interest in the account, prior to
executing instructions regarding the account; (b) interplead
disputed funds or accounts with a court of competent
jurisdiction; or (c) surrender ownership of all or a portion of
the account to the Internal Revenue Service in response to a
Notice of Levy.
Appendix A
Description of Municipal Securities Ratings
Municipal Bonds
Moody's Investors Service ("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 municipal
bond ratings. 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.
Standard & Poor's Corporation ("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 Investors Service, Inc. Municipal Division
AAA bonds: (highest quality) "the obligor has an extraordinary
ability to pay interest and repay principal which is unlikely to
be affected by reasonably foreseeable events."
AA bonds: (high quality) "the obligor's ability to pay interest
and repay principal, while very strong, is somewhat less than for
AAA-rated securities or more subject to possible change over the
term of the issue."
A bonds: (good quality) "the obligor's ability to pay interest
and repay principal is strong, but may be more vulnerable to
adverse changes in economic conditions and circumstances than
bonds with higher ratings."
BBB bonds: (satisfactory bonds) "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 weaken this ability than bonds with
higher ratings."
Municipal Notes
Moody's
Moody's ratings for state and 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, while various 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 Short-term and Commercial Paper Ratings
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-S: 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.
Appendix B
Further Information on Special
Factors Affecting Each State Fund
The following information is a summary of special factors
affecting each of the individual State Funds. It does not purport
to be a complete description of such factors and is based
primarily upon information derived from public documents relating
to securities offerings of issuers of such states and other
historically reliable sources such as S&P Creditweek Municipal.
The Trust has not independently verified any of this data. 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. The risk of nonpayment of
principal or interest has been reduced due to the existence of
insurance on all municipal securities in the portfolios of the
Insured Funds.
ARIZONA
In 1970, Arizona retired its general obligation bonds and is now
constitutionally prohibited from issuing such debt. The state
currently relies on revenue bonds, lease obligations, and pay-as-
you-go financing to support its financing needs. Arizona's debt
level is moderate with debt service representing 2.4% of the
state's revenues. On a per capita basis, debt was $279 or 1.6% of
personal income for fiscal 1993.
Beginning in 1985, Arizona experienced 5 consecutive fiscal years
with budget shortfalls. These shortfalls were managed with budget
cuts, one-time adjustments, tax accelerations and borrowing. In
1990, a $250 million tax increase, combined with budget cuts,
resulted in a general fund balance equal to 2% of operating
expenditures, down from 21% in 1980. This balance was maintained
in fiscal 1991 but fell to 0.2%, a $5.2 million general fund
balance, after certain tax refunds. Fiscal 1993, buoyed by an
accelerating state economy, helped Arizona regain an earlier
level of liquidity, a comfortable 2.0% of expenditures. Fiscal
1994, with strong revenues growth, was expected to close with a
general fund balance of approximately 2% also.
FLORIDA
Per capita personal income levels in Florida during 1991 and 1992
were lower than the national average. Personal income growth
slowed from rates exceeding 9% per year to 1.9% in 1991. While
the growth rate will likely accelerate as the recession ends,
population growth will keep Florida's per capita personal income
near the national average. The unemployment rate in 1992
increased to 8.2% from 7.3% in 1991, a higher figure than the
national rate of 7.4% in 1992. The per capita personal income of
$18,992 in 1991 was just below the national figure of $19,092.
Florida's financial performance and position remain satisfactory.
In the last three fiscal years, lower-than-expected economic
activity resulted in significant state revenue shortfalls.
However, because of timely action, the state has maintained
budgetary balance. In the coming years, difficult choices will
continue to be posed among spending priorities and tax policies.
An adequate balance must be found to cope with funding demands
driven by rapid population growth, while still promoting economic
development.
Florida's consumption tax-based revenues received a boost from
the economic activity associated with the rebuilding and cleanup
of southern Florida as a result of damage caused by Hurricane
Andrew in August 1992. The state estimates that increased
economic activity resulting from the rebuilding effort will add
to its sales receipts by nearly $500 million in fiscal 1993-1994.
Net costs to the state attributable to the cleanup and repair
will be in the vicinity of $100 million, with federal and private
insurance picking up the rest of the estimated $20-30 billion
tab.
The proposed budget for fiscal 1994 provides for an increase in
spending in the General Revenue Fund of 14.2% from fiscal 1993.
Projected revenue growth of $949.1 million is based on underlying
economic growth, with an additional $630.7 million to be derived
from new taxes and fees. The governor has proposed funding the
Working Capital Fund at $203.5 million, more than meeting the
goal of funding the first increment of a Budget Stabilization
Fund for fiscal 1995.
MASSACHUSETTS
Despite continuing efforts to restore fiscal control,
Massachusetts' debt service remains among the highest in the
nation. Annual debt service is forecast between $1.4 and $1.6
billion through fiscal 1997, including $280 million for fiscal
recovery bonds. The per capita debt at fiscal year-end 1993 was
$2,104 or 9.3% of personal income, a relatively high level of
debt when compared to the national median of $399 or 2.1%.
In 1993, as in 1992, Massachusetts' revenue goals were met and
its short-term borrowing and accumulated fund deficit were
reduced. At fiscal year-end 1993, the budgeted operating funds
had a balance of $452 million, on a budgetary basis, and up from
$313 million at fiscal year-end 1992 on a budgetary basis and a
$184 million deficit on GAAP basis. For fiscal 1994, balances in
the budgeted operating funds improved, $510 million on a
budgetary basis and a deficit of $72 million on a GAAP basis.
Estimates to fiscal 1995 tax revenues are for a 5.4% increase of
fiscal 1994.
The governor's fiscal 1996 budget estimates spending at $16.7
billion, up 8% from fiscal 1995. Education reform legislation
enacted in June 1993 will require a 13% increase in spending for
elementary and secondary education, an increase of approximately
$175 million, with additional increases required in 1995 and
1996. Tax revenues are projected to grow 4.8% for fiscal 1995.
The budget also provides $35 million in tax cuts, 0.3% of tax
revenues.
MICHIGAN
In fiscal 1991, Michigan faced an estimated $1.8 billion
budgetary gap caused, in part, by a decrease in tax revenues
during the most recent recession. This deficit was reduced to $90
million through measures enacted in 1991 and 1992 which cut
public assistance by more than $500 million, imposed a state
hiring freeze, and resulted in the utilization of the general and
budget stabilization funds' reserves. At the beginning of fiscal
1993, Michigan's operating deficit had been eliminated.
Michigan's financial position improved in fiscal 1993, and $282
million was deposited in the state's budget stabilization fund at
year end. Fiscal 1994 ended with a surplus of $463 million, which
was due to strong revenue growth resulting from a strong state
economy, spending restraint, and the imposition of a two cent
sales tax increase to fund statewide school finance reform. Under
that reform, the dedicated sales tax replaced local property
taxes as the primary funding source.
The state expects that the budget stabilization fund balance will
increase to $1.2 billion at the close of fiscal 1995 from $779
million at 1994 fiscal year end. In early 1995, Michigan enacted
tax cuts totaling $186 million. If the year-end surplus is larger
than expected, the tax cuts would grow. Tax cuts in fiscal 1996
will cost $246 million.
Michigan's debt burden is moderate, with all ratios below the
national median.
MINNESOTA
Minnesota's debt burden is relatively moderate. The state has
recently established a financial management reform program which
includes a debt management policy under which targeted levels for
total outstanding general obligation debt are established, based
upon general fund revenues and personal income levels. The state
has consistently been able to meet its targeted levels. During
fiscal 1993, Minnesota had close to $1.8 billion in outstanding
general obligation bonds. On a per capita basis, this represented
approximately $378 or 1.8% of personal income.
Original forecasts for fiscal 1993 estimated that Minnesota's
budget reserve fund would be reduced to its lowest level since
1987 to meet the state's budget requirements, due largely to
revenue losses caused by the recession. Strong economic growth
and spending cuts, however, enabled the state to improve the
balance of its reserve account from $260 million in February 1993
to $360 million in July 1993. To protect against future economic
uncertainty, Minnesota's legislature now requires across-the-
board spending cuts, up to 1%, before the state's reserve account
may be used. In addition, as part of the state's financial
management reform program, mandatory spending growth limits have
been enacted for some of the state's fastest growing programs,
although expenditures for health and education remain high.
Fiscal 1994 showed a budgetary surplus of $913 million. The
reserve fund balance increased to $500 million at 1994 fiscal
year end. The revised 1994-95 biennium general fund budget
projects 1995 fiscal year end reserves of $769 million.
OHIO
Despite the recent economic recession, timely fiscal action has
allowed Ohio to balance its budget, notwithstanding mid-year
budget imbalances in fiscal years 1991-1993. Lower than expected
tax revenues and pressure to spend on human service programs, due
to the recession, resulted in an estimated deficit of $590
million in fiscal 1993. At fiscal year-end 1993, however, Ohio's
budgetary balance was a positive $111 million, as a result of
expenditure reductions, revenue enhancements and the use of
reserve funds, although $21 million was transferred to the
state's budget stabilization reserve fund.
Financial operations continued to show improvement in fiscal
1994. The state achieved a operating surplus of $468 million,
$260 million of which it deposited in the budget stabilization
fund, whose balance was increased to $280 million. Current
estimates now indicate another year of positive operations in
fiscal 1995, further strengthening financial reserves.
Currently, approximately 80% of Ohio's debt consists of lease
obligations or lease revenue bonds. The state's current direct
debt levels are relatively moderate, representing, on a per
capita basis, $446 or 1.6% of personal income. Total debt
service payments constitute approximately 7% of the state's
budget.
Financial Statements
The financial statement contained in the Annual Report to
Shareholders of the Trust dated February 28, 1995 are
incorporated herein by reference.
FRANKLIN TAX-FREE TRUST
STATEMENT OF ADDITIONAL INFORMATION
May 1, 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 investment
company consisting of 27 separate series. This Statement of
Additional Information (the "SAI") relates only to the ten series
shown below, nine of which, as noted, are currently offering two
classes of shares:
Class I Class II
Franklin Alabama Tax-Free Franklin Alabama Tax-Free
Income Fund, Class I Income Fund, Class II
Franklin Florida Tax-Free Franklin Florida Tax-Free
Income Fund, Class I Income Fund, Class II
Franklin Georgia Tax-Free Franklin Georgia Tax-Free
Income Fund, Class I Income Fund, Class II
Franklin Kentucky Tax-Free Not Available
Income Fund, Class I
Franklin Louisiana Tax-Free Franklin Louisiana Tax-Free
Income Fund, Class I Income Fund, Class II
Franklin Maryland Tax-Free Franklin Maryland Tax-Free
Income Fund, Class I Income Fund, Class II
Franklin Missouri Tax-Free Franklin Missouri Tax-Free
Income Fund, Class I Income Fund, Class II
Franklin North Carolina Franklin North Carolina
Tax-Free Income Fund, Class I Tax-Free Income Fund, Class
II
Franklin Texas Tax-Free Franklin Texas Tax-Free
Income Fund, Class I Income Fund, Class II
Franklin Virginia Tax-Free Franklin Virginia Tax-Free
Income Fund, Class I Income Fund, Class II
The new multiclass structure allows investors to choose, among
other features, the differing upfront sales charges and ongoing
distribution fees ("Rule 12b-1 fees") on their investments in a
Fund.
Each Fund may, separately or collectively, be referred to as a
"Fund," the "Funds," or individually by the state 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
Kentucky Fund will be included in all discussions pertaining to
Class I in this SAI.
The principal investment objective of each Fund is to provide
investors with as high a level of income exempt from federal
income taxes as is consistent with prudent investing, while
seeking preservation of shareholders' capital. The investment
objective of each Fund is a fundamental policy. Each Fund also
seeks to provide a maximum level of income exempt from state
personal income taxes, if any, to shareholders resident in the
named state. The Maryland Fund is non-diversified; the other
Funds are diversified.
Each Fund invests primarily in municipal securities issued by its
respective state and its political subdivisions, agencies, and
instrumentalities.
Separate prospectuses for the Funds, dated May 1, 1995, as may be
amended from time to time, provide the basic information a
prospective investor should know before investing in any Fund of
the Trust and may be obtained without charge from the Trust or
its principal underwriter, Franklin/Templeton Distributors, Inc.
("Distributors"), at the address shown above.
This SAI is not a prospectus. It contains information in addition
to and in more detail than set forth in the Prospectuses. This
SAI is intended to provide investors with additional information
regarding the activities and operations of the Trust and each
Fund and should be read in conjunction with the Trust's
Prospectuses.
Contents Page
About the Trust
The Trust's Investment
Objectives and Policies
Description of Municipal
and Other Securities
Investment Restrictions
Trustees and Officers
Investment Advisory
and Other Services
The Trust's Policies
Regarding Brokers Used
on Portfolio Transactions
Additional Information
Regarding Purchases and
Redemptions of Trust Shares
The Trust's Underwriter
Plans of Distribution
Additional Information
Regarding Taxation
General Information
Miscellaneous Information
Financial Statements
Appendices
About the Trust
The Trust is an open-end management investment company, commonly
called a "mutual fund," and has registered as such under the
Investment Company Act of 1940 (the "1940 Act"). The Trust was
organized as a Massachusetts business trust in September 1984.
The Trust issues its shares of beneficial interest with no par
value in several series. Currently, the Trust has 27 separate
series, each of which maintains a totally separate investment
portfolio. This SAI discusses only the ten series listed on the
cover.
The Trust's Investment
Objectives and Policies
Each Fund seeks to maximize income exempt from federal income
taxes and from the personal income taxes for shareholders
resident in the named state, consistent with prudent investing,
and the preservation of shareholders' capital.
Although the Trust seeks to invest all the assets of each Fund in
a manner designed to accomplish the objective of each Fund, there
may be times when market conditions limit the availability of
appropriate municipal securities or, in the investment manager's
opinion, there exist uncertain economic, market, political, or
legal conditions which may jeopardize the value of municipal
securities. For temporary defensive purposes, a Fund may invest
more than 20% and up to 100% of the value of its net assets in
instruments the interest on which is exempt from federal income
taxes only, and each Fund may invest more than 20% and up to 100%
of its net assets in taxable, fixed-income obligations. The
policy followed by these Funds of attempting to meet these state
requirements in order to distribute tax-exempt income is not a
fundamental policy with respect to the Funds and may be changed
without notification to shareholders. If, due to unusual market
or political conditions, investments in securities as described
above would be advisable, in the investment manager's opinion, in
order to protect the value of the Funds' shares or their net
yield, such investments may be made, notwithstanding the
potential state income tax effects.
It is the policy of each Fund that illiquid securities (including
illiquid securities with contractual or other restrictions on
resale or instruments which are not readily marketable or have no
readily ascertainable market value) may not constitute, at the
time of the purchase or at any time, more than 10% of the value
of the total net assets of the Fund.
Description of Municipal
and Other Securities
The Prospectus describes the general categories and nature of
municipal securities. Discussed below are the major attributes of
the various municipal and other securities in which each of the
Funds may invest.
Municipal Notes
Tax Anticipation Notes are used to finance working capital needs
of municipalities and are issued in anticipation of various
seasonal tax revenues, which will be used to pay the notes. They
are usually general obligations of the issuer, secured by the
taxing power for the payment of principal and interest.
Revenue Anticipation Notes are issued in expectation of receipt
of other kinds of revenue, such as federal revenues available
under the Federal Revenue Sharing Program. They are usually
general obligations of the issuer. Bond Anticipation Notes are
normally issued to provide interim financing until long-term
financing can be arranged. The long-term bonds then provide the
money for the repayment of the notes.
Construction Loan Notes are sold to provide construction
financing for specific projects. After successful completion and
acceptance, many projects receive permanent financing through the
Federal Housing Administration under the Federal National
Mortgage Association or the Government National Mortgage
Association.
Tax-Exempt Commercial Paper typically represents a short-term
obligation (270 days or less) issued by a municipality to meet
working capital needs.
Municipal Bonds, which meet longer-term capital needs and
generally have maturities of more than one year when issued, have
two principal classifications: general obligation bonds and
revenue bonds.
1. General Obligation Bonds. Issuers of general obligation bonds
include states, counties, cities, towns and regional districts.
The proceeds of these obligations are used to fund a wide range
of public projects, including construction or improvement of
schools, highways and roads, and water and sewer systems. The
basic security behind general obligation bonds is the issuer's
pledge of its full faith, credit and taxing power for the payment
of principal and interest. The taxes that can be levied for the
payment of debt service may be limited or unlimited as to the
rate or amount of special assessments.
2. Revenue Bonds. A revenue bond is not secured by the full
faith, credit and taxing power of an issuer. Rather, the
principal security for a revenue bond is generally the net
revenue derived from a particular facility, group of facilities
or, in some cases, the proceeds of a special excise tax or other
specific revenue source. Revenue bonds are issued to finance a
wide variety of capital projects including: electric, gas, water,
and sewer systems; highways, bridges and tunnels; port and
airport facilities; colleges and universities; and hospitals. The
principal security behind these bonds may vary. Housing finance
authorities have a wide range of security, including partially or
fully insured mortgages, rent subsidized and/or collateralized
mortgages, and/or the net revenues from housing or other public
projects. Many bonds provide additional security in the form of a
debt service reserve fund, from which money may be used to make
principal and interest payments on the issuer's obligations. Some
authorities are provided with further security in the form of
state assurance (although without obligation) to make up
deficiencies in the debt service reserve fund.
Industrial Development Bonds. These are issued by or on behalf of
public authorities to raise money for the financing of various
privately operated facilities for business manufacturing,
housing, sports, and pollution control. These bonds are also used
to finance public facilities such as airports, mass transit
systems, ports, and parking. The payment of the principal and
interest on such bonds is solely dependent on the ability of the
facilities user to meet its financial obligations and the pledge,
if any, of the real and personal property so financed as security
for such payment.
Variable or Floating Rate Demand Notes ("VRDNs"). As stated in
the Prospectus, VRDNs are tax-exempt obligations which contain a
floating or variable interest rate adjustment formula and a right
of demand, which may be unconditional, to receive payment of the
unpaid principal balance plus accrued interest upon a short
notice period (generally up to 30 days) prior to specified dates,
either from the issuer or by drawing on a bank letter of credit,
a guarantee or insurance issued with respect to such instrument.
The interest rates are adjustable to the prevailing market rate
for similar investments, at intervals ranging from daily up to
six months, pursuant to an adjustment formula calculated to
maintain the market value of the VRDN at approximately its par
value upon the adjustment date.
When-Issued Purchases. New issues of municipal securities are
freqently offered on a when-issued basis; that is, payment for
and delivery of the securities (the "settlement date") normally
takes place within 15 to 60 days after the date that the offer is
accepted. The purchase price and the yield that will be received
on the securities are fixed at the time the buyer enters into the
commitment. While the Trust will always make commitments to
purchase such securities with the intention of actually acquiring
the securities, it may nevertheless sell these securities before
the settlement date if it is deemed advisable as a matter of
investment strategy. To the extent that assets of a Fund are held
in cash pending the settlement of a purchase of securities, that
Fund would earn no income; however, it is the Trust's intention
to have each Fund fully invested to the extent practicable and
subject to the policies stated in the Prospectus. At the time a
Fund makes the commitment to purchase a municipal bond on a when-
issued basis, it will record the transaction and reflect the
value of the security in determining its net asset value. The
Trust does not believe that any Fund's net asset value or income
will be adversely affected by the purchase of municipal bonds on
a when-issued basis. Each Fund will establish a segregated
account in which it will maintain cash and marketable securities
equal in value to commitments for when-issued securities.
Stripped Municipal Securities. Municipal securities may also be
sold in "stripped" form. Stripped municipal securities represent
separate ownership of interest and principal payments on
municipal obligations.
Callable Bonds. There are municipal bonds which are issued with
provisions which prevent them from being called, typically for
periods of 5 to 10 years. During times of generally declining
interest rates, if the call-protection on callable bonds expires,
there is an increased likelihood that a number of such bonds may,
in fact, be called away by the issuers. Based on a number of
factors, including certain portfolio management strategies used
by the Funds' investment manager, the Funds believe they have
reduced the risk of adverse impact on net asset value based on
calls of callable bonds. The investment manager may dispose of
such bonds in the years prior to their call date, if the
investment manager believes such bonds are at their maximum
premium potential. In pricing such bonds in each Fund's
portfolio, each callable bond is marked-to-market daily based on
the bond's call date. Thus, the call of some or all of each
Fund's callable bonds may have an impact on such Fund's net asset
value. In light of each Fund's pricing policies and because the
Funds follow certain amortization procedures required by the
Internal Revenue Service, the Funds are not expected to suffer
any material adverse impact related to the value at which a Fund
has carried the bonds in connection with calls of bonds purchased
at a premium. Notwithstanding such policies, however, the
reinvestment of the proceeds of any called bond may be in bonds
which pay a higher or lower rate of return than the called bonds;
and as with any investment strategy, there is no guarantee that a
call will not have a more substantial impact than anticipated or
that the Funds' objectives will be achieved.
Certificates of Participation. As stated in the Prospectus, each
Fund may also invest in municipal lease obligations primarily
through Certificates of Participation ("COPs"). COPs are
distinguishable from municipal debt in that the lease which is
the subject of the transaction typically 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.
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 Moody's Investors Service ("Moody's"), Standard &
Poor's (S&P) or Fitch Investors Service, Inc. ("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, 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 has determined
that COPs held in each Fund's portfolio 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; (b) the size of the municipal securities market for
each Fund, 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.
There is no limit as to the amount of assets which each Fund may
invest in COPs.
Escrow-Secured Bonds or Defeased Bonds are created when an issuer
refunds in advance of maturity (or pre-refunds) an outstanding
bond issue which is not immediately callable, and it becomes
necessary or desirable to set aside funds for redemption of the
bonds at a future date. In an advance refunding, the issuer will
use the proceeds of a new bond issue to purchase high grade,
interest bearing debt securities which are then deposited in an
irrevocable escrow account held by a trustee bank to secure all
future payments of principal and interest of the advance refunded
bond. Escrow- secured bonds will often receive a triple-A rating
from S&P, Moody's and Fitch.
U.S. Government Obligations which may be owned by a Fund are
issued by the U.S. Treasury and include bills, certificates of
indebtedness, notes and bonds, or are issued by agencies and
instrumentalities of the U.S. government and backed by the full
faith and credit of the U.S. government.
Commercial Paper refers to promissory notes issued by
corporations in order to finance their short-term credit needs.
Lending of Portfolio Securities. Consistent with procedures
approved by the Board of Trustees and subject to the following
conditions, a 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 a Fund's total
assets at the time of the most recent loan. The borrower must
deposit with a Fund's custodian collateral with an initial market
value of at least 102% of the initial market value of the
securities loaned, including any accrued interest, with the value
of the collateral and loaned securities marked-to-market daily to
maintain collateral coverage of at least 102%. Such collateral
shall consist of cash. The lending of securities is a common
practice in the securities industry. A Fund may engage in
security loan arrangements with the primary objective of
increasing such Fund's income either through investing the cash
collateral in short-term interest bearing obligations or by
receiving a loan premium from the borrower. Under the securities
loan agreement, a Fund continues to be entitled to all dividends
or interest on any loaned securities. As with any extension of
credit, there are risks of delay in recovery and loss of rights
in the collateral should the borrower of the security fail
financially. While such securities are on loan, the borrower will
pay such Fund any income accruing thereon, and such Fund may
invest the cash collateral in portfolio securities, thereby
earning additional income. A Fund will not lend its portfolio
securities if such loans are not permitted by the laws or
regulations of any state in which its shares are qualified for
sale. Loans are typically subject to termination by a Fund in the
normal settlement time or by the borrower on one day's notice.
Borrowed securities must be returned when the loan is terminated.
Any gain or loss in the market price of the borrowed securities
which occurs during the term of the loan inures to such Fund and
its shareholders. A Fund may pay reasonable finders', borrowers',
administrative and custodial fees in connection with a loan of
its securities.
There may, of course, be other types of municipal securities that
become available which are similar to the foregoing described
municipal securities in which the Funds may also invest, to the
extent such investments would be consistent with the foregoing
objectives and policies.
Investment Restrictions
The Trust has adopted the following restrictions as additional
fundamental policies of each Fund. These policies may not be
changed with respect to any Fund without the approval of a
majority of the outstanding voting securities of such Fund. Under
the 1940 Act, a "vote of a majority of the outstanding voting
securities" of the Trust or of a particular Fund means the
affirmative vote of the lesser of (1) more than 50% of the
outstanding shares of the Trust or of such Fund or (2) 67% or
more of the shares of the Trust or of such Fund present at a
shareholders meeting if more than 50% of the outstanding shares
of the Trust or of such Fund are represented at the meeting in
person or by proxy. A Fund may not:
1. Borrow money or mortgage or pledge any of its assets, except
that borrowings (and a pledge of assets therefore) for temporary
or emergency purposes may be made from banks in any amount up to
5% of the total asset value.
2. Buy any securities on "margin" or sell any securities
"short," except that it may use such short-term credits as are
necessary for the clearance of transactions.
3. Make loans, except through the purchase of readily marketable
debt securities which are either publicly distributed or
customarily purchased by institutional investors. Although such
loans are not presently intended, this prohibition will not
preclude a Fund from loaning portfolio securities to
broker/dealers or other institutional investors if at least 102%
cash collateral is pledged and maintained by the borrower;
provided such portfolio security loans may not be made if, as a
result, the aggregate of such loans exceeds 10% of the value of
the Fund's total assets at the time of the most recent loan.
4. Act as underwriter of securities issued by other persons,
except insofar as the Fund may be technically deemed an
underwriter under the federal securities laws in connection with
the disposition of portfolio securities.
5. Purchase the securities of any issuer which would result in
owning more than 10% of the voting securities of such issuer,
except with respect to the Trust's non-diversified Funds, which
Funds will not purchase a security, if as a result: i) more than
25% of its total assets would be invested in the securities of a
single issuer or ii) with respect to 50% of its total assets,
more than 5% of its assets would be invested in the securities of
a single issuer.
6. Purchase securities from or sell to the Trust's officers and
trustees, or any firm of which any officer or trustee is a
member, as principal, or retain securities of any issuer if, to
the knowledge of the Trust, one or more of the Trust's officers,
trustees, or investment adviser own beneficially more than 1/2 of
1% of the securities of such issuer and all such officers and
trustees together own beneficially more than 5% of such
securities.
7. Acquire, lease or hold real estate, except such as may be
necessary or advisable for the maintenance of its offices and
provided that this limitation shall not prohibit the purchase of
municipal and other debt securities secured by real estate or
interests therein.
8. Invest in commodities and commodity contracts, puts, calls,
straddles, spreads or any combination thereof, or interests in
oil, gas, or other mineral exploration or development programs,
except that it may purchase, hold and dispose of "obligations
with puts attached" in accordance with its investment policies.
9. Invest in companies for the purpose of exercising control or
management.
10. Purchase securities of other investment companies, except in
connection with a merger, consolidation or reorganization except
to the extent the Fund invests its uninvested daily cash balances
in shares of the Franklin Tax-Exempt Money Fund and other tax-
exempt money market funds in the Franklin Group of Funds provided
i) its purchases and redemptions of such money market fund shares
may not be subject to any purchase or redemption fees, ii) its
investments may not be subject to duplication of management fees,
nor to any charge related to the expense of distributing the
Fund's shares (as determined under Rule 12b-1, as amended under
the federal securities laws) and iii) provided aggregate
investments by the Fund in any such money market fund do not
exceed (A) the greater of (i) 5% of the Fund's total net assets
or (ii) $2.5 million, or (B) more than 3% of the outstanding
shares of any such money market fund.
11. Invest more than 25% of its assets in securities of any
industry; although for purposes of this limitation, tax-exempt
securities and U.S. government obligations are not considered to
be part of any industry.
Portfolio Turnover: The portfolio turnover of the Funds for each
of the two fiscal years ended February 28, was as follows:
Fiscal Year
1994 1995
Alabama Fund 14.87% 19.85%
Florida Fund 11.99 14.34
Georgia Fund 16.75 36.17
Kentucky Fund 13.22 32.92
Louisiana Fund 17.63 32.28
Maryland Fund 18.38 20.30
Missouri Fund 11.02 19.84
North Carolina Fund 3.86 25.05
Texas Fund 20.18 6.36
Virginia Fund 6.86 21.73
Trustees and Officers
The trustees have the responsibility for the overall management
of the Trust, including general supervision and review of each
Fund's investment activities. The trustees elect the officers of
the Trust who are responsible for administering the day-to-day
operations of the Trust. The affiliations of the officers and
trustees and their principal occupations for the past five years
are listed below. Trustees who are deemed to be "interested
persons" of the Trust, as defined in the 1940 Act, are indicated
by an asterisk (*).
Name, Address Positions and Offices Principal Occupations
and Age with the Trust During Past Five Years
Frank H. Abbott, III (74)
1045 Sansome St.
San Francisco, CA 94111
Trustee
President and Director, Abbott Corporation (an investment
company); and director, trustee or managing general partner, as
the case may be, of 30 of the investment companies in the
Franklin Group of Funds.
Harris J. Ashton (62)
General Host Corporation
Metro Center, 1 Station Place
Stamford, CT 06904-2045
Trustee
President, Chief Executive Officer and Chairman of the Board,
General Host Corporation (nursery and craft centers); Director,
RBC Holdings, Inc. (a bank holding company) and Bar-S Foods; and
director, trustee or managing general partner, as the case may
be, of 54 of the investment companies in the Franklin Templeton
Group of Funds.
S. Joseph Fortunato (62)
Park Avenue at Morris County
P. O. Box 1945
Morristown, NJ 07962-1945
Trustee
Member of the law firm of Pitney, Hardin, Kipp & Szuch; Director
of General Host Corporation; director, trustee or managing
general partner, as the case may be, of 56 of the investment
companies in the Franklin Templeton Group of Funds.
David W. Garbellano (80)
111 New Montgomery St., #402
San Francisco, CA 94105
Trustee
Private Investor; Assistant Secretary/Treasurer and Director,
Berkeley Science Corporation (a venture capital company); and
director, trustee or managing general partner, as the case may
be, of 29 of the investment companies in the Franklin Group of
Funds.
*Charles B. Johnson (62)
777 Mariners Island Blvd.
San Mateo, CA 94404
Chairman of the Board and Trustee
President and Director, Franklin Resources, Inc.; Chairman of the
Board and Director, Franklin Advisers, Inc. and Franklin
Templeton Distributors, Inc.; Director, Franklin/Templeton
Investor Services, Inc. and General Host Corporation; and officer
and/or director, trustee or managing general partner, as the case
may be, of most other subsidiaries of Franklin Resources, Inc.
and of 55 of the investment companies in the Franklin Templeton
Group of Funds.
*Rupert H. Johnson, Jr. (54)
777 Mariners Island Blvd.
San Mateo, CA 94404
President and Trustee
Executive Vice President and Director, Franklin Resources, Inc.
and Franklin Templeton Distributors, Inc.; President and
Director, Franklin Advisers, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; and officer and/or director, trustee or
managing general partner, as the case may be, of most other
subsidiaries of Franklin Resources, Inc. and of 42 of the
investment companies in the Franklin Templeton Group of Funds.
Frank W. T. LaHaye (66)
20833 Stevens Creek Blvd.
Suite 102
Cupertino, CA 95014
Trustee
General Partner, Peregrine Associates and Miller & LaHaye, which
are General Partners of Peregrine Ventures and Peregrine Ventures
II (venture capital firms); Chairman of the Board and Director,
Quarterdeck Office Systems, Inc.; Director, FischerImaging
Corporation; and director or trustee, as the case may be, of 25
of the investment companies in the Franklin Group of Funds.
Gordon S. Macklin (66)
8212 Burning Tree Road
Bethesda, MD 20817
Trustee
Chairman, White River Corporation (information services);
Director, Fund American Enterprises Holdings, Inc., Martin
Marietta Corporation, MCI Communications Corporation, MedImmune,
Inc. (biotechnology), Infovest Corporation (information
services), and Fusion Systems Corporation (industrial
technology); and director, trustee or managing general partner,
as the case may be, of 51 of the investment companies in the
Franklin Templeton Group of Funds; formerly, Chairman, Hambrecht
and Quist Group; formerly, Director, H & Q Healthcare Investors;
and formerly, President, National Association of Securities
Dealers, Inc.
Harmon E. Burns (50)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Executive Vice President, Secretary and Director, Franklin
Resources, Inc.; Executive Vice President and Director, Franklin
Templeton Distributors, Inc.; Executive Vice President, Franklin
Advisers, Inc.; Director, Franklin/Templeton Investor Services,
Inc.; officer and/or director, as the case may be, of other
subsidiaries of Franklin Resources, Inc.; and officer and/or
director or trustee of 41 of the investment companies in the
Franklin Templeton Group of Funds.
Kenneth V. Domingues (62)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President - Financial Reporting and Accounting Standards
Senior Vice President, Franklin Resources, Inc., Franklin
Advisers, Inc., and Franklin Templeton Distributors, Inc.;
officer and/or director, as the case may be, of other
subsidiaries of Franklin Resources, Inc.; and officer and/or
managing general partner, as the case may be, of 36 of the
investment companies in the Franklin Group of Funds.
Don Duerson (62)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Employee of Franklin Resources, Inc. and its subsidiaries in
senior portfolio management capacities.
Martin L. Flanagan (34)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Chief Financial Officer
Senior Vice President, Chief Financial Officer and Treasurer,
Franklin Resources, Inc.; Executive Vice President, Templeton
Worldwide, Inc.; Senior Vice President and Treasurer, Franklin
Advisers, Inc. and Franklin Templeton Distributors, Inc.; Senior
Vice President, Franklin/Templeton Investor Services, Inc.;
officer of most other subsidiaries of Franklin Resources, Inc.;
and officer of 60 of the investment companies in the Franklin
Templeton Group of Funds.
Deborah R. Gatzek (46)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Secretary
Senior Vice President - Legal, Franklin Resources, Inc. and
Franklin Templeton Distributors, Inc.; Vice President, Franklin
Advisers, Inc. and officer of 36 of the investment companies in
the Franklin Group of Funds.
Thomas J. Kenny (32)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President, Franklin Advisers, Inc. and officer of
eight of the investment companies in the Franklin Group of Funds.
Diomedes Loo-Tam (56)
777 Mariners Island Blvd.
San Mateo, CA 94404
Treasurer and Principal Accounting Officer
Employee of Franklin Advisers, Inc.; and officer of 36 of the
investment companies in the Franklin Group of Funds.
Edward V. McVey (57)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President/National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 31 of the investment companies
in the Franklin Group of Funds.
Trustees not affiliated with the investment manager
("nonaffiliated trustees") are currently paid fees of $1,300 per
month plus $1,300 per meeting attended. During the fiscal year
ended February 28, 1995, fees totaling $188,500 were paid to
nonaffiliated trustees of the Trust. As indicated above, certain
of the trustees and officers hold positions with other companies
in the Franklin Group of Funds(Registered Trademark) and the
Templeton Funds ("Franklin Templeton Funds"). The following table
shows the fees paid by the Trust to its nonaffiliated trustees
and the total fees paid to such trustees by the Trust and other
Franklin Templeton Funds for which they serve as directors,
trustees or managing general partners.
Total
Compensation
from
Aggregate Number of Franklin
Compensation Franklin Templeton
Name from the Templeton Funds Funds,
Trust * Boards on Which including
Each Serves the Trust**
Frank H. Abbott, III $32,500 30 $176,870
Harris J. Ashton $31,200 54 $319,925
S. Joseph Fortunato $31,200 56 $336,065
David Garbellano $31,200 29 $153,300
Frank W.T. LaHaye $31,200 25 $150,817
Gordon Macklin $31,200 51 $303,685
*For the fiscal year ended February 28, 1995.
**For the calendar year ended December 31,1994.
Non-affiliated trustees are also reimbursed for expenses incurred
in connection with attending Board meetings, paid pro rata by
each Franklin Templeton Fund for which they serve as directors,
trustees or managing general partners. No officer or trustee
received any other compensation directly from the Trust.
As of April 3, 1995, the trustees and officers, as a group, did
not own of record or beneficially any outstanding shares of the
Funds. In addition, many of the Trust's trustees own shares in
various of the other funds in the Franklin Group of Funds and the
Templeton Group of Funds. Certain officers or trustees who are
shareholders of Franklin Resources, Inc. may be deemed to receive
indirect remuneration by virtue of their participation, if any,
in the fees paid to its subsidiaries. Charles B. Johnson and
Rupert H. Johnson, Jr. are brothers.
Investment Advisory and Other Services
The investment manager for each Fund is Franklin Advisers, Inc.
("Advisers" or "Manager"). Advisers is a wholly-owned subsidiary
of Franklin Resources, Inc. ("Resources"), a publicly owned
holding company whose shares are listed on the New York Stock
Exchange (the "Exchange"). Resources owns several other
subsidiaries which are involved in investment management and
shareholder services. The Manager and other subsidiary companies
of Resources currently manage over $118 billion in assets for
more than 3.8 million shareholders. The preceding table indicates
those officers and trustees who are also affiliated persons of
the Funds who are also affiliated persons of Distributors and
Advisers.
Pursuant to the management agreement, the Manager provides
investment research and portfolio management services, including
the selection of securities for the Funds to purchase, hold or
sell and the selection of brokers through whom the portfolio
transactions of each Fund are executed. The Manager's extensive
research activities include, as appropriate, traveling to meet
with issuers and to review project sites. The Manager's
activities are subject to the review and supervision of the
Trust's Board of Trustees to whom the Manager renders periodic
reports of the Trust's investment activities. The Manager, at its
own expense, furnishes the Trust with office space and office
furnishings, facilities and equipment required for managing the
business affairs of the Trust; maintains all internal
bookkeeping, clerical, secretarial and administrative personnel
and services; and provides certain telephone and other mechanical
services. The Manager is covered by fidelity insurance on its
officers, directors and employees for the protection of the
Funds. Each Fund bears all of its expenses not assumed by the
Manager. Details of these expenses are included in the Trust's
Annual Report to Shareholders dated February 28, 1995.
Pursuant to the management agreement, each Fund is obligated to
pay the Manager a fee computed at the close of business on the
last business day of each month equal to a monthly rate of 5/96
of 1% (approximately 5/8 of 1% per year) for the first $100
million of average monthly net assets of the Fund; 1/24 of 1%
(approximately 1/2 of 1% per year) of average monthly net assets
of the Fund in excess of $100 million up to $250 million; and
9/240 of 1% (approximately 45/100 of 1% per year) of average
monthly net assets of the Fund in excess of $250 million. The
Manager may, however, limit or may not impose its management fees
and may also assume responsibility for making payments, if
necessary, to offset certain operating expenses otherwise payable
by such Fund(s). This action by the Manager to limit its
management fees and assume responsibility for payment of the
expenses related to the operations of any Fund may be terminated
by the Manager at any time.
The management agreement specifies that the management fee will
be reduced to the extent necessary to comply with the most
stringent limits on the expenses which may be borne by a Fund as
prescribed by any state in which a Fund's shares are offered for
sale. The most stringent current limit requires the Manager to
reduce or eliminate its fee to the extent that aggregate
operating expenses of a Fund (excluding interest, taxes,
brokerage commissions, and extraordinary expenses such as
litigation costs) would otherwise exceed in any fiscal year 2.5%
of the first $30 million of average annual net assets of a Fund,
2% of the next $70 million of average annual net assets of a
Fund, and 1.5% of average annual net assets of a Fund in excess
of $100 million. Expense reductions have not been necessary based
on state limitation requirements.
The table below sets forth the management fees which Class I of
each Fund was obligated to pay to Advisers, as well as the
management fees actually paid for each of the three fiscal years
ended February 28:
1995:
Contractual Management
Management Fees Paid by
Fund Fees the Fund
Alabama Fund $ 969,002 $ 969,002
Florida Fund 5,976,798 5,976,798
Georgia Fund 703,628 703,628
Kentucky Fund 190,072 34,216
Louisiana Fund 661,267 661,267
Maryland Fund 877,941 877,941
Missouri Fund 1,246,460 1,246,460
North Carolina Fund 1,181,708 1,181,708
Texas Fund 804,364 804,364
Virginia Fund 1,385,287 1,385,287
1994:
Contractual Management
Management Fees Paid by
Fund Fees the Fund
Alabama Fund $ 964,354 $ 964,354
Florida Fund 6,074,908 6,074,908
Georgia Fund 665,735 665,735
Kentucky Fund 128,196 -
Louisiana Fund 671,274 671,274
Maryland Fund 837,521 837,521
Missouri Fund 1,146,123 1,146,123
North Carolina Fund 1,093,721 1,093,721
Texas Fund 856,916 856,916
Virginia Fund 1,326,276 1,326,276
1993:
Contractual Management
Management Fees Paid by
Fund Fees the Fund
Alabama Fund $ 733,810 $ 733,810
Florida Fund 4,826,737 4,826,737
Georgia Fund 502,421 502,421
Kentucky Fund 43,136 -
Louisiana Fund 524,305 524,305
Maryland Fund 583,311 583,311
Missouri Fund 809,607 809,607
North Carolina Fund 777.766 777.766
Texas Fund 774,052 774,052
Virginia Fund 1,030,606 1,030,606
The management agreement is in effect until March 31, 1996
Thereafter, it may continue in effect for successive annual
periods provided such continuance is specifically approved at
least annually by a majority vote of the Trust's Board of
Trustees or as to each Fund by a vote of the holders of a
majority vote of the outstanding voting securities of such Fund,
and in either event by a majority vote of the trustees who are
not parties to the management agreement or interested persons of
any such party (other than as trustees of the Trust), cast in
person at a meeting called for that purpose. The management
agreement may be terminated without penalty at any time by the
Trust or one or more of its Funds or by the Manager on 30 days'
written notice and will automatically terminate in the event of
its assignment, as defined in the 1940 Act.
Other Services
Franklin/Templeton Investor Services, Inc. ("Investor Services"
or "Shareholder Services Agent"), a wholly-owned subsidiary of
Resources, is the shareholder servicing agent for the Trust and
acts as the Trust's transfer agent and dividend-paying agent.
Investor Services is compensated by each Fund on the basis of a
fixed fee per account.
Bank of America NT & SA, 555 California Street, 4th Floor, San
Francisco, California 94104, acts as custodian of the securities
and other assets of each Fund. Citibank Delaware, One Penn's Way,
New Castle, Delaware 19720, acts as custodian in connection with
transfer services through bank automated clearing houses. The
custodians do not participate in decisions relating to the
purchase and sale of portfolio securities.
Coopers & Lybrand, L.L.P., 333 Market Street, San Francisco,
California 94105, are the Trust's independent auditors. During
the fiscal year ended February 28, 1995, their auditing services
consisted of rendering an opinion on the financial statements of
the Trust included in the Trust's Annual Report to Shareholders
dated February 28, 1995.
The Trust's Policies Regarding
Brokers Used on Portfolio Transactions
Since most purchases made by the Trust are principal transactions
at net prices, the Trust incurs little or no brokerage costs. The
Trust deals directly with the selling or purchasing principal or
market maker without incurring charges for the services of a
broker on its behalf unless it is determined that a better price
or execution may be obtained by utilizing the services of a
broker. Purchases of portfolio securities from underwriters
include a commission or concession paid by the issuer to the
underwriter, and purchases from dealers include a spread between
the bid and ask price. As a general rule, the Funds do not
purchase bonds in underwritings where they are not given any
choice, or only limited choice, in the designation of dealers to
receive the commission. The Trust seeks to obtain prompt
execution of orders at the most favorable net price. Transactions
may be directed to dealers in return for research and statistical
information, as well as for special services rendered by such
dealers in the execution of orders. It is not possible to place a
dollar value on the special executions or on the research
services received by Advisers from dealers effecting transactions
in portfolio securities. The allocations of transactions in order
to obtain additional research services permits Advisers to
supplement its own research and analysis activities and to
receive the views and information of individuals and research
staff of other securities firms. As long as it is lawful and
appropriate to do so, the Manager and its affiliates may use this
research data in their investment advisory capacities with other
clients. Provided that the Trust's officers are satisfied that
the best execution is obtained, the sale of Fund shares may also
be considered as a factor in the selection of securities dealers
to execute the Trust's portfolio transactions.
If purchases or sales of securities of a Fund and one or more
other investment companies or clients supervised by the Manager
are considered at or about the same time, transactions in such
securities will be allocated among the several investment
companies and clients in a manner deemed equitable to all by the
Manager, taking into account the respective sizes of the funds
and the amount of securities to be purchased or sold. It is
recognized that in some cases this procedure could possibly have
a detrimental effect on the price or volume of the security so
far as any Fund is concerned. In other cases, however, it is
possible that the ability to participate in volume transactions
and to negotiate lower brokerage commissions will be beneficial
to a Fund.
During each of the three fiscal years ended February 28, 1993,
1994 and 1995, none of the Funds incurred any brokerage
commissions. As of February 28, 1995, the Funds did not own any
securities of their regular broker-dealers.
Additional Information
Regarding Purchases and
Redemptions of Trust Shares
All checks, drafts, wires and other payment mediums used for
purchasing or redeeming shares of the Funds must be denominated
in U.S. dollars. Each Fund reserves the right, in its sole
discretion, to either (a) reject any order for the purchase or
sale of shares denominated in any other currency or (b) honor the
transaction or make adjustments to a shareholder's account for
the transaction as of a date and with a foreign currency exchange
factor determined by the drawee bank.
In connection with exchanges, (see the Prospectus "Exchange
Privilege"), it should be noted that since the proceeds from the
sale of shares of an investment company generally are not
available until the fifth business day following the redemption,
the fund into which a Fund's shareholders are seeking to exchange
reserve the right to delay issuing shares pursuant to an exchange
until said fifth business day. The redemption of shares of a Fund
to complete an exchange for shares of any of the investment
companies will be effected at the close of business on the day
the request for exchange is received in proper form at the net
asset value then effective.
Shares are eligible to receive dividends beginning on the first
business day following settlement of the purchase transaction
through the date on which a Fund writes a check or sends a wire
on redemption transactions.
Dividend checks which are returned to the Funds marked "unable to
forward" by the postal service will be deemed to be a request by
the shareholder to change the dividend option and the proceeds
will be reinvested in additional shares at net asset value until
new instructions are received.
A Fund may impose a $10 charge for each returned item against any
shareholder account which, in connection with the purchase of a
Fund's shares, submits a check or a draft which is returned
unpaid to such Fund.
A Fund may deduct from a shareholder's account the costs of its
efforts to locate a shareholder if mail to that shareholder is
returned as undeliverable or such Fund is otherwise unable to
locate the shareholder or verify the current mailing address.
These costs may include a percentage of the account when a search
company charges a percentage fee in exchange for its location
services.
Under agreements with certain banks in Taiwan, Republic of China,
the Funds' shares are available to such banks' discretionary
trust funds at net asset value. The banks may charge service fees
to their customers who participate in the discretionary trusts.
Pursuant to the agreements, a portion of such service fees may be
paid to Distributors, or an affiliate of Distributors, to help
defray expenses of maintaining a service office in Taiwan,
including expenses related to local literature fulfillment and
communication facilities.
Class I shares of the Funds may be offered to investors in Taiwan
through securities firms known locally as Securities Investment
Consulting Enterprises. In conformity with local business
practices in Taiwan, Class I shares of the Funds will be offered
with the following schedule of sales charges:
Sales
Size of Purchase Charge
Up to U.S. $100,000 3%
U.S. $100,000 to U.S. $1,000,000 2%
Over U.S. $1,000,000 1%
Purchases and Redemptions Through Securities Dealers
Orders for the purchase of shares of a Fund received in proper
form prior to the close of the Exchange (generally 1:00 p.m.
Pacific time) any business day that the Exchange is open for
trading and promptly transmitted to the Fund will be based upon
the public offering price determined that day. Purchase orders
received by securities dealers or other financial institutions
after the close of the Exchange (generally 1:00 p.m. Pacific
time) will be effected at such class' public offering price on
the day it is next calculated. The use of the term "securities
dealer" herein shall include other financial institutions which,
pursuant to an agreement with Distributors (directly or through
affiliates), handle customer orders and accounts with each Fund.
Such reference, however, is for convenience only and does not
indicate a legal conclusion of capacity.
Orders for the redemption of shares are effected at net asset
value subject to the same conditions concerning time of receipt
in proper form. It is the securities dealer's responsibility to
transmit the order in a timely fashion and any loss to the
customer resulting from failure to do so must be settled between
the customer and the securities dealer.
Special Net Asset Value Purchases - Class I Shares
As discussed in the Prospectus under "How to Buy Shares of a Fund
- - Description of Special Net Asset Value Purchases," certain
categories of investors may purchase Class I shares of a Fund
without a front-end sales charge ("net asset value") or a
contingent deferred sales charge. Distributors or one of its
affiliates may make payments, out of its own resources, to
securities dealers who initiate and are responsible for such
purchases, as indicated below. Distributors may make these
payments in the form of contingent advance payments, which may be
recovered from the securities dealer, or set off against other
payments due to the securities dealer, in the event of investor
redemptions made within 12 months of the calendar month following
purchase. Other conditions may apply. All terms and conditions
may be imposed by an agreement between Distributors, or its
affiliates, and the securities dealer.
With respect to purchases made at net asset value by certain
trust companies and trust departments of banks, Distributors, or
one of its affiliates, out of its own resources, may pay up to 1%
of the amount invested.
Letter of Intent. An investor may qualify for a reduced sales
charge on the purchase of Class I shares of a Fund, as described
in the Prospectus. At any time within 90 days after the first
investment which the investor wants to qualify for the reduced
sales charge, a signed Shareholder Application, with the Letter
of Intent section completed, may be filed with a Fund. After the
Letter of Intent is filed, each additional investment will be
entitled to the sales charge applicable to the level of
investment indicated on the Letter. Sales charge reductions based
upon purchases in more than one of the Franklin Templeton Funds
will be effective only after notification to Distributors that
the investment qualifies for a discount. The shareholder's
holdings in the Franklin Templeton Funds, including Class II
shares, acquired more than 90 days before the Letter of Intent is
filed will be counted towards completion of the Letter of Intent
but will not be entitled to a retroactive downward adjustment in
the sales charge. Any redemptions made by the shareholder, other
than by a designated benefit plan during the 13-month period will
be subtracted from the amount of the purchases for purposes of
determining whether the terms of the Letter of Intent have been
completed. If the Letter of Intent is not completed within the 13-
month period, there will be an upward adjustment of the sales
charge, depending upon the amount actually purchased (less
redemptions) during the period. The upward adjustment does not
apply to designated benefit plans. An investor who executes a
Letter of Intent prior to a change in the sales charge structure
for a Fund will be entitled to complete the Letter of Intent at
the lower of (i) the new sales charge structure; or (ii) the
sales charge structure in effect at the time the Letter of Intent
was filed with such Fund.
As mentioned in the Prospectus, 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. If the total purchases,
less redemptions, equal the amount specified under the Letter,
the reserved shares will be deposited to an account in the name
of the investor or delivered to the investor or the investor's
order. If the total purchases, less redemptions, exceed the
amount specified under the Letter of Intent and is an amount
which would qualify for a further quantity discount, a
retroactive price adjustment will be made by Distributors and the
dealer through whom purchases were made pursuant to the Letter of
Intent (to reflect such further quantity discount) on purchases
made within 90 days before and on those made after filing the
Letter. The resulting difference in offering price will be
applied to the purchase of additional shares at the offering
price applicable to a single purchase or the dollar amount of the
total purchases. If the total purchases, less redemptions, are
less than the amount specified under the Letter, the investor
will remit to Distributors an amount equal to the difference in
the dollar amount of sales charge actually paid and the amount of
sales charge which would have applied to the aggregate purchases
if the total of such purchases had been made at a single time.
The shareholder will receive a written notification from
Distributors requesting the remittance. Upon such remittance the
reserved shares held for the investor's account will be deposited
to an account in the name of the investor or delivered to the
investor or to the investor's order. If within 20 days after
written request such difference in sales charge is not paid, the
redemption of an appropriate number of reserved shares to realize
such difference will be made. In the event of a total redemption
of the account prior to fulfillment of the Letter of Intent, the
additional sales charge due will be deducted from the proceeds of
the redemption, and the balance will be forwarded to the
investor.
Redemptions in Kind
Each Fund has committed itself to pay in cash (by check) all
requests for redemption by any shareholder of record, limited in
amount, however, during any 90-day period to the lesser of
$250,000 or 1% of the value of a Fund's net assets at the
beginning of such period. Such commitment is irrevocable without
the prior approval of the Securities and Exchange Commission (the
"SEC"). In the case of requests for redemption in excess of such
amounts, the trustees reserve the right to make payments in whole
or in part in securities or other assets of the Fund from which
the shareholder is redeeming, in case of an emergency, or if the
payment of such a redemption in cash would be detrimental to the
existing shareholders of the Fund. In such circumstances, the
securities distributed would be valued at the price used to
compute such Fund's net assets. Should a Fund do so, a
shareholder may incur brokerage fees in converting the securities
to cash. The Funds do not intend to redeem illiquid securities in
kind; however, should it happen, shareholders may not be able to
timely recover their investment and may also incur brokerage
costs in selling such securities.
Redemptions by the Funds
Due to the relatively high cost of handling small investments,
each Fund reserves the right to redeem, involuntarily, at net
asset value, the shares of any shareholder of such Fund whose
account has a value of less than one-half of the initial minimum
investment required for that shareholder, but only where the
value of such account has been reduced by the shareholder's prior
voluntary redemption of shares. Until further notice, it is the
present policy of the Funds not to exercise this right with
respect to any shareholder whose account has a value of $50 or
more. In any event, before a Fund redeems such shares and sends
the proceeds to the shareholder, it will notify the shareholder
that the value of the shares in the account is less than the
minimum amount and allow the shareholder 30 days to make an
additional investment in an amount which will increase the value
of the account to at least $100.
Calculation of Net Asset Value
As noted in the Prospectus, each Fund generally calculates net
asset for each class, separately, as of the scheduled close of
the Exchange (generally 1:00 p.m. Pacific time) each day that the
Exchange is open for trading. As of the date of this SAI, the
Trust is informed that the Exchange observes the following
holidays: New Year's Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas
Day.
Each Fund's portfolio securities are valued as stated in the
Prospectus. Generally, trading in bonds, U.S. government
securities and money market instruments is substantially
completed each day at various times prior to the close of the
Exchange. The values of such securities used in computing the net
asset value of a Fund's shares are determined as of such times.
Occasionally, events affecting the values of such securities may
occur between the times at which they are determined at the close
of the Exchange (generally 1:00 p.m. Pacific time) which will not
be reflected in the computation of a Fund's net asset value. If
events materially affecting the value of such securities occur
during such period, then these securities will be valued at their
fair value as determined in good faith by the Board of Trustees.
Reports to Shareholders
The Funds send annual and semi-annual reports to their
shareholders regarding a Fund's performance and its portfolio
holdings. Shareholders who would like to receive an interim
quarterly report may phone Fund Information at 1-800 DIAL BEN.
Special Services
The Trust and Institutional Services Division of Distributors
provides specialized services, including recordkeeping for
institutional investors of the Funds. The cost of these services
is not borne by the Funds.
Investor Services or the Trust may pay certain financial
institutions which maintain omnibus accounts with the Funds on
behalf of numerous beneficial owners for recordkeeping operations
performed with respect to such beneficial owners. For each
beneficial owner in the omnibus account, the Funds may reimburse
Investor Services an amount not to exceed the per account fee
which the Funds normally pay Investor Services. Such financial
institutions may also charge a fee for their services directly to
their clients.
The Trust's Underwriter
Pursuant to an underwriting agreement in effect until March 31,
1996, Distributors acts as principal underwriter in a continuous
public offering for shares of each Fund.
Distributors pays the expenses of distribution of each Fund's
shares, including advertising expenses and the costs of printing
sales material and prospectuses used to offer shares to the
public. The Trust pays the expenses of preparing and printing
amendments to its registration statements and prospectuses (other
than those necessitated by the activities of Distributors) and of
sending prospectuses to existing shareholders.
The underwriting agreement will continue in effect for successive
annual periods, provided that its continuance is specifically
approved at least annually by a vote of the Trust's Board of
Trustees or by a vote of the holders of a majority of the
outstanding voting securities of each Fund, and in either event
by a majority vote of the Trust's trustees who are not parties to
the underwriting agreement or interested persons of any such
party (other than as trustees of the Trust), cast in person at a
meeting called for that purpose. The underwriting agreement
terminates automatically in the event of its assignment and may
be terminated by either party on 90 days' written notice.
Until April 30, 1994, income dividends for the Class I shares
were reinvested at the offering price (which includes the sales
charge) and Distributors allowed 50% of the entire commission to
the securities dealer of record, if any, on an account. Starting
with any income dividends paid after April 30, 1994, such
reinvestment is at net asset value.
In connection with the offering of the Class I shares,
underwriting commissions received by Distributors for each Fund
and the amounts which were subsequently paid by Distributors to
other dealers for each of the three fiscal years ending February
28, were as follows:
1995
Total
Commissions Paid
Fund Received to Dealers
Alabama Fund $643,138 $611,161
Florida Fund 3,251,098 3,083,771
Georgia Fund 523,120 497,134
Kentucky Fund 241,431 231,761
Louisiana Fund 334,861 317,646
Maryland Fund 764,216 726,520
Missouri Fund 1,080,398 1,027,614
North Carolina Fund 1,089,308 1,037,779
Texas Fund 243,044 228,882
Virginia Fund 998,646 946,658
1994
Total
Commissions Paid
Fund Received to Dealers
Alabama Fund $ 1,482,367 $ 1,423,143
Florida Fund 8,654,468 8,360,636
Georgia Fund 1,155,912 1,109,385
Kentucky Fund 562,417 554,169
Louisiana Fund 992,774 953,997
Maryland Fund 1,718,141 1,656,444
Missouri Fund 2,311,745 2,227,973
North Carolina Fund 2,310,605 2,224,377
Texas Fund 805,955 758,973
Virginia Fund 2,134,332 2,029,496
1993
Total
Commissions Paid
Fund Received to Dealers
Alabama Fund $ 1,789,127 $ 1,741,260
Florida Fund 9,067,356 8,839,207
Georgia Fund 936,143 898,305
Kentucky Fund 254,110 251,794
Louisiana Fund 927,272 897,787
Maryland Fund 1,724,712 1,682,783
Missouri Fund 1,715,810 1,655,696
North Carolina Fund 1,717,074 1,655,260
Texas Fund 882,917 842,020
Virginia Fund 2,025,899 1,942,888
Distributors may be entitled to reimbursement under the
distribution plan relating to Class I shares as discussed below.
Except as noted, Distributors received no other compensation from
the Funds with respect to the Class I shares for acting as
underwriter.
Plans of Distribution
Each class of the Funds has adopted a Distribution Plan ("Class I
Plan" and "Class II Plan," respectively, or "Plans") pursuant to
Rule 12b-1 under the 1940 Act. Pursuant to the Class I Plan, each
Fund may pay up to a maximum of 0.10% per annum of its average
daily net assets for expenses incurred in the promotion and
distribution of its shares.
The Class I Plan
In implementing the Class I Plan, the Board of Trustees
determined that the annual fees payable thereunder will be equal
to the sum of: (i) the amount obtained by multiplying 0.10% by
the average daily net assets represented by Class I shares of a
Fund that were acquired by investors on or after May 1, 1994
("New Assets"), and (ii) the amount obtained by multiplying 0.05%
by the average daily net assets represented by Class I shares of
a Fund that were acquired before May 1, 1994 ("Old Assets").
Such fees will be paid to the current securities dealer of record
on the shareholder's account. In addition, until such time as the
maximum payment of 0.10% is reached on a yearly basis, up to an
additional 0.02% will be paid to Distributors under the Class I
Plan. The payments to be made to Distributors will be used by
Distributors to defray other marketing expenses that have been
incurred in accordance with the Class I Plan, such as
advertising.
The fee relating to the Class I Plan is an expense of Class I as
a whole, so that all Class I shareholders, regardless of when
they purchased their shares, will bear Rule 12b-1 expenses at the
same rate. That rate initially will be at least 0.07% (0.05%
plus 0.02%) of such average daily net assets and, as Class I
shares are sold on or after May 1, 1994 (the "Effective Date"),
will increase over time. Thus, as the proportion of Class I
shares purchased on or after May 1, 1994 increases in relation to
outstanding Class I shares, the expenses attributable to payments
under the Class I Plan will also increase (but will not exceed
0.10% of average daily net assets). While this is the currently
anticipated calculation for fees payable under the Class I Plan,
the Class I Plan permits the Trust's trustees to allow a Fund to
pay a full 0.10% on all assets at any time. The approval of the
Board of Trustees would be required to change the calculation of
the payments to be made under the Class I Plan.
Pursuant to each Class I Plan, Distributors or others will be
entitled to be reimbursed each quarter (up to the maximum as
stated above) for actual expenses incurred in the distribution
and promotion of Class I shares, including, but 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 Class I 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 Trust, Distributors or its affiliates.
For the fiscal year ended February 28, 1995, aggregate amounts
paid by Class I shares pursuant to each Class I Plan were as
follows:
Class I Rule Adver- Printing Payments Payments
Fund 12b-1 tising and to Under- to Brokers
Fees Mailing of writers or Dealers
Paid Prospectuses
by the
Fund
Alabama
Fund $101,352 $14,189 $8,108 $6,082 $ 72,973
Florida
Fund 753,709 135,668 45,223 37,685 535,133
Georgia
Fund 68,470 9,717 5,685 3,991 49,077
Kentucky 17,764 1,776 1,776 1,599 12,613
Fund
Louisiana
Fund 62,959 8,814 5,666 3,148 45,331
Maryland
Fund 89,815 11,676 7,185 6,287 64,667
Missouri
Fund 132,880 24,147 7,044 6,462 95,227
North
Carolina
Fund 125,373 18,806 8,776 7,522 90,269
Texas
Fund 79,560 12,729 7,956 2,387 56,488
Virginia
Fund 146,307 21,068 12,039 9,106 104,076
The Class I Plan does not permit unreimbursed expenses incurred
in a particular year to be carried over to or reimbursed in
subsequent years.
The Class II Plan
Under the Class II Plan, a Fund is permitted to pay to
Distributors or others annual distribution fees, payable
quarterly, of .50% of Class II's average daily net assets, in
order to compensate Distributors or others for providing
distribution and related services and bearing certain expenses of
the Class. All expenses of distribution and marketing over that
amount will be borne by Distributors, or others who have incurred
them, without reimbursement by such Fund. In addition to this
amount, under the Class II Plan, a Fund shall pay 0.15% per
annum, payable quarterly, of the Class' average daily net assets
as a servicing fee. This fee will be used to pay 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 a Fund on
behalf of the customers, and similar activities related to
furnishing personal services and maintaining shareholder
accounts. Distributors may pay the securities dealer, from its
own resources, a commission of up to 1% of the amount invested.
In General
In addition to the payments to which Distributors or others are
entitled under the Plans, the Plans also provide that to the
extent a Fund, the Manager or Distributors or other parties on
behalf of such Fund, the Manager or Distributors, make payments
that are deemed to be payments for the financing of any activity
primarily intended to result in the sale of each class of shares
of such Fund within the context of Rule 12b-1 under the 1940 Act,
then such payments shall be deemed to have been made pursuant to
the Plans.
In no event shall the aggregate asset-based sales charges which
include payments made under a Plan, plus any other payments
deemed to be made pursuant to the Plan, exceed the amount
permitted to be paid pursuant to the Rules of Fair Practice of
the National Association of Securities Dealers, Inc., Article
III, Section 26(d)4.
The terms and provisions of the Plans relating to required
reports, term, and approval are consistent with Rule 12b-1. The
Plans do not permit unreimbursed expenses incurred in a
particular year to be carried over or reimbursed in subsequent
years.
To the extent fees are for distribution or marketing functions,
as distinguished from administrative servicing or agency
transactions, certain banks may not be entitled to participate in
the Plans to the extent that applicable federal law prohibits
certain banks from engaging in the distribution of mutual fund'
shares. Such banking institutions, however, are permitted to
receive fees under the Plans for administrative servicing or for
agency transactions. If a bank were prohibited from providing
such services, its customers who are shareholders would be
permitted to remain shareholders of a Fund, and alternate means
for continuing the servicing of such shareholders would be
sought. In such an event, changes in the services provided might
occur and such shareholders might no longer be able to avail
themselves of any automatic investment or other services then
being provided by the bank. It is not expected that shareholders
would suffer any adverse financial consequences as a result of
any of these changes. Securities laws of states in which a Fund's
shares are offered for sale may differ from the interpretations
of federal law expressed herein, and banks and financial
institutions selling shares of a Fund may be required to register
as dealers pursuant to state law.
The Class I Plan and the Class II Plan were approved by
shareholders in April, 1994 and April 1995, respectively, and by
the Trust's trustees, including those trustees who are not
interested persons, as defined in the 1940 Act. The Class II Plan
became effective on May 1, 1995. The Class I and Class II Plans
are effective through April 30, 1996, and are renewable annually
by a vote of the Trust's Board of Trustees, including a majority
vote of the trustees who are non-interested persons of the Trust
and who have no direct or indirect financial interest in the
operation of the Plans, cast in person at a meeting called for
that purpose. It is also required that the selection and
nomination of such trustees be done by the non-interested
trustees. The Plans and any related agreement may be terminated
at any time, without any penalty, by vote of a majority of the
non-interested trustees on not more than 60 days' written notice,
by Distributors on not more than 60 days' written notice, by any
act that constitutes an assignment of the management agreement
with the Manager, the underwriting agreement with Distributors,
or by vote of a majority of a Fund's outstanding shares.
Distributors or any dealer or other firm may also terminate their
respective distribution or service agreement at any time upon
written notice.
With respect to a Plan, the Plan and any related agreements may
not be amended to increase materially the amount to be spent for
distribution expenses without approval by a majority of such
class of a Fund's outstanding shares, and all material amendments
to the Plan or any related agreements shall be approved by a vote
of the non-interested trustees, cast in person at a meeting
called for the purpose of voting on any such amendment.
Distributors is required to report in writing to the Board of
Trustees at least quarterly on the amounts and purpose of any
payment made under the Plans and any related agreements, as well
as to furnish the Board of Trustees with such other information
as may reasonably be requested in order to enable the Board of
Trustees to make an informed determination of whether the Plans
should be continued.
Additional Information Regarding Taxation
As stated in the Prospectus, each Fund has elected to be treated
as a regulated investment company under Subchapter M of the
Internal Revenue Code (the "Code"). The trustees reserve the
right not to maintain the qualification of any Fund as a
regulated investment company if they determine such course of
action to be beneficial to the shareholders. In such case, the
Fund will be subject to federal and possibly state corporate
taxes on its taxable income and gains, to the alternative minimum
tax on a portion of its tax-exempt income, and distributions
(including tax-exempt interest dividends) to shareholders will be
taxable income to the extent of the Fund's available earnings and
profits.
The Code requires all funds to distribute at least 98% of their
taxable ordinary income earned during the calendar year and at
least 98% of their capital gain net income earned during the
twelve-month period ending October 31 of each year (in addition
to amounts from the prior year that were neither distributed nor
taxed to the Fund) to shareholders by December 31 of each year in
order to avoid the imposition of a federal excise tax. Under
these rules, 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 Funds and
received by the shareholder on December 31 of the calendar year
in which they are declared. The Funds intend as a matter of
policy to declare and pay such dividends, if any, in December to
avoid the imposition of this tax, but do not guarantee that the
distributions will be sufficient to avoid any or all federal
excise taxes.
Redemptions and exchanges of a Fund's shares are taxable
transactions for federal and state income tax purposes. For most
shareholders, gain or loss will be recognized in an amount equal
to the difference between the shareholder's basis in the shares
and the amount received, subject to the rules described below. If
such shares are a capital asset in the hands of the shareholder,
gain or loss will be capital gain or loss and will be long-term
for federal income tax purposes if the shares have been held for
more than one year.
All or a portion of the sales charge incurred in purchasing
shares of a Fund will not be included in the federal tax basis of
such shares sold or exchanged within ninety (90) days of their
purchase (for purposes of determining gain or loss with respect
to such shares) if the sales proceeds are reinvested in a Fund or
in another fund in the Franklin Group of Funds(Registered
Trademark) and the Templeton Group (defined under "How to Buy
Shares of a Fund") and a sales charge which would otherwise apply
to the reinvestment is reduced or eliminated. Any portion of such
sales charge excluded from the tax basis of the shares sold will
be added to the tax basis of the shares acquired in the
reinvestment. Shareholders should consult with their tax advisors
concerning the tax rules applicable to the redemption or exchange
of a Fund's shares.
Since each Fund's income is derived from interest income and gain
on the sale of portfolio securities rather than dividend income,
no portion of any of the Funds' distributions will generally be
eligible for the corporate dividends-received deduction. None of
the distributions paid by any 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.
All or a portion of a loss realized upon a redemption of shares
will be disallowed to the extent other shares of such Fund are
purchased (through reinvestment of dividends or otherwise) within
30 days before or after such redemption. Any loss disallowed
under these rules will be added to the tax basis of the shares
purchased.
Many states grant tax-free status to dividends paid to
shareholders of mutual funds from interest income earned by a
fund from direct obligations of the U.S. Government, subject in
some states to minimum investment requirements that must be met
by a fund. Investments in GNMA/FNMA securities and repurchase
agreements collateralized by U.S. Government securities do not
generally qualify for tax-free treatment. While it is not the
primary investment objective of any Fund of the Trust to invest
in such obligations, the Funds are authorized to so invest for
temporary or defensive purposes. To the extent that such
investments are made, any affected Fund will provide shareholders
with the percentage of any dividends paid which may qualify for
such tax-free treatment at the end of each calendar year.
Shareholders should then consult with their own tax advisors with
respect to the application of their state and local laws to these
distributions and on the application of other state and local
laws on distributions and redemption proceeds received from the
Fund.
Persons who are defined in the Code as "substantial users" (or
related persons) of facilities financed by private activity bonds
should consult with their tax advisors before purchasing shares
of the Fund.
General Information
Performance
As noted in the Prospectus, each class may from time to time
quote various performance figures to illustrate its past
performance. Each class may occasionally cite statistics to
reflect its volatility or risk.
Performance quotations by investment companies are subject to
rules adopted by the SEC. These rules require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by a class be
accompanied by certain standardized performance information
computed as required by the SEC. Current yield and average annual
compounded total return quotations used by a class are based on
the standardized methods of computing performance mandated by the
SEC. An explanation of those and other methods used by the Funds
to compute or express performance follows.
Total Return
The average annual total return is determined by finding the
average annual compounded rates of return over one-, five-, and
ten-year periods, or fractional portion thereof, that would
equate an initial hypothetical $1,000 investment to its ending
redeemable value. The calculation assumes the maximum sales
charge is deducted from the initial $1,000 purchase order and
that dividends and capital gains are reinvested at net asset
value, on the reinvestment dates during the period. The quotation
assumes the account was completely redeemed at the end of each
one-, five-, and ten-year period and the deduction of all
applicable charges and fees. If a change is made in the sales
charge structure, historical performance information will be
restated to reflect the maximum sales charge currently in effect.
In considering the quotations of total return set forth below,
investors should remember that the maximum initial sales charge
reflected in each quotation is a one-time fee (charged on all
direct purchases) which will have its greatest impact during the
early stages of an investor's investment in one of the Funds. The
average annual compounded rates of return for Class I shares of
each Fund for the indicated periods ending February 28, 1995,
were as shown below:
Average Annual Total Return
Inception From
of the Fund One Year Five Year Inception
Alabama Fund 09/01/87 -2.73% 6.70% 7.48%
Florida Fund 09/01/87 -1.96 7.05 7.94
Georgia Fund 09/01/87 -2.43 6.74 7.64
Kentucky Fund 10/12/91 -4.06 n/a 5.82
Louisiana 09/01/87 -3.12 6.68 7.46
Maryland Fund 10/03/88 -2.50 6.73 6.90
Missouri Fund 09/01/87 -2.85 7.04 7.55
North Carolina Fund 09/01/87 -3.26 6.54 7.56
Texas Fund 09/01/87 -2.51 6.80 7.74
Virginia Fund 09/01/87 -2.70 6.92 7.67
These figures were calculated according to the following SEC
formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the one-, five-, or ten-year periods at
the end of the one-, five-, or ten-year periods (or fractional
portion thereof)
As discussed in the Prospectus, each class may quote total rates
of return in addition to its average annual total return. Such
quotations are computed in the same manner as a class' average
annual compounded rate, except that such quotations will be based
on such class' actual return for a specified period instead of
the average return over one-, five- and ten-year periods. The
rates of total return for Class I shares of each Fund for the
indicated periods ending February 28, 1995, were as follows:
Aggregate Total Return
Inception From
of the Fund One Year Five Year Inception
Alabama Fund 09/01/87 -2.73% 38.33% 71.80%
Florida Fund 09/01/87 -1.96 40.57 77.35
Georgia Fund 09/01/87 -2.43 38.54 73.75
Kentucky Fund 10/12/91 -4.06 n/a 21.12
Louisiana 09/01/87 -3.12 38.19 71.59
Maryland Fund 10/03/88 -2.50 38.48 53.34
Missouri Fund 09/01/87 -2.85 40.49 72.69
North Carolina Fund 09/01/87 -3.26 37.29 72.75
Texas Fund 09/01/87 -2.51 38.97 74.93
Virginia Fund 09/01/87 -2.70 39.76 74.06
Yield
Current yield reflects the income per share earned by a Fund's
portfolio investments.
Current yield is determined by dividing the net investment income
per share earned during a 30-day base period by the maximum
offering price per share on the last day of the period and
annualizing the result. Expenses accrued for the period include
any fees charged to all shareholders during the base period. The
yield for Class I shares of each Fund for the 30-day period ended
February 28, 1995 was as follows:
Current
30-Day
Yield
Alabama Fund 5.38%
Florida Fund 5.56
Georgia Fund 5.20
Kentucky Fund 5.73
Louisiana Fund 5.50
Maryland Fund 5.43
Missouri Fund 5.24
North Carolina Fund 5.30
Texas Fund 5.33
Virginia Fund 5.29
These figures were obtained using the following SEC formula:
6
Yield = 2 [( a-b + 1 ) - 1]
----
cd
where:
a = interest earned during the period
b = net expenses accrued for the period
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends
d = the maximum offering price per share on the last day of the
period
30-Day Tax Equivalent Yield
A class may also quote a tax equivalent yield which demonstrates
the taxable yield necessary to produce an after-tax yield
equivalent to that of a fund which invests in tax-exempt
obligations. Such yield is computed by dividing that portion of
the yield of a class (computed as indicated above) which is tax-
exempt by one minus the highest applicable combined federal and
state income tax rate (and adding the product to that portion of
the yield of a fund that is not tax-exempt, if any). The tax
equivalent yield for Class I shares of each Fund for the 30-day
period ended February 28, 1995, was as follows:
30-Day Tax
Equivalent
Yield
Alabama Fund 9.38%
Florida Fund 9.21
Georgia Fund 9.16
Kentucky Fund 10.09
Louisiana Fund 9.69
Maryland Fund 9.95
Missouri Fund 9.23
North Carolina Fund 9.51
Texas Fund 8.82
Virginia Fund 9.29
The following table lists for each state, the state and the
combined state and federal income tax rates upon which the
Trust's tax equivalent yield quotations are based. From time to
time, as any changes to such rates become effective, tax
equivalent yield quotations advertised by the Trust will be
updated to reflect such changes. The Trust expects updates will
be necessary as tax rates are frequently changed by federal,
state and local governments. The advantage of tax-free
investments, such as the Funds of the Trust, will be enhanced by
any tax rate increases. Therefore, the details of specific tax
increases may be used in sales material for any Fund.
State Combined*
Alabama 5.00% 42.62%
Florida 0.00 39.60
Georgia 6.00 43.22
Kentucky 6.00 43.22
Louisiana 6.00 43.22
Maryland** 6.00 45.40
Missouri 6.00 43.22
North Carolina 7.75 44.28
Texas 0.00 39.60
Virginia 5.75 43.07
*Based on the maximum combined state and 39.6% federal tax rate
in effect as of the date of this SAI.
**Based on the maximum combined federal, state and county tax
rate for all Maryland counties except Worcester County.
Quotations of taxable equivalent yield by a class in
advertisements may reflect assumed rates of return which are not
intended to represent historical or current distribution rates or
yields. Such quotations will be used in sales literature, such as
Franklin's Tax-Free Yield Calculator, to illustrate the general
principle of the impact taxes have on rates of return or to show
the taxable rate of return that would be needed to match a tax-
free rate of return.
Current Distribution Rate
Current yield and tax equivalent yield, which are calculated
according to a formula prescribed by the SEC, are not indicative
of the amounts which were or will be paid to a class'
shareholders. Amounts paid to shareholders are reflected in the
quoted current distribution rate or taxable equivalent
distribution rate. 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 a current maximum offering price. A
taxable equivalent distribution rate demonstrates the taxable
distribution rate equivalent to a class' current distribution
rate (calculated as indicated above). The advertised taxable
equivalent distribution rate will reflect the most current
federal and state tax rates available to a Fund.
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 over 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 additional sources (i.e., sources other than dividends and
interest), such as short-term capital gains and net equalization
credits, and is calculated over a different period of time.
The current distribution rate for Class I shares of each Fund for
the 12-month period ended February 28, 1995, was as follows:
Current
Distribution
Rate
Alabama Fund 5.49
Florida Fund 5.77
Georgia Fund 5.48
Kentucky Fund 5.55*
Louisiana Fund 5.63
Maryland Fund 5.47
Missouri Fund 5.32
North Carolina Fund 5.46
Texas Fund 5.72
Virginia Fund 5.48
*includes expense waiver
Volatility
Occasionally statistics may be used to specify Fund volatility or
risk. Measures of volatility or risk are generally used to
compare a Fund's net asset value or performance relative to a
market index. One measure of volatility is beta. Beta is the
volatility of a fund relative to the total market as represented
by the Standard & Poor's 500 Stock Index. A beta of more than
1.00 indicates volatility greater than the market, and a beta of
less than 1.00 indicates volatility less than the market. Another
measure of volatility or risk is standard deviation. Standard
deviation is used to measure variability of net asset value or
total return around an average over a specified period of time.
The premise is that greater volatility connotes greater risk
undertaken in achieving performance.
Other Performance Quotations
With respect to those categories of investors who are permitted
to purchase Class I shares at net asset value, sales literature
pertaining to Class I shares may quote a current distribution
rate, yield, total return, average annual total return and other
measures of performance as described elsewhere in this SAI with
the substitution of net asset value for the public offering
price.
Regardless of the method used, past performance is not
necessarily indicative of future results, but is an indication of
the return to shareholders only for the limited historical period
used.
A Fund may include in its advertising or sales material
information relating to investment objectives and performance
results of funds and classes belonging to the Templeton Group of
Funds. Resources is the parent company of the advisers and
underwriter of both the Franklin Group of Funds and Templeton
Group of Funds.
Comparisons
To help investors better evaluate how an investment in a Fund
might satisfy their investment objective, advertisements and
other materials regarding the Funds may discuss various measures
of Fund and class performance as reported by various financial
publications. Materials may also compare performance (as
calculated above) to performance as reported by other
investments, indices, and averages. When advertising current
ratings or rankings, a class may advertise together or separately
the following past ratings and rankings, and such information in
those categories which may appear in the future:
Lipper Fixed-Income Fund Performance Analysis ranked the Florida
Fund number one in total return in the Florida Municipal Debt
Funds Category for its one-year total return for the year-ended
December 31, 1994, with a total return of -3.33%. There were
fifty funds in the category.
Lipper Fixed-Income Fund Performance Analysis ranked the Georgia
Fund number one in total return in the Georgia Municipal Debt
Funds Category for its one-year and five-year total returns for
the year-ended December 31, 1994, with total returns of -3.72%
and 38.58%, respectively. There were seventeen funds in the one-
year category, and five funds in the five-year category.
Lipper Fixed-Income Fund Performance Analysis ranked the Missouri
Fund number one in total return in the Missouri Municipal Debt
Funds Category for its one-year and five-year total returns for
the year-ended December 31, 1994, with total returns of -5.08%
and 39.57%, respectively. There were eleven funds in the one-
year category, and five funds in the five-year category.
Lipper Fixed-Income Fund Performance Analysis ranked the Virginia
Fund number one in total return in the Virginia Municipal Debt
Funds Category for its one-year and five-year total returns for
the year-ended December 31, 1994, with total returns of -4.62%
and 38.80%, respectively. There were twenty-three funds in the
one-year category, and five funds in the five-year category.
Lipper Fixed-Income Fund Performance Analysis ranked the North
Carolina Fund number one in total return in the North Carolina
Municipal Debt Funds Category for its five-year total return for
the year-ended December 31, 1994, with a total return of 35.84%.
There were four funds in the category.
The Lipper Fixed-Income Fund Performance Analysis and Lipper
Mutual Fund Yield Survey for Industry Averages - measure total
return and average current yield for the mutual fund industry. It
ranks individual mutual fund performance over specified time
periods, assuming reinvestment of all distributions, exclusive of
any applicable sales charges.
In addition to such reports by Lipper, the following publications
and indices may be used to discuss or compare Fund performance:
Lehman Brothers Municipal Bond Index measures yield, price, and
total return for the municipal bond market.
Bond Buyer 20 Bond Index is an index of municipal bond yields
based on yields of 20 general obligation bonds maturing in 20
years.
Bond Buyer 40 Bond Index is an index of municipal bond yields
based on yields of 40 general obligation bonds with an average
maturity of 29-30 years.
Salomon Brothers Composite High Yield Index covers much of the
below-investment grade U.S. corporate bond market. It combines
previously published indices to create a broad index for the high-
yield market. To enter the index, an issue must be rated
speculative by S&P or Moody's.
Salomon Brothers Broad Investment Grade Index is representative
of the entire universe of taxable - fixed income investments. It
includes issues of U.S. government securities, and any agency
thereof; corporate issues of investment grade, mortgage backed
securities; and yankee bonds.
Lehman Brothers Aggregate Bond Index includes fixed-rate debt
issues rated investment grade or higher by Moody's, S&P or Fitch,
in that order. All issues have at least one year to maturity and
an outstanding par value of at least $100 million for U.S.
government, $50 million for all others. It is a composite of the
Government Corporate Index and the Mortgage-Backed Securities
Index.
Merrill Lynch California Municipal Bond Index is based upon
yields from revenue and general obligation bonds weighted in
accordance with their respective importance to the California
municipal market. The index is published weekly in the Los
Angeles Times and the San Francisco Chronicle.
Savings & Loan Historical Interest Rates as published by the U.S.
Savings & Loan League Fact Book.
Inflation as measured by the Consumer Price Index, published by
the U.S. Bureau of Labor Statistics.
CDA Mutual Fund Report, published by CDA Investment Technologies
Inc. - analyzes price, current yield, risk, total return, and
average rate of return (average annual compounded growth rate)
over specified time periods for the mutual fund industry.
Financial Publications: The Wall Street Journal, Business Week,
Changing Times, Financial World, Forbes, and Money magazine.
Standard & Poor's Bond Indices - measure yield and price of
corporate, municipal, and government bonds.
Advertisements or information may mention or discuss ratings or
rankings of the Insured Funds or their securities, issued by
securities ratings agencies or other organizations.
From time to time, advertisements or information for a Fund or
class may include a discussion of certain attributes or benefits
to be derived by an investment in the Fund. Such advertisements
or information may also compare a Fund's performance to the
return on certificates of deposit or other investments. Investors
should be aware, however, that an investment in a Fund involves
the risk of fluctuation of principal value, a risk generally not
present in an investment in a certificate of deposit issued by a
bank. For example, as the general level of interest rates rise,
the value of the Fund's fixed-income investments, as well as the
value of its shares which are based upon the value of such
portfolio investments, can be expected to decrease. Conversely,
when interest rates decrease, the value of a Fund's shares can be
expected to increase. Certificates of deposit are frequently
insured by an agency of the U.S. government. An investment in any
of the Funds is not insured by any federal, state or private
entity.
In assessing such comparisons of performance, an investor should
keep in mind that the composition of the investments in the
reported indices and averages is not identical to the Funds'
portfolios, that the indices and averages are generally
unmanaged, and that the items included in the calculations of
such averages may not be identical to the formula used by the
Funds to calculate their figures. In addition there can be no
assurance that the Funds will continue this performance as
compared to such other averages.
Franklin had the first single-state municipal bond funds in
California, Massachusetts, Michigan, Minnesota and Ohio.
Other Features and Benefits
Founded in 1947, Franklin is a leader in the tax-free mutual fund
industry, currently offering 42 tax-free funds, including 33
funds free from both federal and state personal income taxes, and
managing more than $40 billion in municipal bond assets for over
half a million investors.
Under current tax laws, municipal securities remain one of the
few investments offering the potential for tax-free income. In
1995, taxes could cost as much as $47 on every $100 earned from a
fully taxable investment (based on the maximum combined 39.6%
federal tax rate and the highest state tax rate of 12% for 1995.)
Franklin tax-free funds, however, offer tax relief through a
professionally managed portfolio of tax-free securities selected
based on their yield, quality and maturity. An investment in a
Franklin tax-free fund can provide an investor with the potential
to earn income free of federal taxes and, depending on the fund,
state and local taxes as well, while supporting state and local
public projects. Franklin tax-free funds may also provide tax-
free compounding, when dividends are reinvested. An investment in
Franklin's tax-free funds can grow more rapidly than similar
taxable investments.
Municipal securities are generally considered to be creditworthy,
second in quality only to securities issued or guaranteed by the
United States government and its agencies. The market price of
such securities, however, may fluctuate. This fluctuation will
have a direct impact on the net asset value of an investment in a
Fund.
Currently, there are more mutual funds than there are stocks
listed on the Exchange. While many of them have similar
investment objectives, no two are exactly alike. As noted in the
Prospectuses, shares of a Fund are generally sold through
securities dealers or other financial institutions. Investment
representatives of such securities dealers or financial
institutions are experienced professionals who can offer advice
on the type of investment suitable to an investor's unique goals
and needs, as well as the types of risks associated with such
investment.
Each Fund may help investors achieve various investment goals
such as accumulating money for retirement, saving for a down
payment on a home, college costs and/or other long-term goals.
The Franklin College Costs Planner may assist an investor in
determining how much money must be invested on a monthly basis in
order to have a projected amount available in the future to fund
a child's college education. (Projected college cost estimates
are based upon current costs published by the College Board.)
Miscellaneous Information
Each Fund is a member of the Franklin Templeton Group, one of the
largest mutual fund organizations in the United States and may be
considered in a program for diversification of assets. Founded in
1947, Franklin, one of the oldest mutual fund organizations, has
managed mutual funds for over 47 years and now services more than
2.5 million shareholder accounts. In 1992, Franklin, a leader in
managing fixed-income mutual funds and an innovator in creating
domestic equity funds, joined forces with Templeton Worldwide,
Inc., a pioneer in international investing. Together, the
Franklin Templeton Group has over $116 billion in assets under
management for more than 3.8 million shareholder accounts and
offers 111 U.S.-based mutual funds. A Fund may identify itself by
its NASDAQ or CUSIP number.
The Dalbar Surveys, Inc. broker/dealer survey has ranked Franklin
number one in service quality for five of the past seven years.
According to Research and Ratings Review, Volume II, dated
February 28, 1994, Franklin's municipal research team ranked
number 2 out of 1,000 investment advisory firms surveyed by TMS
Holdings, Inc. As of November 14, 1994, this ranking was
unchanged.
According to Strategic Insight, dated November 30, 1994, the
Franklin Florida Tax-Free Income Fund is the largest municipal
bond fund.
From time to time, advertisements or sales material issued by the
Funds may discuss or be based upon information in a recent issue
of the Special Report on Tax Freedom Day published by the Tax
Foundation, a Washington, D.C.-based nonprofit, research and
public education organization. The report illustrates, among
other things, the amount of time, on an annual basis, the average
taxpayer works to satisfy his or her tax obligations to the
federal, state and local taxing authorities.
The Trust amortizes the organizational expenses attributable to a
Fund over a period of five years from the effective date of the
registration statement covering that Fund. New investors
purchasing shares of a Fund after the effective date of such
Fund's registration statement under the Securities Act of 1933
will bear such expenses during the amortization period.
The shareholders of a Massachusetts business trust could, under
certain circumstances, be held personally liable as partners for
its obligations. The Trust's Declaration of Trust, however,
contains an express disclaimer of shareholder liability for acts
or obligations of the Trust. The Declaration of Trust also
provides for indemnification and reimbursement of expenses out of
Trust assets for any shareholder held personally liable for
obligations of the Trust. The Declaration of Trust provides that
the Trust shall, upon request, assume the defense of any claim
made against any shareholder for any act or obligation of the
Trust and satisfy any judgment thereon. All such rights are
limited to the assets of the Fund(s) of which a shareholder holds
shares. The Declaration of Trust further provides that the Trust
may maintain appropriate insurance (for example, fidelity bonding
and errors and omissions insurance) for the protection of the
Trust, its shareholders, Trustees, officers, employees and agents
to cover possible tort and other liabilities. Thus, the risk of a
shareholder incurring financial loss on account of shareholder
liability is limited to circumstances in which both inadequate
insurance exists and the Trust itself is unable to meet its
obligations.
From time to time, the number of shares of beneficial interest of
any Fund held in the "street name" accounts of various securities
dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares
outstanding. To the best knowledge of the Trust, as of April 3,
1995, no other person holds beneficially or of record more than
5% of a Fund's outstanding shares.
Access persons of the Franklin Templeton Group, as defined in SEC
Rule 17(j) under the 1940 Act, who are employees of Resources or
its subsidiaries, are permitted to engage in personal securities
transactions subject to the following general restrictions and
procedures: (1) the trade must receive advance clearance from a
compliance officer and must be completed within 24 hours after
this clearance; (2) copies of all brokerage confirmations must be
sent to the compliance officer and within 10 days after the end
of each calendar quarter, a report of all securities transactions
must be provided to the compliance officer; (3) in addition to
items (1) and (2), access persons involved in preparing and
making investment decisions must file annual reports of their
securities holdings each January and also inform the compliance
officer (or other designated personnel) if they own a security
that is being considered for a fund or other client transaction
or if they are recommending a security in which they have an
ownership interest for purchase or sale by a fund or other
client.
Ownership and Authority Disputes
In the event of disputes involving multiple claims of ownership
or authority to control a shareholder's account, the Funds have
the right (but has no obligation) to: (a) freeze the account and
require the written agreement of all persons deemed by the Funds
to have a potential property interest in the account, prior to
executing instructions regarding the account; (b) interplead
disputed funds or accounts with a court of competent
jurisdiction; or (c) surrender ownership of all or a portion of
the account to the Internal Revenue Service in response to a
Notice of Levy.
Financial Statements
The financial statements contained in the Trust's Annual Report
to Shareholders dated February 28, 1995, are incorporated herein
by reference.
Appendix A
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 municipal
bond ratings. 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 mar- ket 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: (highest quality) "the obligor has an extraordinary
ability to pay interest and repay principal which is unlikely to
be affected by reasonably foreseeable events."
AA bonds: (high quality) "the obligor's ability to pay interest
and repay principal, while very strong, is somewhat less than for
AAA-rated securities or more subject to possible change over the
term of the issue."
A bonds: (good quality) "the obligor's ability to pay interest
and repay principal is strong, but may be more vulnerable to
adverse changes in economic conditions and circumstances than
bonds with higher ratings."
BBB bonds: (satisfactory bonds) "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 weaken this ability than bonds with
higher ratings."
Municipal Notes
Moody's
Moody's ratings for state and 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, while various 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 Short-term and Commercial Paper Ratings
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-S: 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.
Appendix B
Further Information on Special
Factors Affecting Each Fund
The following information is a summary of special factors
affecting each of the individual Funds. It does not purport to be
a complete description of such factors and is based primarily
upon information derived from public documents relating to
securities offerings of issuers of such states and other
historically reliable sources such as S&P Creditweek Municipal
and Moody's Municipal Credit Reports. The Trust has not
independently verified any of this data. 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.
ALABAMA
Alabama's finances are primarily handled through the Special
Education Trust and General Funds, on a cash basis. In recent
years, these funds have constituted about 43% and 11%,
respectively, of all state revenues.
The state implements conservative financial policies as evidenced
by its strong balanced budget acts, which allow spending only
from monies on-hand in the state treasury. During fiscal 1991,
the governor prorated the state's Special Education Trust Fund
budget twice and the General Fund once to ensure expenditures did
not exceed revenues at year-end. Although these funds ended the
1991 fiscal year with positive balances of $416,000 and $402,000,
respectively, these levels represented substantial declines from
previous years and reflected the effects of weakened revenue
collections during the fiscal year.
During fiscal 1992, in response to projected revenues shortfalls
in the Special Education Trust Fund, the administration prorated
the fund by 6.5%. This proration placed fiscal 1992
appropriations equal to 1991 levels. However, as the fiscal year
progressed, income and sales tax receipts improved, enabling the
Governor to reduce the original proration to 5.5%. At fiscal year
end, unencumbered balances of the Special Education Trust Fund
and the General Fund equaled $2.5 million and $23.4 million,
respectively.
Although the original 1993 budget projected a 6.1% or $47 million
increase in general fund expenditures, shortfalls in General Fund
revenues led the state to reduce expenditures by 3.2%. As a
result, Alabama achieved a surplus of approximately $29 million
for fiscal 1993. At year end, the unecumbered balances for the
Special Education Trust Fund and the General Fund, respectively,
were approximatley $83 million and $48 million.
The state's overall outlook is stable, and the state has sound
financial management and low debt.
FLORIDA
Florida's financial performance and position remain satisfactory.
In recent fiscal years, lower-than-expected economic activity
resulted in significant state revenue shortfalls. However,
because of timely action, the state has maintained budgetary
balance. In the coming years, difficult choices will arise among
spending priorities and tax policies. An adequate balance must be
found to cope with funding demands driven by rapid population
growth while still promoting economic development. Funding
increased Medicaid and corrections costs will be especially
important.
In recent years, Florida's consumption tax-based revenues
received a boost from the economic activity associated with the
rebuilding and cleanup of southern Florida as a result of damage
caused by Hurricane Andrew in August 1992.
The budget adopted for fiscal 1995 provides for an increase in
spending in the General Revenue Fund of 7.6% from fiscal 1994.
Florida projects revenue growth of approximately 6.6%, no new
taxes and and relatively minor fee increases. The budget provides
the first required minimum 5% deposit into the Budget
Stabilization Fund of $200 million and for a drawn down of the
Working Capital Fund from $300 million to $159 million. The
Governor's proposed 1996 budget calls for increased general
revenue spending of 4.8% based on existing tax sources. It also
calls for a $260 million budget stabilization fund balance and a
working capital fund balance of $900 million. The proposed budget
is within the state's 1994 revenue limitation law limits.
GEORGIA
Through the 1980's, Georgia's financial operations were
favorable, with strong General Fund revenue gains and increases
in reserve levels. However, slower than budgeted revenue growth
resulted in Georgia budget deficits for the fiscal years 1990
through 1992 and virtually depleted state reserves. However,
stonger economic trends and more conservative budgeting resulted
in surpluses for fiscal years 1993 and 1994 as well as
significant increases in reserve fund levels. For fiscal 1993,
Georgia deposited approximately $123 million to the Revenue
Shortfall Reserve and $83 million to the Mid-Year Adjustment
Reserve. For fiscal 1994, revenues increased approximately 7.8%,
and Georgia deposited approximately $220 million and $83 million,
respectively, in the the two reserves.
The state's fiscal 1995 budget projects overall revenue growth at
7.8%. In addition, the budget provides for an reduced capital
borrowing program of $377 million, down from 1993's $792 million,
to provide additional funding for public and higher education, as
well as for roads, bridges and environmental preservation. Net
proceeds of an anticipated $240 million from the state lottery
will be used to fund education programs.
KENTUCKY
Kentucky's financial operations were strained during the fiscal
years 1987-1990 due to substantial increases in educational
expenditures absent concurrent revenue-generating proposals.
Following a 1989 state supreme court decision, Kentucky increased
taxes by more than $1.2 billion to fund education reform in the
1990-1992 biennium. By June 30, 1991, the commonwealth's
unreserved general fund balance on a Generally Accepted
Accounting Principle ("GAAP") basis reached $124 million as a
result of the new taxes. It was expected that Kentucky would
spend some of those reserves during the ensuing fiscal years.
Despite surprisingly strong economic activity, Kentucky had to
resort to one-time budget balancing strategies in recent years.
By fiscal 1992 the commonwealth was already resorting to
withholding income tax refunds to balance its cash-based budget.
On a GAAP basis, the commonwealth's budget reached negative $113
million on an unreserved basis. Of even greater concern was the
structural imbalance between what the commonwealth was spending
and what it was taking in as revenue. For fiscal 1993, Kentucky
again resorted to delaying income tax refunds to balance the
budget.
By fiscal 1994, however, Kentucky's financial operations had
stabilized as the commonwealth enacted measures promoting
structural balance and increased reserves. By depositing $56
million at fiscal 1994 year end, Kentucky raised the Budget
Revenue Fund balance to approximately $90 million. The enacted
biennial budget for fiscal 1995 and 1996 was designed to continue
this trend. The budget calls for a $100 million Budget Reserve
Fund balance by 1995 fiscal year end.
LOUISIANA
Louisiana's property tax code structure tends to favor residences
over commercial and industrial real estate, with the latter two
sectors carrying much of the local tax burden. Attempts to reform
the tax code have not met with success in recent years, although
new attempts to create a more equitable tax code are likely.
Despite tight budgets in fiscal 1993 and 1994, both years
produced balanced budgets due to strong revenue performance based
on the economy and large federal funding infusions for Medicaid.
Prior cash flow concerns were mitigated in 1994 due to the
legislature's expansion of borrowable funds to other treasury-
managed accounts.
Fiscal 1993's appropriation of $620 million was reduced mid-year
to $575 million. Higher education was cut further in to $555
million. However, tuition increases allowed by the legislature in
fiscal 1994 may generate $25 million in annualized revenues,
bringing 1994 funding back to the final amount available in 1993.
Louisiana faces large gaps in funding for fiscal years 1995 and
1996. The state is scheduled to lose $750 million in federal
Medicaid funding and has unfunded risk management liabilities of
approximately $750 million. Louisiana is seeking a federal
waiver to restructure its Medicaid program to avoid a shortfall.
MARYLAND
Although Maryland is among the most heavily indebted of the
states, it has maintained a superior credit rating. The state has
restrained borrowing in recent years, resulting in a more modest
relative debt position. The state's formal debt review process
seeks to limit total debt to 3.2% of personal income and debt
service to 8% of state revenues.
Strong administrative control of state finances is maintained by
the State Board of Public Works, made up of the governor,
treasurer and controller. The revenue stream is diversified,
relying on sales and income taxes, and state property tax
continues to be levied to service part of the debt. During the
late 1980's, when the state's economy flourished, sizeable
reserves were gathered in the Revenue Stabilization Fund.
The state's financial performance and position, though
historically very strong, came under stress during, and after,
the recent recession. A combination of revenue shortfalls and
expenditure overruns hindered state finances in the years just
prior to 1993. Budgetary solutions have included administrative
expenditure cuts, use of general and other fund reserves,
implementation of new revenues measures, and local aid
reductions.
Prompt and prudent actions by state officials restored budgetary
balance in 1993. The state ended 1993 with a positive $302
million and $114 million general fund balance on a budgetary and
GAAP basis, respectively. In addition, the state's reserve fund
was restored to $57.5 million after being reduced substantially
in prior years to fund budget shortfalls.
Preliminary year-end estimates for fiscal 1994 showed a $60
million general fund surplus and a reserve fund balance of $162
million. The approved budget for fiscal 1995 calls for a
budgetary surplus of approximately $49 million and reserve fund
balance exceeding $220 million.
MISSOURI
Missouri ended fiscal 1993 with finances improved over the
previous year. The state's General Fund recorded an unreserved,
undesignated surplus of $77 million. A continuing strength was
the state's reserve for cash operations and budget stabilization,
which increased to $218 million in 1993 from $204.9 million in
1992.
General revenues for fiscal 1994 were up approximately 7.1% and
allowed Missouri to make additional deposits to reserves. The
state projects that general revenues for fiscal year 1995 to
increase approximately 9.8% over fiscal 1994. Missouri continues
to maintain relatively low per capita debt levels.
Continuing litigation and penalties imposed over desegregation
issues in Kansas City and St. Louis continue to affect the
state's financial strength. The state has budgeted approximately
$360 million in fiscal 1995 to be used to for desegregation
costs.
NORTH CAROLINA
Economic improvement and conservative budget practices continued
the improvements in the state's finances in fiscal 1993. The
general fund deficit was eliminated and at June 30, the
unreserved, undesignated general fund balance equaled $209
million, not including $176 million reserved for budget
stabilization, and $57 million reserved for repairs and
replacement. When combined, these balances equal $442 million,
which compares very favorably with the original budgetary
estimate of only $3.6 million. The positive difference from the
original budget resulted largely from better-than-expected tax
revenues. Personal income tax collections exceeded estimates by
$195 million, and sales taxes were greater than estimated by $18
million. Expenditures for fiscal 1993 fell $320 million below
original budgetary projection. Spending reversions in excess of
$150 million combined with $158 million of federal aid for
disproportionate share payments caused the positive expenditure
difference.
As required by the state's 1992 budget reform package, 25% of all
future ending balances are to be reserved in a budget
stabilization fund until that fund equals 5% of the prior year's
operating budget. At the end of fiscal 1993, $176 million had
been accumulated in this fund.
For fiscal 1994, restrained expenditure growth combined with
conservative revenue assumption again yielded positive financial
variances. Overall tax revenues grew 8.0% compared to the
budgeted growth of 6.0%. Expenditures again fell below 1994
fiscal estimates because of spending reversions and the effects
of federal disproportionate share aid on Medicaid spending.
Available unreserved balances and budget stabilization reserves
totaled $440 million at the end of fiscal 1994, which was
equivalent to 4.1% of annual expenditures.
TEXAS
Texas' financial performance has improved following the
substantial operating and fund balance deficits for the fiscal
1986-1987 biennium, which were precipitated by an economic
downturn in the energy sector. The state's economy slowly began
to rebound during the fiscal 1988-1989 biennium, and the
recovery, coupled with a $5.7 billion tax bill approved by the
1987 legislature, strengthened the state's financial position.
The state ended fiscal year 1992 with $615 million in cash in the
state treasury.
The state had a projected budget gap of $4.8 billion for the
biennium ending August 31, 1993. This was offset by $1.9 billion
in budget cuts and $540 million of consolidation of funds, as
well as approval of a state lottery in order to generate $500
million. Tax rates were increased and tax bases expanded which
raised an additional $1.6 billion. As a result, the state ended
fiscal year 1993 with $1.6 billion in cash in the state treasury.
Due to an economy that outpaced the nation as a whole, Texas
finished fiscal 1994 with an approximately $600 million budget
surplus and approximately $2.2 billion in the state treasury. The
budget for the biennium ending August 31, 1995, totalling $70
billion, represents a 12.3% increase in spending over the prior
budget.
In response to a 1989 Texas Supreme Court decision that held that
the state's school finance system unconstitutional, the Texas
legislature enacted Senate Bill 7, which provides for five
alternative ways for wealthy districts to share their tax base
with poorer districts. In January 1995, the Texas Supreme Court
upheld Senate Bill 7 as constitutional, thus resolving a major
but not the only major uncertainty surrounding Texas school
financing.
VIRGINIA
The commonwealth enjoys a superior credit rating based in part on
a long history of well-managed financial operations. Its
guideline of limiting expected debt service to 5% of revenues is
a prudent management tool. Also, the commonwealth has made
significant mid-biennium budgetary adjustments to maintain
financial balance. During the 1990-92 period, when revenue
expectations for the biennium were reduced $2.1 billion, the
commonwealth preserved financial balance through a series of
transfers, appropriation reductions and other budgetary
revisions. As a result, the General Fund ended fiscal 1992 with
a surplus of $195 million.
The commonwealth's finances continued to improve through fiscal
years 1993 and 1994. Improved General Fund balances resulted
primarily from increased revenue collections generated by better
economic conditions, the collections growing 8.9% in 1993 and
6.0% in 1994. At the end of fiscal 1993, the commonwealth
deposited approximately $79 million in a constitutionally
mandated revenue stabilization fund.
The biennial budget for fiscal years 1995 and 1996 calls for
revenue growth of 5.6% and 5.1%, respectively, with no new taxes.
However, realization of these estimates may be vulnerable to
weakened personal income growth. The budget also calls for an
additonal $80 million deposit to the revenue stabilization fund
during the 1995-96 biennium.
The commonwealth's direct general obligation per capita is low.
FRANKLIN
TAX-FREE
TRUST
STATEMENT OF
ADDITIONAL INFORMATION 777 Mariners Island Blvd., P.O. Box 7777
May 1, 1995 San Mateo, CA 94403-7777 1-800/DIAL BEN
Franklin Tax-Free Trust (the "Trust") is an open-end investment
company consisting of 27 separate series. This Statement of
Additional Information (the "SAI") relates to the nine series
shown below, eight of which, as noted, are currently offering two
classes of shares:
Class I Class II
Franklin Arizona Tax-Free Franklin Arizona Tax-Free
Income Fund, Class I Income Fund, Class II
Franklin Colorado Tax-Free Franklin Colorado Tax-Free
Income Fund, Class I Income Fund, Class II
Franklin Connecticut Tax-Free Franklin Connecticut Tax-Free
Income Fund, Class I Income Fund, Class II
Franklin High Yield Tax-Free Franklin High Yield Tax-Free
Income Fund, Class I Income Fund, Class II
Franklin Indiana Tax-Free not available
Income Fund, Class I
Franklin New Jersey Tax-Free Franklin New Jersey Tax-Free
Income Fund, Class I Income Fund, Class II
Franklin Oregon Tax-Free Income Franklin Oregon Tax-Free Income
Fund, Class I Fund, Class II
Franklin Pennsylvania Tax-Free Franklin Pennsylvania Tax-Free
Income Fund, Class I Income Fund, Class II
Franklin Puerto Rico Tax-Free Franklin Puerto Rico Tax-Free
Income Fund, Class I Income Fund, Class I
This new class structure ("multiclass") allows investors to
consider, among other features, the impact of sales charges and
distribution fees ("Rule 12b-1 fees") on their investments in the
Funds.
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
SAI.
The principal investment objective of each Fund, except the High
Yield Fund, is to provide investors with as high a level of
income exempt from federal income taxes as is consistent with
prudent investing, while seeking preservation of shareholders'
capital. The High Yield Fund seeks to provide investors with a
high current yield exempt from federal income taxes by investing
primarily in municipal securities which have been rated in the
lower-grade categories by one of the 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
quality by the Fund's investment manager. As a secondary
objective, the High Yield Fund will seek capital appreciation to
the extent that this is possible and is consistent with its
principal investment objective. The investment objectives of each
Fund are fundamental policies. Each Fund, other than the High
Yield Fund, also seeks to provide a maximum level of income
exempt from state personal income taxes, if any, to shareholders
resident in the named state. The Puerto Rico Fund seeks to
provide a maximum level of income which is exempt from the
personal income taxes of the majority of states. The Connecticut
Fund is non-diversified; the other Funds are diversified.
Generally, 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 the state's political subdivisions,
agencies, and instrumentalities.
This SAI is not a prospectus. It contains information in addition
to and in more detail than set forth in the Prospectuses of the
respective Funds. This SAI is intended to provide a prospective
investor with additional information regarding the activities and
operations of the Trust and each Fund and should be read in
conjunction with the Prospectus covering the specific Fund.
A Prospectus for the Funds dated May 1, 1995, as may be amended
from time to time, provides the basic information a prospective
investor should know before investing in the Funds and may be
obtained without charge from the Trust or from the Trust's
principal underwriter, Franklin/Templeton Distributors, Inc.
("Distributors"), at the address shown above.
Contents Page
About the Trust
The Trust's Investment Objectives
and Policies
Description of Municipal and
Other Securities
Investment Restrictions
Trustees and Officers
Investment Advisory and Other Services
The Trust's Policies Regarding Brokers
Used on Portfolio Transactions
Additional Information Regarding
Purchases and Redemptions
of Trust Shares
The Trust's Underwriter
Plans of Distribution
Additional Information
Regarding Taxation
Performance
Miscellaneous Information
Appendix
Financial Statements
About the Trust
The Trust is an open-end management investment company, commonly
called a "mutual fund," and has registered as such under the
Investment Company Act of 1940 (the "1940 Act"). The Trust was
organized as a Massachusetts business trust in September 1984.
The Trust issues its shares of beneficial interest with no par
value in several series. The Trust currently has 27 separate
series, each of which maintains a totally separate investment
portfolio. This SAI discusses only the nine series listed on the
cover.
The Trust's Investment
Objectives and Policies
As noted in the Prospectus, the Puerto Rico Fund seeks to provide
a maximum level of income which is exempt from the personal
income taxes of the majority of states; the High Yield Fund seeks
to provide investors with a high current yield exempt from
federal income taxes by investing primarily in lower-rated or
unrated municipal securities; and the State Funds seek to provide
a maximum level of income which is exempt from the personal
income taxes for resident shareholders of the named state.
Although the Trust seeks to invest all the assets of each Fund in
a manner designed to accomplish the objective of each Fund, there
may be times when market conditions limit the availability of
appropriate municipal securities or, in the investment manager's
opinion, there exist uncertain economic, market, political, or
legal conditions which may jeopardize the value of municipal
securities. For temporary defensive purposes, a State Fund may
invest more than 20% and up to 100% of the value of its net
assets in instruments the interest on which is exempt from
federal income taxes only, and each Fund may invest more than 20%
and up to 100% of its net assets in taxable, fixed-income
obligations. To the extent that the states of Connecticut and New
Jersey require dividends to be derived exclusively from interest
on obligations of such states or of the United States ("U.S.")
and its territories in order to be tax-exempt, the Trust will
endeavor to meet such requirements. The policy followed by these
Funds of attempting to meet these state requirements in order to
distribute tax-exempt income is not a fundamental policy with
respect to the Funds and may be changed without notification to
shareholders. If, due to unusual market or political conditions,
investments in securities as described above would be advisable,
in the investment manager's opinion, in order to protect the
value of the Funds' shares or their net yield, such investments
may be made, notwithstanding the potential state income tax
effects.
It is the policy of each Fund that illiquid securities (including
illiquid securities with contractual or other restrictions on
resale or instruments which are not readily marketable or have no
readily ascertainable market value) may not constitute, at the
time of the purchase or at any time, more than 10% of the value
of the total net assets of the Fund.
Description of Municipal
and Other Securities
The Prospectus describes the general categories and nature of
municipal securities. Discussed below are the major attributes of
the various municipal and other securities in which each of the
Funds may invest.
Municipal Notes
Tax Anticipation Notes are used to finance working capital needs
of municipalities and are issued in anticipation of various
seasonal tax revenues, which will be used to pay the notes. They
are usually general obligations of the issuer, secured by the
taxing power for the payment of principal and interest.
Revenue Anticipation Notes are issued in expectation of receipt
of other kinds of revenue, such as federal revenues available
under the Federal Revenue Sharing Program. They are usually
general obligations of the issuer. Bond Anticipation Notes are
normally issued to provide interim financing until long-term
financing can be arranged. The long-term bonds then provide the
money for the repayment of the notes.
Construction Loan Notes are sold to provide construction
financing for specific projects. After successful completion and
acceptance, many projects receive permanent financing through the
Federal Housing Administration under the Federal National
Mortgage Association or the Government National Mortgage
Association.
Tax-Exempt Commercial Paper typically represents a short-term
obligation (270 days or less) issued by a municipality to meet
working capital needs.
Municipal Bonds, which meet longer-term capital needs and
generally have maturities of more than one year when issued, have
two principal classifications: general obligation bonds and
revenue bonds.
1. General Obligation Bonds. Issuers of general obligation bonds
include states, counties, cities, towns and regional districts.
The proceeds of these obligations are used to fund a wide range
of public projects, including construction or improvement of
schools, highways and roads, and water and sewer systems. The
basic security behind general obligation bonds is the issuer's
pledge of its full faith, credit and taxing power for the payment
of principal and interest. The taxes that can be levied for the
payment of debt service may be limited or unlimited as to the
rate or amount of special assessments.
2. Revenue Bonds. A revenue bond is not secured by the full
faith, credit and taxing power of an issuer. Rather, the
principal security for a revenue bond is generally the net
revenue derived from a particular facility, group of facilities
or, in some cases, the proceeds of a special excise tax or other
specific revenue source. Revenue bonds are issued to finance a
wide variety of capital projects including: electric, gas, water,
and sewer systems; highways, bridges and tunnels; port and
airport facilities; colleges and universities; and hospitals. The
principal security behind these bonds may vary. Housing finance
authorities have a wide range of security, including partially or
fully insured mortgages, rent subsidized and/or collateralized
mortgages, and/or the net revenues from housing or other public
projects. Many bonds provide additional security in the form of a
debt service reserve fund, from which money may be used to make
principal and interest payments on the issuer's obligations. Some
authorities are provided with further security in the form of
state assurance (although without obligation) to make up
deficiencies in the debt service reserve fund.
Tax-Exempt Industrial Development Revenue Bonds are issued by or
on behalf of public authorities to raise money for the financing
of various privately operated facilities for business
manufacturing, housing, sports, and pollution control. These
bonds are also used to finance public facilities such as
airports, mass transit systems, ports, and parking. The payment
of the principal and interest on such bonds is solely dependent
on the ability of the facilities user to meet its financial
obligations and the pledge, if any, of the real and personal
property so financed as security for such payment.
Zero coupon bonds. A Fund's investment in zero coupon and delayed
interest bonds may cause the Fund to recognize income and make
distributions to shareholders prior to the receipt of cash
payments. Zero coupon securities make no periodic interest
payments but instead are sold at a deep discount from their face
value. The buyer receives a rate of return determined by the
gradual appreciation of the security, which is redeemed at face
value on a specified maturity date.
Because zero coupon securities bear no interest and compound semi-
annually at the rate fixed at the time of issuance the value of
such securities is generally more volatile than other fixed-
income securities. Since zero coupon bondholders do not receive
interest payments, zeros fall more dramatically than bonds paying
interest on a current basis when interest rates rise. When
interest rates fall, zero coupon securities rise more rapidly in
value, because the bonds reflect a fixed rate of return.
In order to generate cash to satisfy distribution requirements, a
Fund may be required to dispose of portfolio securities that it
otherwise would have continued to hold or to use cash flows from
other sources such as the sale of Fund shares.
Convertible and Step Coupon Bonds. The Fund may invest a portion
of its assets in convertible and step coupon bonds. The
convertible bonds which the Fund may purchase are zero coupon
securities until a predetermined date at which time they convert
to a specified coupon security.
Variable or Floating Rate Demand Notes ("VRDNs"). As stated in
the Prospectus, VRDNs are tax-exempt obligations which contain a
floating or variable interest rate and a right of demand, which
may be unconditional, to receive payment of the unpaid principal
balance plus accrued interest upon a short notice period
(generally up to 30 days) prior to specified dates, either from
the issuer or by drawing on a bank letter of credit, a guarantee
or insurance issued with respect to such instrument. The interest
rates are adjustable at intervals ranging from daily up to
monthly, calculated to maintain the market value of the VRDN at
approximately the par value of the VRDN upon the adjustment date.
The adjustments are typically based upon the prime rate of a bank
or some other appropriate interest rate adjustment index.
When-Issued Purchases. New issues of municipal securities are
frequently offered on a when-issued basis; that is, payment for
and delivery of the securities (the "settlement date") normally
takes place after the date that the offer is accepted. The
purchase price and the yield that will be received on the
securities are fixed at the time the buyer enters into the
commitment. While the Trust will always make commitments to
purchase such securities with the intention of actually acquiring
the securities, it may nevertheless sell these securities before
the settlement date if it is deemed advisable as a matter of
investment strategy. To the extent that assets of a Fund are held
in cash pending the settlement of a purchase of securities, the
Fund would earn no income; however, it is the Trust's intention
to have each Fund fully invested to the extent practicable and
subject to the policies stated in the Prospectus. At the time a
Fund makes the commitment to purchase a municipal bond on a when-
issued basis, it will record the transaction and reflect the
value of the security in determining its net asset value. The
Trust does not believe that any Fund's net asset value or income
will be adversely affected by the purchase of municipal bonds on
a when-issued basis. Each Fund will establish a segregated
account in which it will maintain cash and marketable securities
equal in value to commitments for when-issued securities.
Municipal Securities may also be sold in "stripped" form.
Stripped Municipal Securities represent separate ownership of
interest and principal payments on municipal obligations.
Callable Bonds. These are municipal bonds which are issued with
provisions which prevent them from being called, typically for
periods of 5 to 10 years. During times of generally declining
interest rates, if the call-protection on callable bonds expires,
there is an increased likelihood that a number of such bonds may,
in fact, be called away by the issuers. Based on a number of
factors, including certain portfolio management strategies used
by the Funds' investment manager, the Funds believe they have
reduced the risk of adverse impact on net asset value based on
calls of callable bonds. The investment manager may dispose of
such bonds in the years prior to their call dates, if the
investment manager believes such bonds are at their maximum
premium potential. In pricing such bonds in a Fund's portfolio,
each callable bond is marked-to-market daily based on the bond's
call date. Thus, the call of some or all of a Fund's callable
bonds may have an impact on such Fund's net asset value. In light
of the Funds' pricing policies and because the Funds follow
certain amortization procedures required by the Internal Revenue
Service, the Funds are not expected to suffer any material
adverse impact related to the value at which the Funds have
carried the bonds in connection with calls of bonds purchased at
a premium. Notwithstanding such policies, however, the
reinvestment of the proceeds of any called bond may be in bonds
which pay a higher or lower rate of return than the called bonds;
and, as with any investment strategy, there is no guarantee that
a call may not have a more substantial impact than anticipated or
that the Funds' objectives will be achieved.
Certificates of Participation. As stated in the Prospectus, each
Fund may also invest in municipal lease obligations primarily
through Certificates of Participation ("COPs"). COPs are
distinguishable from municipal debt in that the lease which is
the subject of the transaction typically 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.
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 to be of comparable quality. Criteria
considered by the NRSROs 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 has determined that COPs held in
each Fund's portfolio 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; (b) the size
of the municipal securities market for each Fund, 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. There is no limit as to the
amount of assets which each Fund may invest in COPs.
Escrow-Secured Bonds or Defeased Bonds are created when an issuer
refunds in advance of maturity (or pre-refunds) an outstanding
bond issue which is not immediately callable, and it becomes
necessary or desirable to set aside funds for redemption of the
bonds at a future date. In an advance refunding, the issuer will
use the proceeds of a new bond issue to purchase high grade,
interest bearing debt securities which are then deposited in an
irrevocable escrow account held by a trustee bank to secure all
future payments of principal and interest of the advance refunded
bond. Escrow-secured bonds will often receive a triple-A rating
from S&P, Moody's and Fitch.
U.S. Government Obligations which may be owned by a Fund are
issued by the U.S. Treasury and include bills, certificates of
indebtedness, notes and bonds, or are issued by agencies and
instrumentalities of the U.S. government and backed by the full
faith and credit of the U.S. government.
Commercial Paper refers to promissory notes issued by
corporations in order to finance their short-term credit needs.
There may, of course, be other types of municipal securities that
become available which are similar to the foregoing described
municipal securities in which the Funds may also invest, to the
extent such investments would be consistent with the foregoing
objectives and policies.
Lending Portfolio Securities. As discussed in the Prospectus,
each Fund may lend its portfolio securities, not to exceed 10% of
such Fund's total net assets, to qualified securities dealers or
other institutional investors. The lending of securities is a
common practice in the securities industry. A Fund may engage in
security loan arrangements with the primary objective of
increasing such Fund's income either through investing the cash
collateral in short-term interest bearing obligations or by
receiving a loan premium from the borrower. Under the securities
loan agreement, a Fund continues to be entitled to all dividends
or interest on any loaned securities. As with any extension of
credit, there are risks of delay in recovery and loss of rights
in the collateral should the borrower of the security fail
financially. While such securities are on loan, the borrower will
pay such Fund any income accruing thereon, and such Fund may
invest the cash collateral in portfolio securities, thereby
earning additional income. A Fund will not lend its portfolio
securities if such loans are not permitted by the laws or
regulations of any state in which its shares are qualified for
sale. Loans are typically subject to termination by a Fund in the
normal settlement time or by the borrower on one day's notice.
Borrowed securities must be returned when the loan is terminated.
Any gain or loss in the market price of the borrowed securities
which occurs during the term of the loan inures to such Fund and
its shareholders. A Fund may pay reasonable finders', borrowers',
administrative and custodial fees in connection with a loan of
its securities.
Income derived by a Fund from securities lending transactions and
investments in commercial paper, bankers' acceptances and
certificates of deposit will be taxable for federal income tax
purposes when distributed to shareholders. Income derived by a
Fund from interest on direct obligations of the U.S. government
will be taxable for federal income tax purposes when distributed
to shareholders.
Investment Restrictions
The Trust has adopted the following restrictions as additional
fundamental policies of each Fund. These policies may not be
changed with respect to any Fund without the approval of a
majority of the outstanding voting securities of such Fund. Under
the 1940 Act, a "vote of a majority of the outstanding voting
securities" of the Trust or of a particular Fund means the
affirmative vote of the lesser of (1) more than 50% of the
outstanding shares of the Trust or of such Fund or (2) 67% or
more of the shares of the Trust or of such Fund present at a
shareholders meeting if more than 50% of the outstanding shares
of the Trust or of such Fund are represented at the meeting in
person or by proxy. A Fund may not:
1. Borrow money or mortgage or pledge any of its assets, except
that borrowings (and a pledge of assets therefore) for temporary
or emergency purposes may be made from banks in any amount up to
5% of the total asset value.
2. Buy any securities on "margin" or sell any securities
"short," except that it may use such short-term credits as are
necessary for the clearance of transactions.
3. Make loans, except through the purchase of readily marketable
debt securities which are either publicly distributed or
customarily purchased by institutional investors. Although such
loans are not presently intended, this prohibition will not
preclude a Fund from loaning portfolio securities to
broker/dealers or other institutional investors if at least 102%
cash collateral is pledged and maintained by the borrower;
provided such portfolio security loans may not be made if, as a
result, the aggregate of such loans exceeds 10% of the value of
the Fund's total assets at the time of the most recent loan.
4. Act as underwriter of securities issued by other persons,
except insofar as the Fund may be technically deemed an
underwriter under the federal securities laws in connection with
the disposition of portfolio securities.
5. Purchase the securities of any issuer which would result in
owning more than 10% of the voting securities of such issuer,
except with respect to the Connecticut Fund, which will not
purchase a security if, as a result: i) more than 25% of its
total assets would be invested in the securities of a single
issuer or ii) with respect to 50% of its total assets, more than
5% of its assets would be invested in the securities of a single
issuer.
6. Purchase securities from or sell to the Trust's officers and
trustees, or any firm of which any officer or trustee is a
member, as principal, or retain securities of any issuer if, to
the knowledge of the Trust, one or more of the Trust's officers,
trustees, or investment adviser own beneficially more than 1/2 of
1% of the securities of such issuer and all such officers and
trustees together own beneficially more than 5% of such
securities.
7. Acquire, lease or hold real estate, except such as may be
necessary or advisable for the maintenance of its offices and
provided that this limitation shall not prohibit the purchase of
municipal and other debt securities secured by real estate or
interests therein.
8. Invest in commodities and commodity contracts, puts, calls,
straddles, spreads or any combination thereof, or interests in
oil, gas, or other mineral exploration or development programs,
except that it may purchase, hold and dispose of "obligations
with puts attached" in accordance with its investment policies.
9. Invest in companies for the purpose of exercising control or
management.
10. Purchase securities of other investment companies, except in
connection with a merger, consolidation or reorganization, except
to the extent the Fund invests its uninvested daily cash balances
in shares of the Franklin Tax-Exempt Money Fund and other tax-
exempt money market funds in the Franklin Group of Funds provided
i) its purchases and redemptions of such money market fund shares
may not be subject to any purchase or redemption fees, ii) its
investments may not be subject to duplication of management fees,
nor to any charge related to the expense of distributing the
Fund's shares (as determined under Rule 12b-1, as amended under
the federal securities laws) and iii) provided aggregate
investments by the Fund in any such money market fund do not
exceed (A) the greater of (i) 5% of the Fund's total net assets
or (ii) $2.5 million, or (B) more than 3% of the outstanding
shares of any such money market fund.
11. Invest more than 25% of its assets in securities of any
industry; although for purposes of this limitation, tax-exempt
securities and U.S. government obligations are not considered to
be part of any industry.
Trustees and Officers
The trustees have the responsibility for the overall management
of the Trust, including general supervision and review of each
Fund's investment activities. The trustees elect the officers of
the Trust who are responsible for administering the day-to-day
operations of the Trust. The affiliations of the officers and
trustees and their principal occupations for the past five years
are listed below. Trustees who are deemed to be "interested
persons" of the Trust, as defined in the 1940 Act, are indicated
by an asterisk (*).
Positions
and Offices
Name, Age and with the Principal Occupation
Address Trust During Past Five Years
Frank H. Abbott, III Trustee President and Director, Abbott
Age 74 Corporation (an investment
1045 Sansome St. company); and director, trustee
San Francisco, CA or managing general partner, as
94111 the case may be, of 30 of the
investment companies in the
Franklin Group of Funds.
Harris J. Ashton Trustee President, Chief Executive
Age 62 Officer and Chairman of the
General Host Board, General Host Corporation
Corporation (nursery and craft centers);
Metro Center, 1 Director, RBC Holdings, Inc. (a
Station Place bank holding company) and Bar-S
Stamford, CT 06904- Foods; and director, trustee or
2045 managing general partner, as the
case may be, of 54 of the
investment companies in the
Franklin Templeton Group of
Funds.
S. Joseph Fortunato Trustee Member of the law firm of
Age 62 Pitney, Hardin, Kipp & Szuch;
Park Avenue at Director of General Host
Morris County Corporation; director, trustee
P. O. Box 1945 or managing general partner, as
Morristown, NJ 07962- the case may be, of 56 of the
1945 investment companies in the
Franklin Templeton Group of
Funds.
David W. Garbellano Trustee Private Investor; Assistant
Age 80 Secretary/Treasurer and
111 New Montgomery Director, Berkeley Science
St., #402 Corporation (a venture capital
San Francisco, CA company); and director, trustee
94105 or managing general partner, as
the case may be, of 29 of the
investment companies in the
Franklin Group of Funds.
*Charles B. Johnson Chairman President and Director,
Age 62 of the Franklin Resources, Inc.;
777 Mariners Island Board and Chairman of the Board and
Blvd. Trustee Director, Franklin Advisers,
San Mateo, CA 94404 Inc. and Franklin Templeton
Distributors, Inc.; Director,
Franklin/Templeton Investor
Services, Inc. and General
Host Corporation; and officer
and/or director, trustee or
managing general partner, as
the case may be, of most
other subsidiaries of
Franklin Resources, Inc. and
of 55 of the investment
companies in the Franklin
Templeton Group of Funds.
*Rupert H. Johnson, President Executive Vice President and
Jr. and Director, Franklin Resources,
Age 54 Trustee Inc. and Franklin Templeton
777 Mariners Island Distributors, Inc.; President
Blvd. and Director, Franklin
San Mateo, CA 94404 Advisers, Inc.; Director,
Franklin/Templeton Investor
Services, Inc.; and officer
and/or director, trustee or
managing general partner, as
the case may be, of most other
subsidiaries of Franklin
Resources, Inc. and of 42 of
the investment companies in the
Franklin Templeton Group of
Funds.
Frank W. T. LaHaye Trustee General Partner, Peregrine
Age 66 Associates and Miller & LaHaye,
20833 Stevens Creek which are General Partners of
Blvd. Peregrine Ventures and Peregrine
Suite 102 Ventures II (venture capital
Cupertino, CA 95014 firms); Chairman of the Board
and Director, Quarterdeck Office
Systems, Inc.; Director,
FischerImaging Corporation; and
director or trustee, as the case
may be, of 25 of the investment
companies in the Franklin Group
of Funds.
Gordon S. Macklin Trustee Chairman, White River
Age 66 Corporation (information
8212 Burning Tree services); Director, Fund
Road American Enterprises Holdings,
Bethesda, MD 20817 Inc., Martin Marietta
Corporation, MCI Communications
Corporation, MedImmune, Inc.
(biotechnology), Infovest
Corporation (information
services), and Fusion Systems
Corporation (industrial
technology); and director,
trustee or managing general
partner, as the case may be, of
51 of the investment companies
in the Franklin Templeton Group
of Funds; formerly, Chairman,
Hambrecht and Quist Group;
Director, H & Q Healthcare
Investors; and President,
National Association of
Securities Dealers, Inc.
Harmon E. Burns Vice Executive Vice President,
Age 50 President Secretary and Director, Franklin
777 Mariners Island Resources, Inc.; Executive Vice
Blvd. President and Director, Franklin
San Mateo, CA 94404 Templeton Distributors, Inc.;
Executive Vice President,
Franklin Advisers, Inc.;
Director, Franklin/Templeton
Investor Services, Inc.; officer
and/or director, as the case may
be, of other subsidiaries of
Franklin Resources, Inc.; and
officer and/or director or
trustee of 41 of the investment
companies in the Franklin
Templeton Group of Funds.
Kenneth V. Domingues Vice Senior Vice President, Franklin
Age 62 President - Resources, Inc., Franklin
777 Mariners Island Financial Advisers, Inc., and Franklin
Blvd. Reporting Templeton Distributors, Inc.;
San Mateo, CA 94404 and officer and/or director, as the
Accounting case may be, of other
Standards subsidiaries of Franklin
Resources, Inc.; and Officer
and/or managing general partner,
as the case may be, of 36 of the
investment companies in the
Franklin Group of Funds.
Don Duerson Vice Employee of Franklin Resources,
Age 62 President Inc. and its subsidiaries in
777 Mariners Island senior portfolio management
Blvd. capacities.
San Mateo, CA 94404
Martin L. Flanagan Vice Senior Vice President, Chief
Age President Financial Officer and Treasurer,
777 Mariners Island and Chief Franklin Resources, Inc.;
Blvd. Financial Executive Vice President,
San Mateo, CA 94404 Officer Templeton Worldwide, Inc.;
Senior Vice President and
Treasurer, Franklin Advisers,
Inc. and Franklin Templeton
Distributors, Inc.; Senior Vice
President, Franklin/Templeton
Investor Services, Inc.; officer
of most other subsidiaries of
Franklin Resources, Inc.; and
officer of 60 of the investment
companies in the Franklin
Templeton Group of Funds.
Deborah R. Gatzek Vice Senior Vice President - Legal,
Age 46 President Franklin Resources, Inc. and
777 Mariners Island and Franklin Templeton Distributors,
Blvd. Secretary Inc.; Vice President, Franklin
San Mateo, CA 94404 Advisers, Inc. and officer of 36
of the investment companies in
the Franklin Group of Funds.
Thomas J. Kenny Vice Senior Vice President, Franklin
Age 32 President Advisers, Inc. and officer of
777 Mariners Island eight of the investment
Blvd. companies in the Franklin Group
San Mateo, CA 94404 of Funds.
Diomedes Loo-Tam Treasurer Employee of Franklin Advisers,
Age 56 and Inc.; and officer of 36 of the
777 Mariners Island Principal investment companies in the
Blvd. Accounting Franklin Group of Funds.
San Mateo, CA 94404 Officer
Edward V. McVey Vice Senior Vice President/National
Age 57 President Sales Manager, Franklin
777 Mariners Island Templeton Distributors, Inc.;
Blvd. and officer of 31 of the
San Mateo, CA 94404 investment companies in the
Franklin Group of Funds.
Trustees not affiliated with the investment manager
("nonaffiliated trustees") are currently paid fees of $1,300 per
month plus $1,300. During the fiscal year ended February 28,
1995, fees totaling $188,500 were paid to nonaffiliated trustees
of the Trust. As indicated above, certain of the trustees and
officers hold positions with other companies in the Franklin
Group of Funds(Registered Trademark) and the Templeton
Funds("Franklin Templeton Funds"). The following table shows the
fees paid by the Trust to its nonaffiliated trustees and the
total fees paid to such trustees by the Trust and other Franklin
Templeton Funds for which they serve as directors, trustees or
managing general partners.
Total
Compensation
from
Number of Franklin
Franklin Templeton
Aggregate Templeton Funds Funds,
Compensation Boards on Which including
Name from Trust * Each Serves the Trust **
Frank H. Abbott, III $32,500 30 $176,870
Harris J. Ashton 31,200 54 319,925
S. Joseph Fortunato 31,200 56 336,065
David W. Garbellano 31,200 29 153,300
Frank W.T. LaHaye 31,200 25 150,817
Gordon S. Macklin 31,200 51 303,685
* For the fiscal year ended February 1, 1995
** For the calendar year ended December 31, 1994.
Nonaffiliated trustees are also reimbursed for expenses incurred
in connection with attending Board meetings, paid pro rata by all
Franklin Templeton Funds for which they serve as trustees,
directors or managing general partners. No officer or trustee
received any other compensation directly from the Trust.
As of April 7, 1995, the officers and trustees, as a group, owned
of record and beneficially 22,640 shares of the New Jersey Fund,
which shares are less than 1% of the total outstanding shares of
the Fund. In addition, some trustees own shares in various other
Franklin Templeton Funds. Certain officers or trustees who are
shareholders of Franklin Resources, Inc. may be deemed to receive
indirect remuneration by virtue of their participation, if any,
in the fees paid to its subsidiaries. Charles B. Johnson and
Rupert H. Johnson, Jr.are brothers.
Investment Advisory and Other Services
The investment manager for each Fund is Franklin Advisers, Inc.
("Advisers" or "Manager"). Advisers is a wholly-owned subsidiary
of Franklin Resources, Inc. ("Resources"), a publicly owned
holding company whose shares are listed on the New York Stock
Exchange (the "Exchange"). Resources owns several other
subsidiaries which are involved in investment management and
shareholder services. The Manager and other subsidiary companies
of Resources currently manage over $118 billion in assets for
more than 3.8 million shareholders. The preceding table indicates
those officers and trustees who are affiliated persons of
Distributors and Advisers.
Pursuant to the management agreement, the Manager provides
investment research and portfolio management services, including
the selection of securities for the Funds to purchase, hold or
sell and the selection of brokers through whom the portfolio
transactions of each Fund are executed. The Manager's extensive
research activities include, as appropriate, traveling to meet
with issuers and to review project sites. The Manager's
activities are subject to the review and supervision of the
trustees to whom the Manager renders periodic reports of the
Trust's investment activities. The Manager, at its own expense,
furnishes the Trust with office space and furnishings, facilities
and equipment required for managing the business affairs of the
Trust; maintains all internal bookkeeping, clerical, secretarial
and administrative personnel and services; and provides certain
telephone and other mechanical services. The Manager is covered
by fidelity insurance on its officers, directors and employees
for the protection of the Funds. Each Fund bears all of its
expenses not assumed by the Manager. Details of these expenses
are included in the Trust's Annual Report to Shareholders dated
February 28, 1995.
Pursuant to the management agreement, each Fund is obligated to
pay the Manager a fee computed at the close of business on the
last business day of each month equal to a monthly rate of 5/96
of 1% (approximately 5/8 of 1% per year) for the first $100
million of average monthly net assets of the Fund; 1/24 of 1%
(approximately 1/2 of 1% per year) of average monthly net assets
of the Fund in excess of $100 million up to $250 million; and
9/240 of 1% (approximately 45/100 of 1% per year) of average
monthly net assets of the Fund in excess of $250 million.
Advisers may, however, limit or may not impose its management
fees and may also assume responsibility for making payments, if
necessary, to offset certain operating expenses otherwise payable
by such Fund(s). This action by Advisers to limit its management
fees and assume responsibility for payment of the expenses
related to the operations of any Fund may be terminated by
Advisers at any time.
The management agreement specifies that the management fee be
reduced to the extent necessary to comply with the most stringent
limits on the expenses which may be borne by a Fund prescribed by
any state in which a Fund's shares are offered for sale. The most
stringent current limit requires the Manager to reduce or
eliminate its fee to the extent that aggregate operating expenses
of a Fund (excluding interest, taxes, brokerage commissions and
extraordinary expenses such as litigation costs) would otherwise
exceed in any fiscal year 2.5% of the first $30 million of
average annual net assets of a Fund, 2% of the next $70 million
of average annual net assets of a Fund, and 1.5% of average
annual net assets of a Fund in excess of $100 million. Expense
reductions have not been necessary based on state limitation
requirements.
The table below sets forth the management fees which each Class I
shares was obligated to pay Advisers:
Fiscal Year Ended February 28:
Management Fees
Fund - Class I 1995 1994 1993
Arizona Fund $ 3,571,548 $ 3,701,321 $ 3,131,852
Colorado Fund 1,081,347 1,046,886 791,120
Connecticut Fund 892,225 876,259 665,608
High Yield Fund 14,863,761 14,279,943 11,262,179
Indiana Fund 284,741 272,338 184,624*
New Jersey Fund 2,640,430 2,552,530 1,941,488
Oregon Fund 1,831,692 1,832,220 1,390,785
Pennsylvania Fund 2,880,051 2,828,236 2,257,960
Puerto Rico Fund 986,561 936,205 759,846
*After reduction by the Manager, the Fund paid management fees of
$145,359.
The management agreement is in effect until March 31, 1996.
Thereafter, it may continue in effect for successive annual
periods provided such continuance is specifically approved at
least annually by a majority vote of the Trust's Board of
Trustees or as to each Fund by a vote of the holders of a
majority vote of the outstanding voting securities of such Fund,
and in either event by a majority vote of the trustees who are
not parties to the management agreement or interested persons of
any such party (other than as trustees), cast in person at a
meeting called for that purpose. The management agreement may be
terminated without penalty at any time by the Trust or one or
more of its Funds or by the Manager on 30 days' written notice
and will automatically terminate in the event of its assignment,
as defined in the 1940 Act.
Other Services
Franklin/Templeton Investor Services, Inc. ("Investor Services"
or "Shareholder Services Agent"), a wholly-owned subsidiary of
Resources, is the shareholder servicing agent for the Trust and
acts as the Trust's transfer agent and dividend-paying agent.
Investor Services is compensated by each Fund on the basis of a
fixed fee per account.
Bank of America NT & SA, 555 California Street, 4th Floor, San
Francisco, California 94104, acts as custodian of the securities
and other assets of each Fund. Citibank Delaware, One Penn's Way,
New Castle, Delaware 19720, acts as custodian in connection with
transfer services through bank automated clearing houses. The
custodians do not participate in decisions relating to the
purchase and sale of portfolio securities.
Coopers & Lybrand, L.L.P., 333 Market Street, San Francisco,
California 94105, are the Trust's independent auditors. During
the fiscal year ended February 28, 1995, their auditing services
consisted of rendering an opinion on the financial statements of
the Trust included in the Trust's Annual Report to Shareholders
dated February 28, 1995.
The Trust's Policies
Regarding Brokers Used on Portfolio Transactions
Since most purchases made by the Trust are principal transactions
at net prices, the Trust incurs little or no brokerage costs. The
Trust deals directly with the selling or purchasing principal or
market maker without incurring charges for the services of a
broker on its behalf, unless it is determined that a better price
or execution may be obtained by utilizing the services of a
broker. Purchases of portfolio securities from underwriters
include a commission or concession paid by the issuer to the
underwriter, and purchases from dealers include a spread between
the bid and ask price. As a general rule, the Funds do not
purchase bonds in underwritings where they are not given any
choice, or only limited choice, in the designation of dealers to
receive the commission. The Trust seeks to obtain prompt
execution of orders at the most favorable net price. Transactions
may be directed to dealers in return for research and statistical
information, as well as for special services rendered by such
dealers in the execution of orders. It is not possible to place a
dollar value on the special executions or on the research
services received by Advisers from dealers effecting transactions
in portfolio securities. The allocations of transactions in order
to obtain additional research services permits Advisers to
supplement its own research and analysis activities and to
receive the views and information of individuals and research
staff of other securities firms. As long as it is lawful and
appropriate to do so, the Manager and its affiliates may use this
research data in their investment advisory capacities with other
clients. Provided that the Fund's officers are satisfied that the
best execution is obtained, the sale of shares of a Fund may also
be considered as a factor in the selection of securities dealers
to execute the Trust's portfolio transactions.
If purchases or sales of securities of a Fund and one or more
other investment companies or clients supervised by the Manager
are considered at or about the same time, transactions in such
securities will be allocated among the several investment
companies and clients in a manner deemed equitable to all by the
Manager, taking into account the respective sizes of the funds
and the amount of securities to be purchased or sold. It is
recognized that in some cases this procedure could possibly have
a detrimental effect on the price or volume of the security so
far as any Fund is concerned. In other cases, however, it is
possible that the ability to participate in volume transactions
and to negotiate lower brokerage commissions will be beneficial
to a Fund.
During each of the three fiscal years ended February 28, 1995 the
Funds did not incur any brokerage commissions. As of February 28,
1995, the Funds did not own any securities of their regular
broker-dealers.
Additional Information
Regarding Purchases and Redemptions of Trust Shares
All checks, drafts, wires and other payment mediums used for
purchasing or redeeming shares of the Funds must be denominated
in U.S. dollars. Each Fund reserves the right, in its sole
discretion, to either (a) reject any order for the purchase or
sale of shares denominated in any other currency or (b) honor the
transaction or make adjustments to a shareholder's account for
the transaction as of a date and with a foreign currency exchange
factor determined by the drawee bank.
In connection with exchanges, (see the Prospectus "Exchange
Privilege"), it should be noted that since the proceeds from the
sale of shares of an investment company generally are not
available until the fifth business day following the redemption,
the fund into which a Fund's shareholders are seeking to exchange
reserve the right to delay issuing shares pursuant to an exchange
until said fifth business day. The redemption of shares of a Fund
to complete an exchange for shares of any of the investment
companies will be effected at the close of business on the day
the request for exchange is received in proper form at the net
asset value then effective.
Shares are eligible to receive dividends beginning on the first
business day following settlement of the purchase transaction
through the date on which a Fund writes a check or sends a wire
on redemption transactions.
Dividend checks which are returned to the Funds marked "unable to
forward" by the postal service will be deemed to be a request by
the shareholder to change the dividend option and the proceeds
will be reinvested in additional shares at net asset value until
new instructions are received.
The Funds may impose a $10 charge for each returned item,
against any shareholder account which, in connection with the
purchase of a Fund's shares, submits a check or a draft which is
returned unpaid to the Fund.
Each Fund may deduct from a shareholder's account the costs of
its efforts to locate a shareholder if mail to that shareholder
is returned as undeliverable or the Fund is otherwise unable to
locate the shareholder or verify the current mailing address.
These costs may include a percentage of the account when a search
company charges a percentage fee in exchange for its location
services.
Under agreements with certain banks in Taiwan, Republic of China,
the Funds' shares are available to such banks' discretionary
trust funds at net asset value. The banks may charge service fees
to their customers who participate in the discretionary trusts.
Pursuant to agreements, a portion of such service fees may be
paid to Distributors, or an affiliate of Distributors, to help
defray expenses of maintaining a service office in Taiwan,
including expenses related to local literature fulfillment and
communication facilities.
Shares of the Funds may be offered to investors in Taiwan through
securities firms known locally as Securities Investment
Consulting Enterprises. In conformity with local business
practices in Taiwan, shares of the Funds will be offered with the
following schedule of sales charges:
Sales
Size of Purchase Charge
Up to U.S. $100,000 3%
U.S. $100,000 to U.S. $1,000,000 2
Over U.S. $1,000,000 1
Purchases and Redemptions
Through Securities Dealers
Orders for the purchase of shares of a Fund received in proper
form prior to the close of the Exchange (generally 1:00 p.m.
Pacific time) any business day that the Exchange is open for
trading and promptly transmitted to the Fund will be based upon
the public offering price determined that day. Purchase orders
received by securities dealers or other financial institutions
after the close of the Exchange will be effected at the class'
public offering price on the day it is next calculated. The use
of the term "securities dealer" herein shall include other
financial institutions which, pursuant to an agreement with
Distributors (directly or through affiliates), handle customer
orders and accounts with the Fund. Such reference, however, is
for convenience only and does not indicate a legal conclusion of
capacity.
Orders for the redemption of shares are effected at net asset
value subject to the same conditions concerning time of receipt
in proper form. It is the securities dealer's responsibility to
transmit the order in a timely fashion and any loss to the
customer resulting from failure to do so must be settled between
the customer and the securities dealer. Any applicable contingent
deferred sales charge will be deducted from the redemption
proceeds.
Special Net Asset Value Purchases - Class I Shares
As discussed in the Prospectus under "How to Buy Shares of the
Funds - Description of Special Net Asset Value Purchases,"
certain categories of investors may purchase Class I shares
without a front-end sales charge ("net asset value") or a
contingent deferred sales charge. Distributors or one of its
affiliates may make payments, out of its own resources, to
securities dealers who initiate and are responsible for such
purchases, as indicated below. Distributors may make these
payments in the form of contingent advance payments, which may be
recovered from the securities dealer, or set off against other
payments due to the securities dealer, in the event of investor
redemptions made within 12 months of the calendar month following
purchase. Other conditions may apply. All terms and conditions
may be imposed by an agreement between Distributors, or its
affiliates, and the securities dealer.
With respect to purchases made at net asset value by certain
trust companies and trust departments of banks, Distributors, or
one of its affiliates, out of its own resources, may pay up to 1%
of the amount invested.
Letter of Intent. An investor may qualify for a reduced sales
charge on the purchase of Class I shares of the Funds, as
described in the prospectus. At any time within 90 days after the
first investment which the investor wants to qualify for the
reduced sales charge, a signed Shareholder Application, with the
Letter of Intent section completed, may be filed with the Fund.
After the Letter of Intent is filed, each additional investment
will be entitled to the sales charge applicable to the level of
investment indicated on the Letter. Sales charge reductions based
upon purchases in more than one of the Franklin Templeton Funds
will be effective only after notification to Distributors that
the investment qualifies for a discount. The shareholder's
holdings in the Franklin Templeton Funds, including Class II
shares, acquired more than 90 days before the Letter of Intent is
filed will be counted towards completion of the Letter of Intent
but will not be entitled to a retroactive downward adjustment in
the sales charge. Any redemptions made by the shareholder during
the 13-month period will be subtracted from the amount of the
purchases for purposes of determining whether the terms of the
Letter of Intent have been completed. If the Letter of Intent is
not completed within the 13-month period, there will be an upward
adjustment of the sales charge, depending upon the amount
actually purchased (less redemptions) during the period. An
investor who executes a Letter of Intent prior to a change in the
sales charge structure for a Fund will be entitled to complete
the Letter of Intent at the lower of (i) the new sales charge
structure; or (ii) the sales charge structure in effect at the
time the Letter of Intent was filed with the Fund.
As mentioned in the Prospectus, 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. If the total purchases,
less redemptions, equal the amount specified under the Letter,
the reserved shares will be deposited to an account in the name
of the investor or delivered to the investor or the investor's
order. If the total purchases, less redemptions, exceed the
amount specified under the Letter of Intent and is an amount
which would qualify for a further quantity discount, a
retroactive price adjustment will be made by Distributors and the
securities dealer through whom purchases were made pursuant to
the Letter of Intent (to reflect such further quantity discount)
on purchases made within 90 days before and on those made after
filing the Letter. The resulting difference in offering price
will be applied to the purchase of additional shares at the
offering price applicable to a single purchase or the dollar
amount of the total purchases. If the total purchases, less
redemptions, are less than the amount specified under the Letter,
the investor will remit to Distributors an amount equal to the
difference in the dollar amount of sales charge actually paid and
the amount of sales charge which would have applied to the
aggregate purchases if the total of such purchases had been made
at a single time. The shareholder will receive a written
notification from Distributors requesting the remittance. Upon
such remittance the reserved shares held for the investor's
account will be deposited to an account in the name of the
investor or delivered to the investor or to the investor's order.
If within 20 days after written request such difference in sales
charge is not paid, the redemption of an appropriate number of
reserved shares to realize such difference will be made. In the
event of a total redemption of the account prior to fulfillment
of the Letter of Intent, the additional sales charge due will be
deducted from the proceeds of the redemption, and the balance
will be forwarded to the investor.
REDEMPTIONS IN KIND
Each Fund has committed itself to pay in cash (by check) all
requests for redemption by any shareholder of record, limited in
amount, however, during any 90-day period to the lesser of
$250,000 or 1% of the value of the Fund's net assets at the
beginning of such period. Such commitment is irrevocable without
the prior approval of the Securities and Exchange Commission
("SEC"). In the case of requests for redemption in excess of such
amounts, the trustees reserve the right to make payments in whole
or in part in securities or other assets of the Fund from which
the shareholder is redeeming, in case of an emergency, or if the
payment of such a redemption in cash would be detrimental to the
existing shareholders of the Fund. In such circumstances, the
securities distributed would be valued at the price used to
compute the Fund's net assets. Should the Fund do so, a
shareholder may incur brokerage fees in converting the securities
to cash. The Funds do not intend to make payment for redemptions
in illiquid securities; however, should it happen, shareholders
may not be able to timely recover their investment and may also
incur brokerage costs in selling such securities.
Redemptions by the Funds
Due to the relatively high cost of handling small investments,
each Fund reserves the right to redeem, involuntarily, at net
asset value, the shares of any shareholder of such Fund whose
account has a value of less than one-half of the initial minimum
investment required for that shareholder, but only where the
value of such account has been reduced by the shareholder's prior
voluntary redemption of shares. Until further notice, it is the
present policy of the Funds not to exercise this right with
respect to any shareholder whose account has a value of $50 or
more. In any event, before a Fund redeems such shares and sends
the proceeds to the shareholder, it will notify the shareholder
that the value of the shares in the account is less than the
minimum amount and allow the shareholder 30 days to make an
additional investment in an amount which will increase the value
of the account to at least $100.
Calculation of Net Asset Value
As noted in the Prospectus, each Fund generally calculates net
asset value for each class, 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. As of the date of this
SAI, the Trust is informed that the Exchange observes the
following holidays: New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
Each Fund's portfolio securities are valued as stated in the
Prospectus. Generally, trading in U.S. government securities and
money market instruments is substantially completed each day at
various times prior to the close of the Exchange. The values of
such securities used in computing the net asset value of a Fund's
shares are determined as of such times. Occasionally, events
affecting the values of such securities may occur between the
times at which they are determined and the close of the Exchange
which will not be reflected in the computation of a Fund's net
asset value. If events materially affecting the value of such
securities occur during such period, then these securities will
be valued at their fair value as determined in good faith by the
Board of Trustees.
Special Services
The Trust and Institutional Services Division of Distributors
provides specialized services, including recordkeeping, for
institutional investors of the Funds. The cost of these services
is not borne by the Funds.
Investor Services or the Trust may pay certain financial
institutions which maintain omnibus accounts with the Funds on
behalf of numerous beneficial owners for recordkeeping operations
performed with respect to such beneficial owners. For each
beneficial owner in the omnibus account, the Funds may reimburse
Investor Services an amount not to exceed the per account fee
which the Funds normally pay Investor Services. Such financial
institutions may also charge a fee for their services directly to
their clients.
The Trust's Underwriter
Pursuant to an underwriting agreement in effect until March 31,
1996, Distributors acts as principal underwriter in a continuous
public offering for shares of each Fund.
Distributors pays the expenses of distribution of each Fund's
shares, including advertising expenses and the costs of printing
sales material and prospectuses used to offer shares to the
public. The Trust pays the expenses of preparing and printing
amendments to its registration statements and prospectuses (other
than those necessitated by the activities of Distributors) and of
sending prospectuses to existing shareholders.
The underwriting agreement will continue in effect for successive
annual periods, provided that its continuance is specifically
approved at least annually by a vote of the Trust's Board of
Trustees or by a vote of the holders of a majority of the
outstanding voting securities of each Fund, and in either event
by a majority of the Trust's trustees who are not parties to the
underwriting agreement or interested persons of any such party
(other than as trustees of the Trust), cast in person at a
meeting called for that purpose. The underwriting agreement
terminates automatically in the event of its assignment and may
be terminated by either party on 90 days' written notice.
Until April 30, 1994, income dividends for the Class I shares
were reinvested at the offering price (which includes the sales
charge) and Distributors allowed 50% of the entire commission to
the securities dealer of record, if any, on an account. Starting
with any income dividends paid after April 30, 1994, such
reinvestment is at net asset value.
Underwriting commissions received by Distributors for the Class I
shares and the net underwriting commissions retained by
Distributors, after allowances to dealers, for each of the three
fiscal years ending on February 28, 1995 were as follows:
Net
Total Underwriting
Fund Commissions Commissions
Received Retained
1995
Arizona Fund $ 2,104,781 $ 111,192
Colorado Fund 797,125 44,768
Connecticut Fund 642,299 35,101
High Yield Fund 13,569,789 730,196
Indiana Fund 200,372 10,647
New Jersey Fund 2,338,378 125,247
Oregon Fund 1,145,080 63,384
Pennsylvania Fund 2,302,144 117,424
Puerto Rico Fund 787,985 39,822
1994
Arizona Fund 4,856,037 246,362
Colorado Fund 1,851,780 85,769
Connecticut Fund 1,525,567 67,668
High Yield Fund 28,269,127 1,152,341
Indiana Fund 512,478 18,881
New Jersey Fund 5,864,699 245,225
Oregon Fund 3,420,681 169,738
Pennsylvania Fund 5,211,610 233,882
Puerto Rico Fund 1,580,955 73,313
1993
Arizona Fund 4,548,313 205,689
Colorado Fund 1,627,553 66,144
Connecticut Fund 1,457,153 54,203
High Yield Fund 23,636,987 1,045,852
Indiana Fund 367,784 14,436
New Jersey Fund 4,087,815 198,955
Oregon Fund 3,353,292 125,232
Pennsylvania Fund 4,096,911 182,142
Puerto Rico Fund 1,220,228 57,125
Distributors may be entitled to reimbursement under the Rule 12b-
1 distribution plan relating to both classes. See "Plans of
Distribution" below. Except as noted, Distributors received no
other compensation from the Funds for acting as underwriter.
PLANS OF DISTRIBUTION
Each class of the Funds has adopted a Distribution Plan ("Class I
Plan" and "Class II Plan," respectively, or "Plans") pursuant to
Rule 12b-1 under the 1940 Act. Pursuant to the Class I Plan, each
Fund may pay up to a maximum of 0.10% per annum of its average
daily net assets for expenses incurred in the promotion and
distribution of its shares.
The Class I Plan
In implementing the Class I Plan, the Board of Trustees
determined that the annual fees payable thereunder will be equal
to the sum of: (i) the amount obtained by multiplying 0.10% by
the average daily net assets represented by Class I shares of a
Fund that were acquired by investors on or after May 1, 1994
("New Assets"), and (ii) the amount obtained by multiplying 0.05%
by the average daily net assets represented by Class I shares of
a Fund that were acquired before May 1, 1994 ("Old Assets"). Such
fees will be paid to the current securities dealer of record on
the shareholder's account. In addition, until such time as the
maximum payment of 0.10% is reached on a yearly basis, up to an
additional 0.02% will be paid to Distributors under the Class I
Plan. The payments to be made to Distributors will be used by
Distributors to defray other marketing expenses that have been
incurred in accordance with the Class I Plan, such as
advertising.
The fee relating to the Class I Plan is an expense of Class I as
a whole, so that all Class I shareholders, regardless of when
they purchased their shares will bear Rule 12b-1 expenses at the
same rate. That rate initially will be at least 0.07% (0.05% plus
0.02%) of Class I's average daily net assets and, as Class I
shares are sold on or after May 1, 1994 (the "Effective Date"),
will increase over time. Thus, as the proportion of Class I
shares purchased on or after May 1, 1994 increases in relation to
outstanding Class I shares, the expenses attributable to payments
under the Class I Plan will also increase (but will not exceed
0.10% of average daily net assets). While this is the currently
anticipated calculation for fees payable under the Class I Plan,
the Class I Plan permits the Trust's trustees to allow each Fund
to pay a full 0.10% on all assets at any time. The approval of
the Board of Trustees would be required to change the calculation
of the payments to be made under the Class I Plan.
Pursuant to the Class I Plan, Distributors or others will be
entitled to be reimbursed each quarter (up to the maximum as
stated above) for actual expenses incurred in the distribution
and promotion of Class I shares, including, but 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 Class I 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 Trust, Distributors or its affiliates.
The Class I Plan does not permit unreimbursed expenses incurred
in a particular year to be carried over to or reimbursed in
subsequent years.
For the fiscal year ended February 28, 1995, aggregate amounts
paid by Class I shares pursuant to the Plan were as follows:
Class I Aggregate Adver- Printing Payments Payments
Fund Rule tising and to to
12b-1 Mailing Under- Brokers
Fees of writers or
Paid Prospec- Dealers
by Fund tuses*
Arizona $ 428,271 $ 59,958 $ 34,262 $ 29,979 $304,072
Fund
Colorado 113,322 14,079 10,688 7,403 81,152
Fund
Connectic 90,379 12,653 7,230 5,423 65,073
ut Fund
High 1,918,113 287,717 134,268 115,087 1,381,041
Yield
Fund
Indiana 27,021 3,513 2,972 1,351 19,185
Fund
New 310,985 40,428 27,989 18,659 223,909
Jersey
Fund
Oregon 210,327 30,647 17,306 11,268 151,106
Fund
Pennsylva 343,475 44,652 30,913 20,608 247,302
nia Fund
Puerto 100,210 13,027 10,021 6,013 71,149
Rico Fund
The Class II Plan
Under the Class II Plan, each class is permitted to pay to
Distributors or others annual distribution fees, payable
quarterly, of .50% of Class II's average daily net assets, in
order to compensate Distributors or others for providing
distribution and related services and bearing certain expenses of
the Class. All expenses of distribution and marketing over that
amount will be borne by Distributors, or others who have incurred
them, without reimbursement by the class. In addition to this
amount, under the Class II Plan, each class shall pay .15% per
annum, payable quarterly, of the Class' average daily net assets
as a servicing fee. This fee will be used to pay 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 the Class II
shares on behalf of the customers, and similar activities related
to furnishing personal services and maintaining shareholder
accounts. Distributors may pay the securities dealer, from its
own resources, a commission of up to 1% of the amount invested.
In General
In addition to the payments to which Distributors or others are
entitled under the Plans, the Plans also provide that to the
extent the Funds, the Manager or Distributors or other parties on
behalf of the Funds, the Manager or Distributors, make payments
that are deemed to be payments for the financing of any activity
primarily intended to result in the sale of Fund shares within
the context of Rule 12b-1 under the 1940 Act, then such payments
shall be deemed to have been made pursuant to the Plans.
In no event shall the aggregate asset-based sales charges which
include payments made under the Plan, plus any other payments
deemed to be made pursuant to the Plan, exceed the amount
permitted to be paid pursuant to the Rules of Fair Practice of
the National Association of Securities Dealers, Inc., Article
III, Section 26(d)4.
The terms and provisions of the Plans relating to required
reports, term, and approval are consistent with Rule 12b-1.
To the extent fees are for distribution or marketing functions,
as distinguished from administrative servicing or agency
transactions, certain banks may not be entitled to participate in
the Plans to the extent that applicable federal law prohibits
certain banks from engaging in the distribution of mutual fund
shares. Such banking institutions, however, are permitted to
receive fees under the Plans for administrative servicing or for
agency transactions. If a bank were prohibited from providing
such services, its customers who are shareholders would be
permitted to remain shareholders of the Fund, and alternate means
for continuing the servicing of such shareholders would be
sought. In such an event, changes in the services provided might
occur and such shareholders might no longer be able to avail
themselves of any automatic investment or other services then
being provided by the bank. It is not expected that shareholders
would suffer any adverse financial consequences as a result of
any of these changes. Securities laws of states in which the
Fund's shares are offered for sale may differ from the
interpretations of federal law expressed herein, and banks and
financial institutions selling shares of the Fund may be required
to register as dealers pursuant to state law.
The Class I Plan and the Class II Plan were approved by
shareholders in April, 1994, and April, 1995, respectively, and
by the trustees of the Fund, including those trustees who are not
interested persons, as defined in the 1940 Act. The Class II Plan
became effective on May 1, 1995. The Class I Plan and the Class
II Plan are effective through April 30, 1996, and are renewable
annually by a vote of the Trust's Board of Trustees, including a
majority vote of the trustees who are non-interested persons of
the Fund and who have no direct or indirect financial interest in
the operation of the Plans, cast in person at a meeting called
for that purpose. It is also required that the selection and
nomination of such trustees be done by the non-interested
trustees. The Plans and any related agreement may be terminated
at any time, without any penalty, by vote of a majority of the
non-interested trustees on not more than 60 days' written notice,
by Distributors on not more than 60 days' written notice, by any
act that constitutes an assignment of the management agreement
with the Manager, the underwriting agreement with Distributors,
or by vote of a majority of the Fund's outstanding shares.
Distributors or any dealer or other firm may also terminate their
respective distribution or service agreement at any time upon
written notice.
With respect to the Plan, the Plan and any related agreements may
not be amended to increase materially the amount to be spent for
distribution expenses without approval by a majority of such
class of the Fund's outstanding shares, and all material
amendments to the Plans or any related agreements shall be
approved by a vote of the non-interested trustees, cast in person
at a meeting called for the purpose of voting on any such
amendment.
Distributors is required to report in writing to the Board of
Trustees at least quarterly on the amounts and purpose of any
payment made under the Plans and any related agreements, as well
as to furnish the Board of Trustees with such other information
as may reasonably be requested in order to enable the Board of
Trustees to make an informed determination of whether the Plan
should be continued.
Additional Information Regarding Taxation
As stated in the Prospectus, each Fund has elected to be treated
as a regulated investment company under Subchapter M of the
Internal Revenue Code, as amended (the "Code"). The trustees
reserve the right not to maintain the qualification of any Fund
as a regulated investment company if they determine such course
of action to be beneficial to the shareholders. In such case, a
Fund will be subject to federal and possibly state corporate
taxes on its taxable income and gains and to the alternative
minimum tax on a portion of its tax-exempt income distributions
to shareholders (including tax-exempt interest dividends) will be
taxable dividend income to the extent of a Fund's available
earnings and profits.
The Code requires all funds to distribute at least 98% of their
taxable ordinary income earned during the calendar year and at
least 98% of their capital gain net income earned during the 12-
month period ending October 31 of each year (in addition to
amounts from the prior year that were neither distributed nor
taxed to a Fund) to shareholders by December 31 of each year in
order to avoid the imposition of a federal excise tax. Under
these rules, certain distributions, which are declared in
October, November or December but which, for operational reasons,
may not be paid to shareholders until the following January, will
be treated for tax purposes as if paid by the Funds and received
by shareholders on December 31 of the calendar year in which they
are declared. The Funds intend as a matter of policy to declare
and pay such dividends, if any, in December to avoid the
imposition of this tax, but do not guarantee that the
distributions will be sufficient to avoid any or all federal
excise taxes.
Redemptions and exchanges of a Fund's shares are taxable
transactions for federal and state income tax purposes. For most
shareholders, gain or loss will be recognized in an amount equal
to the difference between the shareholder's basis in the shares
and the amount received, subject to the rules described below. If
such shares are a capital asset in the hands of the shareholder,
gain or loss will be capital gain or loss and will be long-term
for federal income tax purposes if the shares have been held for
more than one year.
All or a portion of a loss realized upon a redemption of shares
will be disallowed to the extent other shares of such Fund are
purchased (through reinvestment of dividends or otherwise) within
30 days before or after such redemption. Any loss disallowed
under these rules will be added to the tax basis of the shares
purchased.
All or a portion of the sales charge incurred in purchasing
shares of a Fund will not be included in the federal tax basis of
such shares sold or exchanged within ninety (90) days of their
purchase (for purposes of determining gain or loss with respect
to such shares) if the sales proceeds are reinvested in the Fund
or another Franklin Templeton Funds and a sales charge which
would otherwise apply to the reinvestment is reduced or
eliminated. Any portion of such sales charge excluded from the
tax basis of the shares sold will be added to the tax basis of
the shares acquired in the reinvestment. Shareholders should
consult with their tax advisors concerning the tax rules
applicable to the redemption or exchange of a Fund's shares.
Since each Fund's income is derived from interest income and gain
on the sale of portfolio securities rather than dividend income,
no portion of any of the Fund's distributions will generally be
eligible for the corporate dividends-received deduction. None of
the distributions paid by any 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.
Many states grant tax-free status to dividends paid to
shareholders of mutual funds from interest income earned by a
fund from direct obligations of the U.S. government, subject in
some states to minimum investment requirements that must be met
by a fund. Investments in GNMA/FNMA securities and repurchase
agreements collateralized by U.S. government securities do not
generally qualify for tax-free treatment. While it is not the
primary investment objective of any Fund of the Trust to invest
in such obligations, the Funds are authorized to so invest for
temporary or defensive purposes. To the extent that such
investments are made, any affected Fund will provide shareholders
with the percentage of any dividends paid which may qualify for
such tax-free treatment at the end of each calendar year.
Shareholders should then consult with their own tax advisors with
respect to the application of their state and local laws to these
distributions and on the application of other state and local
laws on distributions and redemption proceeds received from the
Fund.
Persons who are defined in the Code as "substantial users" (or
related persons) of facilities financed by private activity bonds
should consult their tax advisors before purchasing shares of a
Fund.
Performance
As noted in the Prospectus, a Fund may from time to time quote
various performance figures to illustrate its past performance.
Each Fund may occasionally cite statistics to reflect its
volatility or risk.
Performance quotations by investment companies are subject to
rules adopted by the SEC. These rules require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by a Fund be
accompanied by certain standardized performance information
computed as required by the SEC. Current yield and average annual
compounded total return quotations used by the Funds are based on
the standardized methods of computing performance mandated by the
SEC. An explanation of those and other methods used by the Funds
to compute or express performance follows.
Total Return
The average annual total return is determined by finding the
average annual compounded rates of return over one-, five-, and
ten-year periods, or fractional portion thereof, that would
equate an initial hypothetical $1,000 investment to its ending
redeemable value. The calculation assumes the maximum sales
charge is deducted from the initial $1,000 purchase order and
that income dividends and capital gains are reinvested at net
asset value on the reinvestment dates during the period. The
quotation assumes the account was completely redeemed at the end
of each one-, five- and ten-year period and the deduction of all
applicable charges and fees. If a change is made to the sales
charge structure, historical performance information will be
restated to reflect the maximum sales charge currently in effect.
In considering the quotations set forth below, investors should
remember that the maximum sales charge reflected in each
quotation is a one-time fee (charged on all direct purchases)
which will have its greatest impact during the early stages of an
investment in one of the Funds. The actual performance of an
investment will be affected less by this charge the longer an
investor retains the investment in such Fund. The average annual
compounded rates of return for Class I shares for the indicated
periods ended February 28, 1995 were as shown below.
Average Annual Total Return
Inception
of the From
Fund One-Year Five-Year Inception
Arizona Fund 09/01/87 -2.62% 6.79% 7.37%
Colorado Fund 09/01/87 -3.21 6.95 7.61
Connecticut Fund 10/03/88 -3.88 5.93 6.37
High Yield Fund 03/18/86 -2.04 7.24 7.94
Indiana Fund 09/01/87 -3.64 6.89 7.76
New Jersey Fund 04/23/88 -3.11 6.70 7.60
Oregon Fund 09/01/87 -2.92 6.50 6.93
Pennsylvania Fund 12/01/86 -2.10 6.95 6.56
Puerto Rico Fund 04/03/85 -2.72 6.56 7.62
The above figures were calculated according to the following SEC
formula:
n
P(1+T) = ERV
where:
P = hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the one-, five-, or ten-year periods at
the end of the one-, five-, or ten-year periods (or fractional
portion thereof)
As discussed in each Prospectus, a Fund may quote total rates of
return in addition to its average annual total return. Such
quotations are computed in the same manner as the average annual
compounded rate, except that such quotations will be based on the
actual return for a specified period instead of the average
return over one-, five- and ten-year periods. The rates of total
return for each Fund for the indicated periods ended February 28,
1995 were as follows:
Aggregate Total Return
Inception
of the From
Fund One-Year Five-Year Inception
Arizona Fund 09/01/87 -2.62% 38.90% 70.43%
Colorado Fund 09/01/87 -3.21 39.93 73.41
Connecticut Fund 10/03/88 -3.88 33.41 48.54
High Yield Fund 03/18/86 -2.04 41.81 98.29
Indiana Fund 09/01/87 -3.64 39.51 75.13
New Jersey Fund 05/12/88 -3.11 38.33 64.66
Oregon Fund 09/01/87 -2.92 37.00 65.32
Pennsylvania Fund 12/01/86 -2.10 39.94 68.95
Puerto Rico Fund 04/03/85 -2.72 37.39 107.03
Yield
Current yield reflects the income per share earned by a Fund's
portfolio investments.
Current yield is determined by dividing the net investment income
per share earned during a 30-day base period by the maximum
offering price per share on the last day of the period and
annualizing the result. Expenses accrued for the period include
any fees charged to all shareholders during the base period. The
yield for Class I shares for the 30-day period ended February 28,
1995 was as follows:
Current
30-Day
Yield
Arizona Fund 5.15%
Colorado Fund 5.34
Connecticut Fund 5.44
High Yield Fund 6.46
Indiana Fund 5.21
New Jersey Fund 5.33
Oregon Fund 5.23
Pennsylvania Fund 5.35
Puerto Rico Fund 5.19
These figures were obtained using the SEC formula:
6
Yield = 2 [( a-b + 1 ) - 1]
----
cd
where:
a = interest earned during the period
b = net expenses accrued for the period
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends
d = the maximum offering price per share on the last day of the
period
30-Day Tax Equivalent Yield
Each Fund may also quote a tax equivalent yield which
demonstrates the taxable yield necessary to produce an after-tax
yield equivalent to that of a fund which invests in tax-exempt
obligations. Such yield is computed by dividing that portion of
the yield of a Fund (computed as indicated above) which is tax-
exempt by one minus the highest applicable combined federal and
state income tax rate (and adding the product to that portion of
the yield of a Fund that is not tax-exempt, if any). The tax
equivalent yield for Class I shares for the 30-day period ended
February 28, 1995 was as follows:
30-Day Tax
Equivalent
Yield
Arizona Fund 9.16%
Colorado Fund 9.31
Connecticut Fund 9.45
High Yield Fund 10.70
Indiana Fund 8.93
New Jersey Fund 9.49
Oregon Fund 9.52
Pennsylvania Fund 9.11
Puerto Rico Fund 8.59
The following table lists the state and the combined state and
federal income tax rates upon which the Trust's tax equivalent
yield quotations are based. From time to time, as any changes to
such rates become effective, tax equivalent yield quotations
advertised by the Trust will be updated to reflect such changes.
The Trust expects updates will be necessary as tax rates are
frequently changed by federal, state and local governments. The
advantage of tax-free investments, such as the Funds, will be
enhanced by any tax rate increases. Therefore, the details of
specific tax increases may be used in sales material for any
Fund.
State Combined
Arizona 6.90% 43.77%
Colorado 5.00 42.62
Connecticut 4.50 42.32
Indiana 3.40 41.65
New Jersey 6.58 43.57
Oregon 9.00 45.04
Pennsylvania 2.80 41.29
Puerto Rico - 39.60
*Based on the maximum combined state and federal tax rate in
effect as of the date of this SAI. The maximum federal tax rate
in effect as of the date of this SAI was 39.6%.
Quotations of taxable equivalent yield by the Funds in
advertisements may reflect assumed rates of return which are not
intended to represent historical or current distribution rates or
yields. Such quotations will be used in sales literature, such as
Franklin's Tax-Free Yield Calculator, to illustrate the general
principle of the impact taxes have on rates of return or to show
the taxable rate of return that would be needed to match a tax-
free rate of return.
Current Distribution Rate
Current yield and tax equivalent yield, which are calculated
according to a formula prescribed by the SEC, are not indicative
of the amounts which were or will be paid to a Fund's
shareholders. Amounts paid to shareholders are reflected in the
quoted current distribution rate or taxable equivalent
distribution rate. 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 equivalent to a Fund's current distribution
rate (calculated as indicated above). The advertised taxable
equivalent distribution rate will reflect the most current
federal and state tax rates available to a Fund.
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 over 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 additional sources (i.e., sources other than dividends and
interest), such as short-term capital gains, and is calculated
over a different period of time.
The current distribution rate for each Fund for the 12-month
period ended February 28, 1995 was as follows:
Current
Distribution
Rate
Arizona Fund 5.59%
Colorado Fund 5.55
Connecticut Fund 5.61
High Yield Fund 6.52
Indiana Fund 5.54
New Jersey Fund 5.40
Oregon Fund 5.32
Pennsylvania Fund 5.88
Puerto Rico Fund 5.79
Volatility
Occasionally statistics may be used to specify Fund volatility or
risk. Measures of volatility or risk are generally used to
compare a Fund's net asset value or performance relative to a
market index. One measure of volatility is beta. Beta is the
volatility of a fund relative to the total market as represented
by the Standard & Poor's 500 Stock Index. A beta of more than
1.00 indicates volatility greater than the market, and a beta of
less than 1.00 indicates volatility less than the market. Another
measure of volatility or risk is standard deviation. Standard
deviation is used to measure variability of net asset value or
total return around an average over a specified period of time.
The premise is that greater volatility connotes greater risk
undertaken in achieving performance.
Other Performance Quotations
With respect to those categories of investors who are permitted
to purchase Class I shares at net asset value, sales literature
pertaining to Class I shares may quote a current distribution
rate, yield, total return, average annual total return and other
measures of performance as described elsewhere in this SAI with
the substitution of net asset value for the public offering
price.
Regardless of the method used, past performance is not
necessarily indicative of future results, but is an indication of
the return to shareholders only for the limited historical period
used.
A Fund may include in its advertising or sales material
information relating to investment objectives and performance
results of funds and classes belonging to the Templeton Group of
Funds. Resources is the parent company of the advisers and
underwriter of the Franklin Templeton Funds.
Comparisons
To help investors better evaluate how an investment in a Fund
might satisfy their investment objective, advertisements and
other materials regarding the Funds may discuss various measures
of Fund and class performance as reported by various financial
publications. Materials may also compare performance (as
calculated above) to performance as reported by other
investments, indices, and averages. When advertising current
ratings or rankings, the Fund may advertise together or
separately the following examples of past ratings and rankings,
and such information in those categories which may appear in the
future:
Lipper Fixed-Income Fund Performance Analysis ranked the Colorado
Fund number one in total return in the Colorado Municipal Debt
Funds Category for its five-year total return for the year ended
December 31, 1994, with a total return of 38.98%. There were six
funds in the category.
Lipper Fixed-Income Fund Performance Analysis ranked the Oregon
Fund number one in total return in the Oregon Municipal Debt
Funds Category for its five-year total return for the year ended
December 31, 1994, with a total return of 35.85%. There were five
funds in the category.
Lipper Fixed-Income Fund Performance Analysis ranked the Indiana
Fund number one in total return in the Other Single States
Municipal Debt Funds Category for its five-year total return for
the year ended December 31, 1994, with a total return of 39.59%.
There were six funds in the category.
Lipper Fixed-Income Fund Performance Analysis ranked the
Pennsylvania Fund number one in total return in the Pennsylvania
Municipal Debt Funds Category for its one-year total return for
the year ended December 31, 1994, with a total return of -3.28%.
There were forty-four funds in the category.
The Lipper Fixed-Income Fund Performance Analysis and Lipper
Mutual Fund Yield Survey for Industry Averages - measure total
return and average current yield for the mutual fund industry.
They rank individual mutual fund performance over specified time
periods, assuming reinvestment of all distributions, exclusive of
any applicable sales charges.
In addition to such reports by Lipper, the following publications
and indices may be used to discuss or compare Fund performance:
Lehman Brothers Municipal Bond Index measures yield, price, and
total return for the municipal bond market.
Bond Buyer 20 Bond Index is an index of municipal bond yields
based on yields of 20 general obligation bonds maturing in 20
years.
Bond Buyer 40 Bond Index is an index of municipal bond yields
based on yields of 40 general obligation bonds maturing in
maturity of 29-30 years.
Salomon Brothers Composite High Yield Index covers much of the
below-investment grade U.S. corporate bond market. It combines
previously published indices to create a broad index for the high-
yield market. To enter the index, an issue must be rated
speculative by S&P or Moody's.
Salomon Brothers Broad Investment Grade Index is representative
of the entire universe of taxable fixed-income investments. It
includes issues of U.S. government securities, and any agency
thereof; corporate issues of investment grade, mortgage backed
securities; and yankee bonds.
Lehman Brothers Aggregate Bond Index includes fixed-rate debt
issues rated investment grade or higher by Moody's, S&P or Fitch,
in that order. All issues have at least one year to maturity and
an outstanding par value of at least $100 million for U.S.
government, $50 million for all others. It is a composite of the
Government Corporate Index and the Mortgage-Backed Securities
Index.
Savings & Loan Historical Interest Rates as published by the U.S.
Savings & Loan League Fact Book.
Inflation as measured by the Consumer Price Index, published by
the U.S. Bureau of Labor Statistics.
CDA Mutual Fund Report, published by CDA Investment Technologies
Inc. - analyzes price, current yield, risk, total return, and
average rate of return (average annual compounded growth rate)
over specified time periods for the mutual fund industry.
Financial Publications: The Wall Street Journal, Business Week,
Changing Times, Financial World, Forbes, and Money magazine.
Standard & Poor's Bond Indices - measure yield and price of
corporate, municipal, and government bonds.
From time to time, advertisements or information for the Funds
may include a discussion of certain attributes or benefits to be
derived by an investment in the Funds. Such advertisements or
information may include symbols, headlines, or other material
which highlight or summarize the information discussed in more
detail in the communication.
Advertisements or information may also compare the Funds'
performance to the return on certificates of deposit or other
investments. Investors should be aware, however, that an
investment in the Funds involve the risk of fluctuation of
principal value, a risk generally not present in an investment in
a certificate of deposit issued by a bank. For example, as the
general level of interest rates rise, the value of a Fund's fixed-
income investments, as well as the value of its shares which are
based upon the value of such portfolio investments, can be
expected to decrease. Conversely, when interest rates decrease,
the value of the Fund's shares can be expected to increase.
Certificates of deposit are frequently insured by an agency of
the U.S. government. An investment in a Fund is not insured by
any federal, state or private entity.
In assessing such comparisons of performance an investor should
keep in mind that the composition of the investments in the
reported indices and averages is not identical to the Fund's
portfolio, that the indices and averages are generally unmanaged,
and that the items included in the calculations of such averages
may not be identical to the formula used by the Fund to calculate
its figures. In addition there can be no assurance that the Fund
will continue this performance as compared to such other
averages.
Franklin had the first single-state municipal bond funds in
California, Massachusetts, Michigan, Minnesota and Ohio.
Other Features and Benefits
Under current tax laws, municipal securities remain one of the
few investments offering the potential for tax-free income. In
1995, taxes could cost as much as $47 on every $100 earned from a
fully taxable investment (based on the maximum combined 39.6%
federal tax rate and the highest state tax rate of 12% for 1995.)
Franklin tax-free funds, however, offer tax relief through a
professionally managed portfolio of tax-free securities selected
based on their yield, quality and maturity. An investment in a
Franklin tax-free fund can provide an investor with the potential
to earn income free of federal taxes and, depending on the fund,
state and local taxes as well, while supporting state and local
public projects. Franklin tax-free funds may also provide tax-
free compounding, when dividends are reinvested. An investment in
Franklin's tax-free funds can grow more rapidly than similar
taxable investments.
Municipal securities are generally considered to be creditworthy,
second in quality only to securities issued or guaranteed by the
United States government and its agencies. The market price of
such securities, however, may fluctuate. This fluctuation will
have a direct impact on the net asset value of an investment in a
Fund.
Currently, there are more mutual funds than there are stocks
listed on the Exchange. While many of them have similar
investment objectives, no two are exactly alike. As noted in the
Prospectuses, shares of a Fund are generally sold through
securities dealers or other financial institutions. Investment
representatives of such securities dealers or financial
institutions are experienced professionals who can offer advice
on the type of investment suitable to an investor's unique goals
and needs, as well as the types of risks associated with such
investment.
Each Fund may help investors achieve various investment goals
such as accumulating money for retirement, saving for a down
payment on a home, college costs and/or other long-term goals.
The Franklin College Costs Planner may assist an investor in
determining how much money must be invested on a monthly basis in
order to have a projected amount available in the future to fund
a child's college education. (Projected college cost estimates
are based upon current costs published by the College Board.)
Each Fund is a member of the Franklin Templeton Group, one of the
largest mutual fund organizations in the U.S. and may be
considered in a program for diversification of assets. Founded in
1947, Franklin, one of the oldest mutual fund organizations, has
managed mutual funds for over 47 years and now services more than
2.4 million shareholder accounts. In 1992, Franklin, a leader in
managing fixed-income mutual funds and an innovator in creating
domestic equity funds, joined forces with Templeton Worldwide,
Inc., a pioneer in international investing. Together, the
Franklin Templeton Group has over $118 billion in assets under
management for more than 3.8 million shareholder accounts and
offers 111 U.S.-based mutual funds. A Fund may identify itself by
its NASDAQ or CUSIP number.
The Dalbar Surveys, Inc. broker/dealer survey has ranked Franklin
number one in service quality for five of the past seven years.
According to Research and Ratings Review, Volume II, dated
February 28, 1994, Franklin's municipal research team ranked 2
out of 1,000 investment advisory firms surveyed by TMS Holdings,
Inc. As of November 14, 1994, this ranking was unchanged.
From time to time, advertisements or sales material issued by a
Fund may discuss or be based upon information in a recent issue
of the Special Report on Tax Freedom Day published by the Tax
Foundation, a Washington, DC based nonprofit, research and public
education organization. The report illustrates, among other
things, the amount of time, on an annual basis, the average
taxpayer works to satisfy his or her tax obligations to the
federal, state and local taxing authorities.
Miscellaneous Information
The shareholders of a Massachusetts business trust could, under
certain circumstances, be held personally liable as partners for
its obligations. The Trust's Declaration of Trust, however,
contains an express disclaimer of shareholder liability for acts
or obligations of the Trust. The Declaration of Trust also
provides for indemnification and reimbursement of expenses out of
Trust assets for any shareholder held personally liable for
obligations of the Trust. The Declaration of Trust provides that
the Trust shall, upon request, assume the defense of any claim
made against any shareholder for any act or obligation of the
Trust and satisfy any judgment thereon. All such rights are
limited to the assets of the Fund(s) of which a shareholder holds
shares. The Declaration of Trust further provides that the Trust
may maintain appropriate insurance (for example, fidelity bonding
and errors and omissions insurance) for the protection of the
Trust, its shareholders, Trustees, officers, employees and agents
to cover possible tort and other liabilities. Thus, the risk of a
shareholder incurring financial loss on account of shareholder
liability is limited to circumstances in which both inadequate
insurance exists and the Trust itself is unable to meet its
obligations.
From time to time, the number of shares of beneficial interest of
any Fund held in the "street name" accounts of various securities
dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares
outstanding. To the best knowledge of the Funds, no other person
holds beneficially or of record more than 5% of a Fund's
outstanding shares.
Access persons of the Franklin Templeton Group, as defined in SEC
Rule 17(j) under the 1940 Act, who are employees of Resources or
its subsidiaries, are permitted to engage in personal securities
transactions subject to the following general restrictions and
procedures: (1) the trade must receive advance clearance from a
compliance officer and must be completed within 24 hours after
this clearance; (2) copies of all brokerage confirmations must be
sent to the compliance officer and within 10 days after the end
of each calendar quarter, a report of all securities transactions
must be provided to the compliance officer; (3) in addition to
items (1) and (2), access persons involved in preparing and
making investment decisions must file annual reports of their
securities holdings each January and also inform the compliance
officer (or other designated personnel) if they own a security
that is being considered for a fund or other client transaction
or if they are recommending a security in which they have an
ownership interest for purchase or sale by a fund or other
client.
Ownership and Authority Disputes
In the event of disputes involving multiple claims of ownership
or authority to control a shareholder's account, the Trust has
the right (but has no obligation) to: (a) freeze the account and
require the written agreement of all persons deemed by the Trust
to have a potential property interest in the account, prior to
executing instructions regarding the account; (b) interplead
disputed funds or accounts with a court of competent
jurisdiction; or (c) surrender ownership of all or a portion of
the account to the Internal Revenue Service in response to a
Notice of Levy.
Appendix
Further Information on Special Factors Affecting Each State Fund
The following information is a summary of special factors
affecting each of the individual State Funds. It does not purport
to be a complete description of such factors and is based
primarily upon information derived from public documents relating
to securities offerings of issuers of such states and other
historically reliable sources such as S&P Creditweek Municipal.
The Trust has not independently verified any of this data. 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.
ARIZONA
In 1970, Arizona retired its general obligation bonds and is now
constitutionally prohibited from issuing such debt. The state
currently relies on revenue bonds, lease obligations, and pay-as-
you-go financing to support its financing needs. Arizona's debt
level is moderate with debt service representing 2.4% of the
state's revenues. On a per capita basis, debt was $279 or 1.6% of
personal income for fiscal 1993.
Beginning in 1985, Arizona experienced 5 consecutive fiscal years
with budget shortfalls. These shortfalls were managed with budget
cuts, one-time adjustments, tax accelerations and borrowing. In
1990, a $250 million tax increase, combined with budget cuts,
resulted in a general fund balance equal to 2% of operating
expenditures, down from 21% in 1980. This balance was maintained
in fiscal 1991 but fell to 0.2%, a $5.2 million general fund
balance, after certain tax refunds. Fiscal 1993, buoyed by an
accelerating state economy, helped Arizona regain an earlier
level of liquidity, a comfortable 2.0% of expenditures. Fiscal
1994, with strong revenues growth, was expected to close with a
general fund balance of approximately 2% also.
COLORADO
As a result of the state's weak 1991 closing position and the
increased Medicaid funding demands, the state faced a potential
$92 million funding gap at the beginning of fiscal 1992. By
implementing a combination of reduced appropriations and revenue
adjustments, including elimination of the deduction for state
income taxes, the state closed the funding gap and, as of June
30, 1992, reported a General Fund balance of $72 million. This
figure fell short of the 3% statutorily required reserve of $84
million. Colorado, however, has maintained an adequate financial
position since June 30, 1992, despite increasing expenditure
demands from Medicaid, corrections and education. As of June 30,
1993, Colorado reported a $326 million General Fund reserved
balance of approximately 6.1% of expenditures, a sharp increase
from the previous year's $133 million figure and an amount well
above the statutorily required reserve of 3%. The increase was
attributable to a better than anticipated operating surplus of
$89 million, resulting from reduced expenditures, and the
elimination of certain tax deductions.
By fiscal 1994, the state committed to fully fund the
implementation of the School Finance Act of 1988 ("1988 Act").
While the 1994 budget increased the state's share of total K-12
education funding by $200 million, the funding was not at the
levels anticipated by the 1988 Act. The purpose of the 1988 Act
was to reduce school districts' reliance on property taxes, while
equalizing school funding across the state. The act included a
series of actions designed to ease the state's increased funding
commitment, which had fallen short of expectations.
Preliminary results for fiscal 1994 indicate that Colorado
finished the year with a $337 million general fund balance.
For fiscal 1995, Colorado adopted a new school financial reform
measure that attempts to further equalize school funding across
the state. Colorado projects a $258 million general fund balance
at fiscal 1995 end. The state's constitutional revenue and
spending limitation should not affect the fiscal 1995 budget.
CONNECTICUT
In the mid-1980s, Connecticut's strong economy resulted in
successful financial operations. Beginning in 1988, the state's
economy weakened, producing severe revenue shortfalls and social
service spending in excess of budgeted amounts. Large tax
increases and spending control measures proved inadequate. For
the fiscal year ended 1991, four years of successive operating
deficits had accumulated into a nearly $1.0 billion deficit for
the General Fund, which was addressed through the issuance of
five year recovery notes totaling almost $966 million.
To provide for stability of the income stream and a new tax
structure more favorable to business and industry, Connecticut
restructured its tax base. The new structure eliminated the taxes
on capital gains, dividends and interest, instituted a personal
income tax of 4.5% and reduced the sales tax to 6% from 8%. In
addition, the state adopted a slower rate of spending. As a
result of the tax change, severe spending restraint and
increased federal Medicaid reimbursement, the state posted an
operating surplus of $110 million for fiscal 1992, after a four-
year series of deficits, with the entire amount applied to the
retirement of state economic recovery notes.
The state's fiscal 1993 budget retained the 1992 tax structure,
sharpened the focus on spending restraint, and incorporated
pension funding changes to generate savings. The operating
surplus for the fiscal year was $113 million, comparing favorably
with the budgeted surplus of $4 million; but was partly offset by
a shortfall in federal aid payments.
Fiscal 1994 ended with an operating surplus of approximately $169
million, $149 million of which was used to pay debt service of
the recovery notes. Despite budgetary surpluses for fiscal years
1992-94, the state's deficit on a GAAP basis increased each year
because of the application of one-time surpluses for operating
requirements.
Budget adjustments for 1995 were relatively modest, with the
largest changes reflecting the incorporation into the General
Fund of a formerly uncompensated care pool after a court
invalidated the state's method of financing.
In February 1995, the governor submitted a budget for the 1996-97
biennium that called for a reduction of state income tax rates
from 4.5% to 3.0% and decreased overall expenditures. Many of
the proposed cuts faced political opposition.
INDIANA
The steady growth in the state's economy from the mid- to late-
1980s, resulted in sustained income and sales tax revenue growth.
As a result of economically driven revenue growth. As a result of
economically driven revenue growth and some tax rate increases,
the state's financial position which had declined significantly
during the recession of the early 1980s has improved
substantially. In 1984, the state legislature established an
economic stabilization reserve fund intended to lessen the impact
of future economically-driven revenue shortfalls. As of June 30,
1993, the budget stabilization fund had grown to $334.8 million
and the general and property tax replacement operating cash
balance to $189.7 million, for a combined working balance of
$524.5 million or 8.3% of general and property tax replacements,
down from 11% in 1992.
During the latter part of the 1990 fiscal year, the national
economic slowdown started to affect state revenues. Through June
30, 1994, the state had seen a significant slow down in sales and
personal income taxes which are the most important revenue
sources for the state. In addition to slower revenue growth, the
state had reserve fund drawdowns due to some expenditure
pressures, with Medicaid the fastest-growing portion of the
state's budget. The fiscal 1993 Medicaid-assistance budget was
nearly $200 million over initial budget projections. While the
state has initiated some expenditure controls, the shortfalls
primarily have been made up by balance utilization. To address a
budgeted shortfall in the fiscal 1994-1995 biennium, the state
effected large Medicaid cost controls.
NEW JERSEY
Due to the recent recession, New Jersey depleted its operating
fund balance by fiscal 1991. During fiscals 1992-94 New Jersey
tax revenues showed little growth while demands for welfare and
other economic relief grew. During this period the state became
increasingly dependent on non-recurring revenues to balance the
budget.
Beginning in 1994, New Jersey cut income tax rates by 15%. While
overall budget expenditures were cut for fiscal year 1995
somewhat to accommodate the rate cut, the bulk of the funds were
scheduled to be achieved by cutting retiree pension fund
contributions (but not benefits).
New Jersey's credit strength is based on its broad-based economy,
high wealth levels, and history of maintaining a positive
financial position. Debt ratios, once moderate, have been rising
in recent years, and now are above average.
OREGON
Legislation enacted in Oregon in 1979 limits the biennial
increase in state appropriations for general governmental
purposes, excluding debt service and property tax relief, to an
amount not greater than the rate of growth in personal income
during the preceding two calendar years. Due to the slow rate of
increase in revenues to the general fund compared to the rate of
growth in personal income in recent years, appropriations since
this legislation was enacted have been limited by availability of
revenues rather than this legislation.
The state's General Fund financial performance has been strong.
After addressing financial problems in the earlier part of the
recent national recession, the state has been able to maintain
satisfactory General Fund operations. For the 1989-1991 biennium,
General Fund revenues were $163 million or 3.6% above original
budgeted amounts. The 1991-1993 biennium had an ending balance
surplus of $361 million. The 1993-1995 biennium budget
anticipates an ending balance surplus of $332 million.
In November 1990, voters approved Measure 5, the property tax
limitation initiative, which required the state to overhaul its
expenditure and revenue structure. It also required the state to
replace local property tax revenues lost by the public school
system, as a result of the initiative, through fiscal 1996. The
replacement requirement rose from $491 million in 1991-1993 to
$1.6 billion in the 1993-1995 biennium. It is anticipated that by
the 1995-1997 biennium, education funding will account for $1.4
billion or more than 50% of general fund expenditures. As a
result of the passage of Measure 5, the state has reexamined its
debt policy and existing debt has been restructured. The state
has established a debt management plan which is intended to limit
debt issuance to high priority projects thereby reducing the
issuance of new debt.
PENNSYLVANIA
Pennsylvania experienced severe revenue shortfalls and declining
human services expenditure growth in 1990-1991, due largely to
the recession. Operating deficits for those two years exceeded
$1.2 billion on a cash basis. To eliminate the deficit and meet
increased spending requirements, the commonwealth adopted tax
increases and controlled expenditures for fiscal 1992, such that
the commonwealth ended fiscal 1992 with a small operating surplus
of $8.8 million on a budgetary basis, which includes the
elimination of the prior year's deficit of $453 million.
The commonwealth relied on cost controls rather than tax
increases during fiscal 1993 and ended fiscal 1993 with a $64
million unreserved and undesignated General Fund surplus.
For fiscal 1994, Pennsylvania ended the year with a budget basis
surplus of $336 million and a balance in the tax stabilization
fund of $63 million, a significant restoration of budgetary
resolves. This was made possible by federal Medicaid
reimbursements totaling $520 million that helped offset $681
million of the Medicaid spending.
For fiscal 1995, the commonwealth is relying on its projected
revenue growth of 5.6%, as well as surplus funds, to balance the
budget under which expenditures increase 3.9%. The largest area
of increased spending is Medicaid, which is anticipated to grow
by $221 million.
The Commonwealth has a moderate per capita debt level.
PUERTO RICO
Puerto Rico's debt level is high, due in large part to the
island's development efforts and its centralized government which
performs many functions carried on at the local level in the
states but also reflecting the pressures of development, its
considerable capital needs and the subsidy requirements for
certain agencies. Debt ratios increased substantially in the
1970's. Since then, Puerto Rico has attempted to maintain its
rate of debt growth at or below that of the gross domestic
product and that effort has succeeded. Still, in 1994, tax-
supported debt amounted to approximately 36% of total personal
income.
In the past, Puerto Rico's financial position has followed
general economic trends, with fiscal improvement occurring during
periods of economic growth and deteriorations in financial
conditions experienced during economic downturns. During the
recent recession, Puerto Rico has been able to balance its budget
but only through the use of non-recurring measures such as tax
amnesties, the sale of assets, and deductions from reserve funds.
For fiscal 1994, Puerto Rico estimated that its General Fund
would have an accumulated deficit of approximately $118 million.
The General Fund budget for fiscal 1994 provides for a 4.9%
spending increase in expenditures from fiscal 1994, with a 13.9%
increase in spending for public safety and a 7.4% increase for
education.. The budget is expected to be balanced, but includes
over $100 million in nonrecurring revenues, including $80 million
from the sale of a long distance company, and is based on
optimistic estimates of economic growth.
Financial Statements
The financial statements contained in the Annual Report to
Shareholders of the Funds dated February 28, 1995 are
incorporated herein by reference.
Franklin Federal Intermediate-Term Tax-Free Income Fund
Franklin Tax-Free Trust
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1995
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777 1-800/DIAL BEN
Franklin Federal Intermediate-Term Tax-Free Income Fund (the
"Fund") is a non-diversified series of Franklin Tax-Free Trust
(the "Trust"), an open-end management investment company. The
principal investment objective of the Fund is 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.
A Prospectus for the Fund dated May 1, 1995, as may be amended
from time to time, provides the basic information an investor
should know before investing in the Fund and may be obtained
without charge from the Fund or from the Fund's principal
underwriter, Franklin/Templeton Distributors, Inc.
("Distributors"), at the address shown above.
This Statement of Additional Information ("SAI") is not a
prospectus. It contains information in addition to and in more
detail than set forth in the Prospectus. This SAI is intended to
provide investors with additional information regarding the
activities and operations of the Trust and the Fund and should be
read in conjunction with the Prospectus.
Contents Page
About the Trust
The Fund's Investment Objective
and Policies
Description of Municipal and
Other Securities
Investment Restrictions
Officers and Trustees
Investment Advisory and Other Services
The Fund's Policies Regarding Brokers
Used on Portfolio Transactions
Additional Information
Regarding Fund Shares
Additional Information
Regarding Taxation
The Fund's Underwriter
General Information
Miscellaneous Information
Appendix - Description of Municipal Securities Ratings
Financial Statements
About the Trust
The Trust is an open-end management investment company, commonly
called a "mutual fund," and registered with the Securities and
Exchange Commission (the "SEC") under the Investment Company Act
of 1940 (the "1940 Act"). The Trust was organized as a
Massachusetts business trust in September 1984. The Trust issues
its shares of beneficial interest with no par value in 27 series,
each of which maintains a totally separate investment portfolio.
The Fund's Investment Objective and Policies
As noted in the Prospectus, the Fund's investment objective is 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 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 described in its Prospectus, under normal market conditions,
the 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 alternative minimum tax.
Thus, it is possible, although not anticipated, that up to 20% of
the Fund's net assets could be invested in municipal securities
subject to the alternative minimum tax and/or in taxable
obligations.
Although the Fund seeks to invest all of its assets in a manner
designed to accomplish its objective, there may be times when
market conditions limit the availability of appropriate municipal
securities or, in the investment manager's opinion, there exist
uncertain economic, market, political or legal conditions which
may jeopardize the value of municipal securities. 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,
the Fund may invest more than 20% and up to 100% of the value of
its net assets in fixed-income obligations, the interest on which
is subject to federal income tax.
The Fund is non-diversified and thus not subject to any statutory
restriction under the 1940 Act with respect to the concentration
of its assets in one or relatively few issuers. This
concentration may present greater risks than in the case of a
diversified company. The Fund, however, intends to qualify as a
regulated investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code") and, therefore,
will be restricted in that, at the close of each quarter of its
taxable year, at least 50% of the value of its total assets must
be represented by cash, government securities, and other
securities limited in respect of any one issuer to not more than
5% of the value of the total assets of the Fund. In addition, at
the close of each quarter of its taxable year, not more than 25%
of the Fund's total assets may be invested in securities of one
issuer, other than government securities. The limitations are not
fundamental policies and may be revised to the extent applicable
federal income tax requirements are revised.
The Fund may invest 25% or more of its net assets in securities
that are related in such a way that an economic, business or
political development or change affecting one security would also
affect the other securities, including, for example, securities
the interest upon which is paid from revenues of similar type
projects, or securities the issuers of which are located in the
same geographic area.
The investment objective of the Fund, as set forth above, is a
fundamental policy and may not be changed without the approval of
a majority of the Fund's outstanding shares.
Description of Municipal and Other Securities
The Prospectus describes the general categories and nature of
municipal securities. Discussed below are the major attributes of
the various municipal and other securities in which the Fund may
invest.
Tax Anticipation Notes are used to finance working capital needs
of municipalities and are issued in anticipation of various
seasonal tax revenues which will be used to pay the notes. They
are usually general obligations of the issuer, secured by the
taxing power for the payment of principal and interest.
Revenue Anticipation Notes are issued in expectation of other
kinds of revenue, such as federal revenues available under the
Federal Revenue Sharing Program. They, also, are usually general
obligations of the issuer.
Bond Anticipation Notes are normally issued to provide interim
financing until long-term financing can be arranged. Long-term
bonds then provide the money for the repayment of the notes.
Construction Loan Notes are sold to provide construction
financing for specific projects. After successful completion and
acceptance, many projects receive permanent financing through the
Federal Housing Administration under the Federal National
Mortgage Association or the Government National Mortgage
Association.
Tax-Exempt Commercial Paper typically represents a short-term
obligation (270 days or less) issued by a municipality to meet
working capital needs.
Municipal Bonds, which meet longer term capital needs and
generally have maturities of more than one year when issued, have
two principal classifications: general obligation bonds and
revenue bonds.
1. General Obligation Bonds. Issuers of general obligation bonds
include states, counties, cities, towns and regional districts.
The proceeds of these obligations are used to fund a wide range
of public projects, including construction or improvement of
schools, highways, roads, and water and sewer systems. The basic
security behind general obligation bonds is the issuer's pledge
of its full faith, credit and taxing power for the payment of
principal and interest. The taxes that can be levied for the
payment of debt service may be limited or unlimited as to the
rate or amount of special assessments.
2. Revenue Bonds. A revenue bond is not secured by the full
faith, credit and taxing power of an issuer. Rather, the
principal security for a revenue bond is generally the net
revenue derived from a particular facility, group of facilities,
or, in some cases, the proceeds of a special excise or other
specific revenue source. Revenue bonds are issued to finance a
wide variety of capital projects, including: electric, gas, water
and sewer systems; highways, bridges and tunnels; port and
airport facilities; colleges and universities; and hospitals. The
principal security behind these bonds may vary. Housing finance
authorities have a wide range of security, including partially or
fully insured mortgages, rent subsidized and/or collateralized
mortgages, and/or the net revenues from housing or other public
projects. Many bonds provide additional security in the form of a
debt service reserve fund which may be used to make principal and
interest payments on the issuer's obligations. Some authorities
are provided further security in the form of a state's assurance
(although without obligation) to make up deficiencies in the debt
service reserve fund.
Industrial Development Bonds which pay tax-exempt interest are in
most cases revenue bonds and are issued by or on behalf of public
authorities to raise money to finance various privately operated
facilities for business, manufacturing, housing, sports, and
pollution control. These bonds are also used to finance public
facilities such as airports, mass transit systems, ports and
parking. The payment of the principal and interest on such bonds
is solely dependent on the ability of the facility's user to meet
its financial obligations and the pledge, if any, of the real and
personal property so financed as security for such payments.
When-Issued Purchases. Municipal bonds are frequently offered on
a "when-issued" basis. When so offered, the price, which is
generally expressed in yield terms, is fixed at the time the
commitment to purchase is made, but delivery and payment for the
when-issued securities take place at a later date. During the
period between purchase and settlement, no payment is made by the
Fund to the issuer and no interest accrues to the Fund. To the
extent that assets of the Fund are held in cash pending the
settlement of a purchase of securities, the Fund would earn no
income; however, it is the Fund's intention to be fully invested
to the extent practicable and subject to the policies stated
above. While when-issued securities may be sold prior to the
settlement date, the Fund intends to purchase such securities
with the purpose of actually acquiring them, unless a sale
appears desirable for investment reasons. At the time the Fund
makes the commitment to purchase a municipal bond on a when-
issued basis, it will record the transaction and reflect the
value of the security in determining its net asset value. The
Fund believes that its net asset value or income will not be
adversely affected by its purchase of municipal bonds on a when-
issued basis. The Fund will establish a segregated account in
which it will maintain cash and marketable securities equal in
value to commitments for when-issued securities.
Callable Bonds. There are municipal bonds which are issued with
provisions which prevent them from being called, typically for
periods of 5 to 10 years. During times of generally declining
interest rates, if the call-protection on callable bonds expires,
there is an increased likelihood that a number of such bonds may,
in fact, be called away by the issuers. Based on a number of
factors, including certain portfolio management strategies used
by the Fund's investment manager, the Fund believes it has
reduced the risk of adverse impact on net asset value based on
calls of callable bonds. The investment manager may dispose of
such bonds in the years prior to their call dates, if the
investment manager believes such bonds are at their maximum
premium potential. In pricing such bonds in the Fund's portfolio,
each callable bond is marked-to-market daily based on the bond's
call date. Thus, the call of some or all of the Fund's callable
bonds may have an impact on the Fund's net asset value. In light
of the Fund's pricing policies and because the Fund follows
certain amortization procedures required by the Internal Revenue
Service ("IRS"), the Fund is not expected to suffer any material
adverse impact related to the value at which the Fund has carried
the bonds in connection with calls of bonds purchased at a
premium. Notwithstanding such policies, however, the reinvestment
of the proceeds of any called bond may be in bonds which pay a
higher or lower rate of return than the called bonds; and, as
with any investment strategy, there is no guarantee that a call
may not have a more substantial impact than anticipated or that
the Fund's objective will be achieved.
Escrow-Secured Bonds or Defeased Bonds are created when an issuer
refunds in advance of maturity (or pre-refunds) an outstanding
bond issue which is not immediately callable, and it becomes
necessary or desirable to set aside funds for redemption of the
bonds at a future date. In an advance refunding, the issuer will
use the proceeds of a new bond issue to purchase high grade,
interest bearing debt securities which are then deposited in an
irrevocable escrow account held by a trustee bank to secure all
future payments of principal and interest of the advance refunded
bond. Escrow-secured bonds will often receive a triple-A rating
from Standard & Poor's Corporation ("S&P"), Moody's Investors
Service ("Moody's") and Fitch Investors Service, Inc. ("Fitch").
Stripped Municipal Securities. Municipal securities may also be
sold in "stripped" form. Stripped municipal securities represent
separate ownership of interest and principal payments on
municipal obligations.
Zero Coupon Securities. The Fund's investment in zero coupon and
delayed interest bonds may cause the Fund to recognize income and
make distributions to shareholders prior to the receipt of cash
payments. Zero coupon securities make no periodic interest
payments but instead are sold at a deep discount from their face
value. The buyer recognizes a rate of return determined by the
gradual appreciation of the security, which is redeemed at face
value on a specified maturity date.
Because zero coupon securities bear no interest, and compound
semiannually at the rate fixed at the time of issuance, the value
of such securities is generally more volatile than other fixed-
income securities. Since zero coupon bondholders do not receive
interest payments, zeros fall more dramatically than bonds paying
interest on a current basis when interest rates rise. When
interest rates fall, zero coupon securities rise more rapidly in
value, because the bonds reflect a fixed rate of return.
In order to generate cash to satisfy distribution requirements,
the Fund may be required to dispose of portfolio securities that
it otherwise would have continued to hold or to use cash flows
from other sources such as the sale of Fund shares.
Convertible and Step Coupon Bonds. The Fund may invest a portion
of its assets in convertible and step coupon bonds. The
convertible bonds which the Fund may purchase are zero coupon
securities until a predetermined date, at which time they convert
to a specified coupon security. The coupon on step coupon bonds
changes periodically during the life of the security based upon
predetermined dates chosen at the time of issuance and/or the
occurrence in the future of a specified event, such as a change
in rating by a nationally recognized statistical rating
organization.
Variable or Floating Rate Demand Notes ("VRDNs") are tax-exempt
obligations which contain a floating or variable interest rate
and a right of demand, which may be unconditional, to receive
payment of the unpaid principal balance plus accrued interest
upon a short notice period (generally up to 30 days) prior to
specified dates, either from the issuer or by drawing on a bank
letter of credit, a guarantee or insurance issued with respect to
such instrument. The interest rates are adjustable at intervals
ranging from daily up to monthly, and are calculated to maintain
the market value of the VRDN at approximately its par value upon
the adjustment date.
Certificates of Participation. The Fund may also invest in
municipal lease obligations primarily through Certificates of
Participation ("COPs"). COPs are distinguishable from municipal
debt in that the lease which is the subject of the transaction
typically 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.
While the risk of nonappropriation is inherent to COP 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, 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 has determined that COPs held in
the Fund's portfolio 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; (b) the size
of the municipal securities market for the Fund, 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. There is no limit as to the
amount of assets which the Fund may invest in COPs.
U.S. Government Obligations which may be owned by the Fund are
issued by the U.S. Treasury and include bills, certificates of
indebtedness, notes and bonds, or are issued by agencies and
instrumentalities of the U.S. government and backed by the full
faith and credit of the U.S. government.
Commercial Paper refers to promissory notes issued by
corporations in order to finance their short-term credit needs.
Certificates of Deposit are certificates issued against funds
deposited in a commercial bank, are for a definite period of
time, earn a specified rate of return, and are normally
negotiable.
Bankers' Acceptances are short-term credit instruments used to
finance the import, export, transfer, or storage of goods. They
are termed "accepted" when a bank guarantees their payment at
maturity.
Lending Portfolio Securities. Consistent with procedures approved
by the Board of Trustees and subject to the following conditions,
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. The borrower
must deposit with the Fund's custodian collateral with an initial
market value of at least 102% of the initial market value of the
securities loaned, including any accrued interest, with the value
of the collateral and loaned securities marked-to-market daily to
maintain collateral coverage of at least 102%. Such collateral
shall consist of cash. The lending of securities is a common
practice in the securities industry. The Fund may engage in
security loan arrangements with the primary objective of
increasing the Fund's income either through investing the cash
collateral in short-term interest bearing obligations or by
receiving a loan premium from the borrower. Under the securities
loan agreement, the Fund continues to be entitled to all
dividends or interest on any loaned securities. As with any
extension of credit, there are risks of delay in recovery and
loss of rights in the collateral should the borrower of the
security fail financially. While such securities are on loan, the
borrower will pay the Fund any income accruing thereon, and the
Fund may invest the cash collateral in portfolio securities,
thereby earning additional income. The Fund will not lend its
portfolio securities if such loans are not permitted by the laws
or regulations of any state in which its shares are qualified for
sale. Loans are typically subject to termination by the Fund in
the normal settlement time or by the borrower on one day's
notice. Borrowed securities must be returned when the loan is
terminated. Any gain or loss in the market price of the borrowed
securities which occurs during the term of the loan inures to the
Fund and its shareholders. The Fund may pay reasonable finders',
borrowers', administrative and custodial fees in connection with
a loan of its securities.
Income derived by the Fund from securities lending transactions
and investments in commercial paper, bankers' acceptances and
certificates of deposit will be taxable for federal income tax
purposes when distributed to shareholders. Income derived by the
Fund from interest on direct obligations of the U.S. government
will be taxable for federal income tax purposes when distributed
to shareholders.
There may, of course, be other types of municipal securities that
become available which are similar to the foregoing described
municipal securities, in which the Fund may also invest, to the
extent such investments would be consistent with the foregoing
objective and policies.
Timing of Securities Transactions
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. While short-term trading
increases portfolio turnover, the execution costs for municipal
bonds are substantially less than for equivalent dollar values of
equity securities. Portfolio turnover rates for the Fund are in
the Financial Highlights table in the Fund's Prospectus.
Investment Restrictions
The Trust has adopted the following restrictions as additional
fundamental policies of the Fund, which means that such
restrictions may not be changed without the approval of a
majority of the outstanding voting securities of the Fund. Under
the 1940 Act, a "vote of a majority of the outstanding voting
securities" of the Trust or of the Fund means the affirmative
vote of the lesser of (1) more than 50% of the outstanding shares
of the Trust or of the Fund, or (2) 67% or more of the shares of
the Trust or of the Fund present at a shareholders meeting if
more than 50% of the outstanding shares of the Trust or of the
Fund are represented at the meeting in person or by proxy. The
Fund may not:
1. Borrow money or mortgage or pledge any of its assets, except
that borrowings (and a pledge of assets therefore) for temporary
or emergency purposes may be made from banks in any amount up to
5% of the total asset value.
2. Buy any securities on "margin" or sell any securities "short,"
except that it may use such short-term credits as are necessary
for the clearance of transactions.
3. Make loans, except through the purchase of readily marketable
debt securities which are either publicly distributed or
customarily purchased by institutional investors. Although such
loans are not presently intended, this prohibition will not
preclude the Fund from loaning portfolio securities to
broker/dealers or other institutional investors if at least 102%
cash collateral is pledged and maintained by the borrower;
provided such portfolio security loans may not be made if, as a
result, the aggregate of such loans exceeds 10% of the value of
the Fund's total assets at the time of the most recent loan.
4. Act as underwriter of securities issued by other persons,
except insofar as the Fund may be technically deemed an
underwriter under the federal securities laws in connection with
the disposition of portfolio securities.
5. Purchase the securities of any issuer which would result in
owning more than 10% of the voting securities of such issuer,
except the Fund will not purchase a security, if as a result: i)
more than 25% of its total assets would be invested in the
securities of a single issuer or ii) with respect to 50% of its
total assets, more than 5% of its assets would be invested in the
securities of a single issuer.
6. Purchase securities from or sell to the Trust's officers and
trustees, or any firm of which any officer or trustee is a
member, as principal, or retain securities of any issuer if, to
the knowledge of the Trust, one or more of the Trust's officers,
trustees, or investment adviser own beneficially more than 1/2 of
1% of the securities of such issuer and all such officers and
trustees together own beneficially more than 5% of such
securities.
7. Acquire, lease or hold real estate, except such as may be
necessary or advisable for the maintenance of its offices and
provided that this limitation shall not prohibit the purchase of
municipal and other debt securities secured by real estate or
interests therein.
8. Invest in commodities and commodity contracts, puts, calls,
straddles, spreads or any combination thereof, or interests in
oil, gas, or other mineral exploration or development programs,
except that it may purchase, hold and dispose of "obligations
with puts attached" in accordance with its investment policies.
9. Invest in companies for the purpose of exercising control or
management.
10. Purchase securities of other investment companies, except in
connection with a merger, consolidation, acquisition or
reorganization. To the extent permitted by exemptions which may
be granted under the 1940 Act, the Fund may invest in shares of
one or more investment companies, of the type generally referred
to as money market funds, managed by Franklin Advisers, Inc. or
its affiliates.
11. Purchase securities, in private placements or in other
transactions, for which there are legal or contractual
restrictions on resale.
12. Invest more than 25% of assets in securities of any industry.
For purposes of this limitation, tax-exempt securities issued by
governments or political subdivisions of governments are not
considered to be part of any industry.
In addition to these fundamental policies, it is a non-
fundamental policy of the Fund not to invest in real estate
limited partnerships or in oil, gas, or other mineral leases.
Officers and Trustees
The Board of Trustees has the responsibility for the overall
management of the Trust, including general supervision and review
of its investment activities. The trustees, in turn, elect the
officers of the Trust who are responsible for administering day-
to-day operations of the Trust. The affiliations of the officers
and trustees and their principal occupations for the past five
years are listed below. Trustees who are deemed to be "interested
persons" of the Trust, as defined in the 1940 Act, are indicated
by an asterisk (*).
Name, Address Positions and Offices Principal Occupations
and Age with the Trust During Past Five Years
Frank H. Abbott, III (74)
1045 Sansome St.
San Francisco, CA 94111
Trustee
President and Director, Abbott Corporation (an investment
company); and director, trustee or managing general partner, as
the case may be, of 30 of the investment companies in the
Franklin Group of Funds.
Harris J. Ashton (62)
General Host Corporation
Metro Center, 1 Station Place
Stamford, CT 06904-2045
Trustee
President, Chief Executive Officer and Chairman of the Board,
General Host Corporation (nursery and craft centers); Director,
RBC Holdings, Inc. (a bank holding company) and Bar-S Foods; and
director, trustee or managing general partner, as the case may
be, of 54 of the investment companies in the Franklin Templeton
Group of Funds.
S. Joseph Fortunato (62)
Park Avenue at Morris County
P. O. Box 1945
Morristown, NJ 07962-1945
Trustee
Member of the law firm of Pitney, Hardin, Kipp & Szuch; Director
of General Host Corporation; and director, trustee or managing
general partner, as the case may be, of 56 of the investment
companies in the Franklin Templeton Group of Funds.
David W. Garbellano (80)
111 New Montgomery St., #402
San Francisco, CA 94105
Trustee
Private Investor; Assistant Secretary/Treasurer and Director,
Berkeley Science Corporation (a venture capital company); and
director, trustee or managing general partner, as the case may
be, of 29 of the investment companies in the Franklin Group of
Funds.
*Charles B. Johnson (62)
777 Mariners Island Blvd.
San Mateo, CA 94404
Chairman of the Board and Trustee
President and Director, Franklin Resources, Inc.; Chairman of the
Board and Director, Franklin Advisers, Inc. and Franklin
Templeton Distributors, Inc.; Director, Franklin/Templeton
Investor Services, Inc. and General Host Corporation; and officer
and/or director, trustee or managing general partner, as the case
may be, of most other subsidiaries of Franklin Resources, Inc.
and of 55 of the investment companies in the Franklin Templeton
Group of Funds.
*Rupert H. Johnson, Jr. (54)
777 Mariners Island Blvd.
San Mateo, CA 94404
President and Trustee
Executive Vice President and Director, Franklin Resources, Inc.
and Franklin Templeton Distributors, Inc.; President and
Director, Franklin Advisers, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; and officer and/or director, trustee or
managing general partner, as the case may be, of most other
subsidiaries of Franklin Resources, Inc. and of 42 of the
investment companies in the Franklin Templeton Group of Funds.
Frank W. T. LaHaye (66)
20833 Stevens Creek Blvd.
Suite 102
Cupertino, CA 95014
Trustee
General Partner, Peregrine Associates and Miller & LaHaye, which
are General Partners of Peregrine Ventures and Peregrine Ventures
II (venture capital firms); Chairman of the Board and Director,
Quarterdeck Office Systems, Inc.; Director, FischerImaging
Corporation; and director or trustee, as the case may be, of 25
of the investment companies in the Franklin Group of Funds.
Gordon S. Macklin (66)
8212 Burning Tree Road
Bethesda, MD 20817
Trustee
Chairman, White River Corporation (information services);
Director, Fund American Enterprises Corporation, Martin Marietta
Corporation, MCI Communications Corporation, MedImmune, Inc.
(biotechnology), Infovest Corporation (information services), and
Fusion Systems Corporation (industrial technology); and director,
trustee or managing general partner, as the case may be, of 51 of
the investment companies in the Franklin Templeton Group of
Funds; formerly, Chairman, Hambrecht and Quist Group; Director, H
& Q Healthcare Investors; and President, National Association of
Securities Dealers, Inc.
Harmon E. Burns
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Executive Vice President, Secretary and Director, Franklin
Resources, Inc.; Executive Vice President and Director, Franklin
Templeton Distributors, Inc.; Executive Vice President, Franklin
Advisers, Inc.; Director, Franklin/Templeton Investor Services,
Inc.; officer and/or director, as the case may be, of other
subsidiaries of Franklin Resources, Inc.; and officer and/or
director or trustee of 41 of the investment companies in the
Franklin Templeton Group of Funds.
Kenneth V. Domingues (62)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President - Financial Reporting and Accounting Standards
Senior Vice President, Franklin Resources, Inc., Franklin
Advisers, Inc., and Franklin Templeton Distributors, Inc.;
officer and/or director, as the case may be, of other
subsidiaries of Franklin Resources, Inc.; and officer and/or
managing general partner, as the case may be, of 36 of the
investment companies in the Franklin Group of Funds.
Don Duerson (62)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Employee of Franklin Resources, Inc. and its subsidiaries in
senior portfolio management capacities.
Martin L. Flanagan (34)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Chief Financial Officer
Senior Vice President, Chief Financial Officer and Treasurer,
Franklin Resources, Inc.; Executive Vice President, Templeton
Worldwide, Inc.; Senior Vice President and Treasurer, Franklin
Advisers, Inc. and Franklin Templeton Distributors, Inc.; Senior
Vice President, Franklin/Templeton Investor Services, Inc.;
officer of most other subsidiaries of Franklin Resources, Inc.;
and officer of 60 of the investment companies in the Franklin
Templeton Group of Funds.
Deborah R. Gatzek (46)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Secretary
Senior Vice President - Legal, Franklin Resources, Inc. and
Franklin Templeton Distributors, Inc.; Vice President, Franklin
Advisers, Inc.; and officer of 36 of the investment companies in
the Franklin Group of Funds.
Thomas J. Kenny (32)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President, Franklin Advisers, Inc. and officer of
eight of the investment companies in the Franklin Group of Funds.
Diomedes Loo-Tam (56)
777 Mariners Island Blvd.
San Mateo, CA 94404
Treasurer and Principal Accounting Officer
Employee of Franklin Advisers, Inc.; and officer of 36 of the
investment companies in the Franklin Group of Funds.
Edward V. McVey (57)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President/National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 31 of the investment companies
in the Franklin Group of Funds.
Trustees not affiliated with the investment manager
("nonaffiliated trustees") are currently paid fees of $1,300 per
month plus $1,300 per meeting attended. During the fiscal year
ended February 28, 1995, fees totaling $188,500 were paid to
nonaffiliated trustees of the Trust, all of which were paid by
the Trust's other series and not by the Fund. As indicated above,
certain of the trustees and officers hold positions with other
companies in the Franklin Group of Funds(Registered Trademark)
and the Templeton Funds ("Franklin Templeton Funds"). The
following table shows the fees paid by the Trust to its
nonaffiliated trustees and the total fees paid to such trustees
by the Trust and other Franklin Templeton Funds for which they
serve as directors, trustees or managing general partners.
Total
Number of Compensation from
Franklin Franklin
Aggregate Templeton Funds Templeton Funds,
Compensation Boards on Which including the
Name from Trust* Each Serves Trust**
Mr. Abbott $32,500 30 $176,870
Mr. Ashton $31,200 54 $319,925
Mr. Fortunato $31,200 56 $336,065
Mr. Garbellano $31,200 29 $153,300
Mr. LaHaye $31,200 25 $150,817
Mr. Macklin $31,200 51 $303,685
*For the fiscal year ended February 28, 1995.
**For the calendar year ended December 31, 1994.
Nonaffiliated trustees are also reimbursed for expenses incurred
in connection with attending Board meetings, paid pro rata by
each Franklin Templeton Fund for which they serve as directors,
trustees or managing general partners. No officer or trustee
received any other compensation directly from the Trust. As of
March 31, 1995, the officers and trustees, as a group, did not
own of record or beneficially any outstanding shares of the Fund.
Many of the Trust's trustees own shares in various of the other
funds in the Franklin Group of Funds and the Templeton Group of
Funds. Certain officers or trustees who are shareholders of
Franklin Resources, Inc. may be deemed to receive indirect
remuneration by virtue of their participation, if any, in the
fees paid to its subsidiaries. Charles B. Johnson and Rupert H.
Johnson, Jr. are brothers.
From time to time, the number of Fund shares held in the "street
name" accounts of various securities dealers for the benefit of
their clients or in centralized securities depositories may
exceed 5% of the total shares outstanding. To the best knowledge
of the Fund, no other person holds beneficially or of record more
than 5% of the Fund's outstanding shares.
Investment Advisory and Other Services
The investment manager of the Fund is Franklin Advisers, Inc.
("Advisers" or "Manager"). Advisers is a wholly-owned subsidiary
of Franklin Resources, Inc. ("Resources"), a publicly owned
holding company whose shares are listed on the New York Stock
Exchange (the "Exchange"). Resources owns several other
subsidiaries which are involved in investment management and
shareholder services. The Manager and other subsidiary companies
of Resources currently manage over $116 billion in assets for
more than 3.8 million shareholders. The preceding table indicates
those officers and trustees who are also affiliated persons of
Distributors and Advisers.
Pursuant to the management agreement, the Manager provides
investment research and portfolio management services, including
the selection of securities for the Fund to purchase, hold or
sell and the selection of brokers through whom the Fund's
portfolio transactions are executed. The Manager's extensive
research activities include, as appropriate, traveling to meet
with issuers and to review project sites. The Manager's
activities are subject to the review and supervision of the
Trust's Board of Trustees to whom the Manager renders periodic
reports of the Fund's investment activities. The Manager, at its
own expense, furnishes the Trust with office space and office
furnishings, facilities and equipment required for managing the
business affairs of the Trust; maintains all internal
bookkeeping, clerical, secretarial and administrative personnel
and services; and provides certain telephone and other mechanical
services. The Manager is covered by fidelity insurance on its
officers, directors and employees for the protection of the Fund.
The Fund bears all of its expenses not assumed by the Manager.
See the Statement of Operations for the Fund in the financial
statements included in the Trust's Annual Report to Shareholders
dated February 28, 1995, for additional details of these
expenses.
Pursuant to the management agreement, the Fund is obligated to
pay the Manager a fee computed at the close of business on the
last business day of each month equal to a monthly rate of 5/96
of 1% (approximately 5/8 of 1% per year) for the first $100
million of average monthly net assets of the Fund; 1/24 of 1%
(approximately 1/2 of 1% per year) of average monthly net assets
of the Fund in excess of $100 million up to $250 million; and
9/240 of 1% (approximately 45/100 of 1% per year) of average
monthly net assets of the Fund in excess of $250 million.
The Manager has limited its management fees and has assumed
responsibility for making payments, if necessary, to offset
certain operating expenses otherwise payable by the Fund. This
action by the Manager to limit its management fees and to assume
responsibility for payment of the expenses related to the
operations of the Fund may be terminated by the Manager at any
time. The management agreement specifies that the management fee
will be reduced to the extent necessary to comply with the most
stringent limits on the expenses which may be borne by the Fund
as prescribed by any state in which the Fund's shares are offered
for sale. The most stringent current limit requires the Manager
to reduce or eliminate its fee to the extent that aggregate
operating expenses of the Fund (excluding interest, taxes,
brokerage commissions and extraordinary expenses such as
litigation costs) would otherwise exceed in any fiscal year 2.5%
of the first $30 million of average net assets of the Fund, 2% of
the next $70 million of average net assets of the Fund and 1.5%
of average net assets of the Fund in excess of $100 million.
Expense reductions have not been necessary based on state
requirements.
For the period from September 21, 1992 (effective date of
registration) through February 28, 1993 and for the fiscal years
ended February 28, 1994 and 1995, the management fees the Fund
was contractually obligated to pay the Manager were $13,573,
$246,332 and $455,865, respectively, and the management fees
actually paid by the Fund for the same periods were $0, $45,151
and $250,402, respectively.
The management agreement is in effect until March 31, 1996.
Thereafter, it may continue in effect for successive annual
periods, provided such continuance is specifically approved at
least annually by a vote of the Trust's Board of Trustees or by a
vote of the holders of a majority of the Fund's outstanding
voting securities, and in either event by a majority vote of the
Trust's trustees who are not parties to the management agreement
or interested persons of any such party (other than as trustees
of the Trust), cast in person at a meeting called for that
purpose. The management agreement may be terminated without
penalty at any time by the Trust or one or more of its Funds or
by the Manager on 30 days' written notice and will automatically
terminate in the event of its assignment, as defined in the 1940
Act.
Franklin/Templeton Investor Services, Inc. ("Investor Services"
or "Shareholder Services Agent"), a wholly-owned subsidiary of
Resources, is the shareholder servicing agent for the Fund and
acts as the Fund's transfer agent and dividend-paying agent.
Investor Services is compensated on the basis of a fixed fee per
account.
Bank of America NT & SA, 555 California Street, 4th Floor, San
Francisco, California 94104, acts as custodian of the securities
and other assets of the Fund. Citibank Delaware, One Penn's Way,
New Castle, Delaware 19720, acts as custodian in connection with
transfer services through bank automated clearing houses. The
custodians do not participate in decisions relating to the
purchase and sale of portfolio securities.
Coopers & Lybrand L.L.P., 333 Market Street, San Francisco,
California 94105, are the Trust's independent auditors. During
the fiscal year ended February 28, 1995, their auditing services
consisted of rendering an opinion on the financial statements of
the Trust included in the Trust's Annual Report to Shareholders
dated February 28, 1995.
The Fund's Policies Regarding
Brokers Used on Portfolio Transactions
Since most purchases made by the Fund are principal transactions
at net prices, the Fund incurs little or no brokerage costs. The
Fund deals directly with the selling or purchasing principal or
market maker without incurring charges for the services of a
broker on its behalf, unless it is determined that a better price
or execution may be obtained by utilizing the services of a
broker. Purchases of portfolio securities from underwriters
include a commission or concession paid by the issuer to the
underwriter, and purchases from dealers include a spread between
the bid and ask price. As a general rule, the Fund does not
purchase bonds in underwritings where it is not given any choice,
or only limited choice, in the designation of dealers to receive
the commission. The Fund seeks to obtain prompt execution of
orders at the most favorable net price. Transactions may be
directed to dealers in return for research and statistical
information, as well as for special services rendered by such
dealers in the execution of orders. It is not possible to place a
dollar value on the special executions or on the research
services received by Advisers from dealers effecting transactions
in portfolio securities. The allocations of transactions in order
to obtain additional research services permits Advisers to
supplement its own research and analysis activities and to
receive the views and information of individuals and research
staff of other securities firms. As long as it is lawful and
appropriate to do so, the Manager and its affiliates may use this
research and data in their investment advisory capacities with
other clients. Provided that Trust's officers are satisfied that
the best execution is obtained, the sale of Fund shares may also
be considered as a factor in the selection of broker-dealers to
execute the Fund's portfolio transactions.
If purchases or sales of securities of the Fund and one or more
other investment companies or clients supervised by the Manager
are considered at or about the same time, transactions in such
securities will be allocated among the several investment
companies and clients in a manner deemed equitable to all by the
Manager, taking into account the respective sizes of the funds
and the amount of securities to be purchased or sold. It is
recognized that in some cases this procedure could possibly have
a detrimental effect on the price or volume of the security so
far as the Fund is concerned. In other cases, it is possible that
the ability to participate in volume transactions and to
negotiate lower brokerage commissions will be beneficial to the
Fund.
During the fiscal years ended February 28, 1993, 1994 and 1995,
the Fund paid no brokerage commissions. As of February 28, 1995,
the Fund did not own securities of its regular broker-dealers.
Additional Information Regarding Fund Shares
All checks, drafts, wires and other payment mediums used for
purchasing or redeeming shares of the Fund must be denominated in
U.S. dollars. The Fund reserves the right, in its sole
discretion, to either (a) reject any order for the purchase or
sale of shares denominated in any other currency, or (b) honor
the transaction or make adjustments to a shareholder's account
for the transaction as of a date and with a foreign currency
exchange factor determined by the drawee bank.
In connection with exchanges, (see the Prospectus "Exchange
Privilege"), it should be noted that since the proceeds from the
sale of shares of an investment company generally are not
available until the fifth business day following the redemption,
the fund into which the Fund's shareholders are seeking to
exchange reserve the right to delay issuing shares pursuant to an
exchange until said fifth business day. The redemption of shares
of the Fund to complete an exchange for shares of any of the
investment companies will be effected at the close of business on
the day the request for exchange is received in proper form at
the net asset value then effective.
The Fund may impose a $10 charge for each returned item, against
any shareholder account which, in connection with the purchase of
the Fund's shares, submits a check or a draft which is returned
unpaid to the Fund.
Shares are eligible to receive dividends beginning on the first
business day following settlement of the purchase transaction,
through the date on which the Fund writes a check or sends a wire
on redemption transactions.
Dividend checks which are returned to the Fund marked "unable to
forward" by the postal service will be deemed to be a request by
the shareholder to change the dividend option and the proceeds
will be reinvested in additional shares at net asset value until
new instructions are received.
The Fund may deduct from a shareholder's account the costs of its
efforts to locate a shareholder if mail is returned as
undeliverable or the Fund is otherwise unable to locate the
shareholder or verify the current mailing address. These costs
may include a percentage of the account when a search company
charges a percentage fee in exchange for its location services.
Under agreements with certain banks in Taiwan, Republic of China,
the Fund's shares are available to such banks' discretionary
trust funds at net asset value. The banks may charge service fees
to their customers who participate in the discretionary trusts.
Pursuant to agreements, a portion of such service fees may be
paid to Distributors, or an affiliate of Distributors, to help
defray expenses of maintaining a service office in Taiwan,
including expenses related to local literature fulfillment and
communication facilities.
Shares of the Fund may be offered to investors in Taiwan through
securities firms known locally as Securities Investment
Consulting Enterprises. In conformity with local business
practices in Taiwan, shares of the Fund will be offered with the
following schedule of sales charges:
Size of Purchase - in U.S. dollars Sales Charge
Up to $100,000 3%
$100,000 to $1,000,000 2%
Over $1,000,000 1%
Purchases and Redemptions Through Securities Dealers
Orders for the purchase of shares of the Fund received in proper
form prior to the scheduled closing time of the Exchange
(generally 1:00 p.m. Pacific time) any business day that the
Exchange is open for trading and promptly transmitted to the Fund
will be based upon the public offering price determined that day.
Purchase orders received by securities dealers or other financial
institutions after the closing of the Exchange will be effected
at the Fund's public offering price on the day it is next
calculated. The use of the term "securities dealer" herein shall
include other financial institutions which, pursuant to an
agreement with Distributors (directly or through affiliates),
handle customer orders and accounts with the Fund. Such
reference, however, is for convenience only and does not indicate
a legal conclusion of capacity.
Orders for the redemption of shares are effected at net asset
value subject to the same conditions concerning time of receipt
in proper form. It is the securities dealer's responsibility to
transmit the order in a timely fashion and any loss to the
customer resulting from failure to do so must be settled between
the customer and the securities dealer.
Special Net Asset Value Purchases
As discussed in the Prospectus under "How to Buy Shares of the
Fund - Description of Special Net Asset Value Purchases," certain
categories of investors may purchase shares of the Fund without a
front-end sales charge ("net asset value") or a contingent
deferred sales charge. Distributors or one of its affiliates may
make payments, out of its own resources, to securities dealers
who initiate and are responsible for such purchases. Distributors
may make these payments in the form of contingent advance
payments, which may be recovered from the securities dealer, or
set off against other payments due to the securities dealer, in
the event of investor redemptions made within 12 months of the
calendar month following purchase. Other conditions may apply.
All terms and conditions may be imposed by an agreement between
Distributors, or its affiliates, and the securities dealer. For
purchases made at net asset value by certain trust companies and
trust departments of banks, Distributors or one of its
affiliates, out of its own resources, may pay up to 1% of the
amount invested.
Letter of Intent
An investor may qualify for a reduced sales charge on the
purchase of shares of the Fund, as described in its Prospectus.
At any time within 90 days after the first investment which the
investor wants to qualify for a reduced sales charge, a signed
Shareholder Application, with the Letter of Intent section
completed, may be filed with the Fund. After the Letter of Intent
is filed, each additional investment will be entitled to the
sales charge applicable to the level of investment indicated on
the Letter of Intent. Sales charge reductions based upon
purchases in more than one of the Franklin Templeton Funds will
be effective only after notification to Distributors that the
investment qualifies for a discount. The shareholder's holdings
in the Franklin Templeton Funds acquired more than 90 days before
the Letter of Intent is filed will be counted towards completion
of the Letter of Intent but will not be entitled to a retroactive
downward adjustment in the sales charge. Any redemptions made by
the shareholder during the 13-month period will be subtracted
from the amount of the purchases for purposes of determining
whether the terms of the Letter of Intent have been completed. If
the Letter of Intent is not completed within the 13-month period,
there will be an upward adjustment of the sales charge, depending
upon the amount actually purchased (less redemptions) during the
period. An investor who executes a Letter of Intent prior to a
change in the sales charge structure for the Fund will be
entitled to complete the Letter of Intent at the lower of the new
sales charge structure or the sales charge structure in effect at
the time the Letter of Intent was filed with the Fund.
As mentioned in the Prospectus of the Fund, 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. If the
total purchases, less redemptions, equal the amount specified
under the Letter of Intent, the reserved shares will be deposited
to an account in the name of the investor or delivered to the
investor or the investor's order. If the total purchases, less
redemptions, exceed the amount specified under the Letter of
Intent and is an amount which would qualify for a further
quantity discount, a retroactive price adjustment will be made by
Distributors and the securities dealer through whom purchases
were made pursuant to the Letter of Intent (to reflect such
further quantity discount) on purchases made within 90 days
before and on those made after filing the Letter of Intent. The
resulting difference in offering price will be applied to the
purchase of additional shares at the offering price applicable to
a single purchase or the dollar amount of the total purchases. If
the total purchases, less redemptions, are less than the amount
specified under the Letter of Intent, the investor will remit to
Distributors an amount equal to the difference in the dollar
amount of sales charge actually paid and the amount of sales
charge which would have applied to the aggregate purchases if the
total of such purchases had been made at a single time. The
shareholder will receive a written notification from Distributors
requesting the remittance. Upon such remittance, the reserved
shares held for the investor's account will be deposited to an
account in the name of the investor or delivered to the investor
or to the investor's order. If within 20 days after written
request such difference in sales charge is not paid, the
redemption of an appropriate number of reserved shares to realize
such difference will be made. In the event of a total redemption
of the account prior to fulfillment of the Letter of Intent, the
additional sales charge due will be deducted from the proceeds of
the redemption, and the balance will be forwarded to the
investor.
Redemptions in Kind
The Fund has committed itself to pay in cash (by check) all
requests for redemption by any shareholder of record, limited in
amount, however, during any 90-day period to the lesser of
$250,000 or 1% of the value of the Fund's net assets at the
beginning of such period. Such commitment is irrevocable without
the prior approval of the SEC. In the case of requests for
redemption in excess of such amounts, the Board of Trustees
reserves the right to make payments in whole or in part in
securities or other assets of the Fund from which the shareholder
is redeeming, in case of an emergency, or if the payment of such
a redemption in cash would be detrimental to the existing
shareholders of the Fund. In such circumstances, the securities
distributed would be valued at the price used to compute the
Fund's net assets. Should the Fund do so, a shareholder may incur
brokerage fees in converting the securities to cash. The Fund
does not intend to redeem illiquid securities in kind; however,
should it happen, shareholders may not be able to timely recover
their investment and may also incur brokerage costs in selling
such securities.
Redemptions by the Fund
Due to the relatively high cost of handling small investments,
the Fund reserves the right to redeem, involuntarily, at net
asset value, the shares of any shareholder whose account has a
value of less than one-half of the initial minimum investment
required for that shareholder, but only where the value of such
account has been reduced by the shareholder's prior voluntary
redemption of shares. Until further notice, it is the present
policy of the Fund not to exercise this right with respect to any
shareholder whose account has a value of $50 or more. In any
event, before the Fund redeems such shares and sends the proceeds
to the shareholder, it will notify the shareholder that the value
of the shares in the account is less than the minimum amount and
allow the shareholder 30 days to make an additional investment in
an amount which will increase the value of the account to at
least $100.
Calculation of Net Asset Value
As noted in the Prospectus, the Fund generally calculates net
asset value as of the scheduled close of the Exchange (generally
1:00 p.m. Pacific time). As of the date of this SAI, the Fund is
informed that the Exchange observes the following holidays: New
Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
The Fund's portfolio securities are valued as stated in the
Prospectus. Generally, trading in U.S. government securities and
money market instruments is substantially completed each day at
various times prior to the close of the Exchange. The values of
such securities used in computing the net asset value of the
Fund's shares are determined as of such times. Occasionally,
events affecting the values of such securities may occur between
the times at which they are determined and 1:00 p.m. Pacific time
which will not be reflected in the computation of the Fund's net
asset value. If events materially affecting the value of such
securities occur during such period, then these securities will
be valued at their fair value as determined in good faith by the
Board of Trustees.
Reports to Shareholders
The Trust sends annual and semiannual reports to its shareholders
regarding the Fund's performance and portfolio holdings.
Shareholders who would like to receive an interim quarterly
report may phone Fund Information at 1-800/DIAL BEN.
Special Services
The Trust and Institutional Services Division of Distributors
provides specialized services, including recordkeeping, for
institutional investors of the Fund. The cost of these services
is not borne by the Fund.
Investor Services may pay certain financial institutions which
maintain omnibus accounts with the Fund on behalf of numerous
beneficial owners for recordkeeping operations performed with
respect to such beneficial owners. For each beneficial owner in
the omnibus account, the Fund may reimburse Investor Services an
amount not to exceed the per account fee which the Fund normally
pays Investor Services. Such financial institutions may also
charge a fee for their services directly to their clients.
Additional Information Regarding Taxation
As stated in the Prospectus, the Fund has elected to be treated
as a regulated investment company under Subchapter M of the Code.
The trustees reserve the right not to maintain the qualification
of the Fund as a regulated investment company if they determine
such course of action to be beneficial to the shareholders. In
such case, the Fund will be subject to federal and possibly state
corporate taxes on its taxable income and gains, to the
alternative minimum tax on a portion of its tax-exempt income,
and distributions (including tax-exempt interest dividends) to
shareholders will be taxable to the extent of the Fund's
available earnings and profits.
The Code requires the Fund to distribute at least 98% of its
taxable ordinary income earned during the calendar year and at
least 98% of its capital gain net income earned during the twelve-
month period ending October 31 of each year (in addition to
amounts from the prior year that were neither distributed nor
taxed to the Fund) to shareholders by December 31 of each year in
order to avoid the imposition of a federal excise tax. Under
these rules, 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. The Fund intends as a matter of policy to declare
and pay such dividends, if any, in December to avoid the
imposition of this tax, but does not guarantee that the
distributions will be sufficient to avoid any or all federal
excise taxes.
Redemptions and exchanges of the Fund's shares are taxable
transactions for federal and state income tax purposes. For most
shareholders, gain or loss will be recognized in an amount equal
to the difference between the shareholder's basis in the shares
and the amount received, subject to the rules described below. If
such shares are a capital asset in the hands of the shareholder,
gain or loss will be capital gain or loss and will be long-term
for federal income tax purposes if the shares have been held for
more than one year.
All or a portion of a loss realized upon a redemption of shares
will be disallowed to the extent other shares of the Fund are
purchased (through reinvestment of dividends or otherwise) within
30 days before or after such redemption. Any loss disallowed
under these rules will be added to the tax basis of the shares
purchased.
All or a portion of the sales charge incurred in purchasing
shares of the Fund will not be included in the federal tax basis
of such shares sold or exchanged within 90 days of their purchase
(for purposes of determining gain or loss upon the sale of such
shares) if the sales proceeds are reinvested in the Fund or in
another fund in the Franklin Templeton Group and a sales charge
that would otherwise apply to the reinvestment is reduced or
eliminated. Any portion of such sales charge excluded from the
tax basis of the shares sold will be added to the tax basis of
the shares acquired in the reinvestment. Shareholders should
consult with their tax advisors concerning the tax rules
applicable to the redemption or exchange of fund shares.
Many states grant tax-free status to dividends paid to
shareholders of mutual funds from interest income earned by the
fund from direct obligations of the U.S. government, subject in
some states to minimum investment requirements that must be met
by the fund. Investments in GNMA/FNMA securities and repurchase
agreements collateralized by U.S. government securities do not
generally qualify for tax-free treatment. While it is not the
primary investment objective of the Fund to invest in such
obligations, the Fund is authorized to so invest for temporary or
defensive purposes. To the extent that such investments are made,
the Fund will provide shareholders with the percentage of any
dividends paid which may qualify for such tax-free treatment at
the end of each calendar year. Shareholders should then consult
with their own tax advisors with respect to the application of
their state and local laws to these distributions and on the
application of other state and local laws on distributions and
redemption proceeds received from the Fund.
Persons who are defined in the Code as "substantial users" (or
related persons) of facilities financed by private activity bonds
should consult with their tax advisors before purchasing shares
of the Fund.
The Fund's Underwriter
Distributors acts as principal underwriter in a continuous public
offering for shares of the Fund, pursuant to an agreement with
the Fund. The underwriting agreement is in effect until March 31,
1996 and will continue in effect for successive annual periods,
provided that its continuance is specifically approved at least
annually by a vote of the Trust's Board of Trustees, or by a vote
of the holders of a majority of the Fund's outstanding voting
securities, and in either event by a majority vote of the Trust's
trustees who are not parties to the underwriting agreement or
interested persons of any such party (other than as trustees of
the Trust), cast in person at a meeting called for that purpose.
The underwriting agreement terminates automatically in the event
of its assignment and may be terminated by either party on 90
days' written notice.
Distributors pays the expenses of distribution of the Fund's
shares, including advertising expenses and the costs of printing
sales material and prospectuses used to offer shares to the
public. The Fund pays the expenses of preparing and printing
amendments to its registration statements and prospectuses (other
than those necessitated by the activities of Distributors) and of
sending prospectuses to existing shareholders.
In connection with the offering of the Fund's shares, aggregate
underwriting commissions for the period September 21, 1992
(effective date of registration) to February 28, 1993 and the
fiscal years ended February 28, 1994 and 1995, were $77,920,
$729,010 and $316,890, respectively. After allowances to dealers,
Distributors retained $2,935, $85,315 and $41,373, during the
periods ended February 28, 1993, 1994 and 1995, respectively.
Distributors may be entitled to reimbursement under the
distribution plan of the Fund, as discussed below. Except as
noted, Distributors received no other compensation from the Fund
for acting as underwriter.
Distribution Plan
The Fund has adopted a distribution plan pursuant to Rule 12b-1
under the 1940 Act (the "Plan") whereby the Fund may pay up to a
maximum of 0.10% per annum of its average daily net assets for
expenses incurred in the promotion and distribution of its
shares.
Pursuant to the Plan, Distributors or others will be entitled to
be reimbursed each quarter (up to the maximum as stated above)
for actual expenses incurred in the distribution and promotion of
the Fund's shares, including, but 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.
For the fiscal year ended February 28, 1995, the total amount
paid by the Fund pursuant to the Plan was $38,867, all of which
was used for payments to brokers or dealers.
In addition to the payments to which Distributors or others are
entitled under the Plan, the Plan also provides that to the
extent the Fund, the Manager or Distributors or other parties on
behalf of the Fund, the Manager or Distributors, make payments
that are deemed to be payments for the financing of any activity
primarily intended to result in the sale of shares of the Fund
within the context of Rule 12b-1 under the 1940 Act, then such
payments shall be deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges which
include payments made under the Plan, plus any other payments
deemed to be made pursuant to the Plan, exceed the amount
permitted to be paid pursuant to the Rules of Fair Practice of
the National Association of Securities Dealers, Inc., Article
III, Section 26(d)4.
The terms and provisions of the Plan relating to required
reports, term, and approval are consistent with Rule 12b-1. The
Plan does not permit unreimbursed expenses incurred in a
particular year to be carried over to or reimbursed in subsequent
years.
To the extent fees are for distribution or marketing functions,
as distinguished from administrative servicing or agency
transactions, certain banks will not be entitled to participate
in the Plan to the extent that applicable federal law prohibits
certain banks from engaging in the distribution of mutual fund
shares. Such banking institutions, however, are permitted to
receive fees under the Plan for administrative servicing or for
agency transactions. If a bank were prohibited from providing
such services, its customers who are shareholders would be
permitted to remain shareholders of the Fund, and alternate means
for continuing the servicing of such shareholders would be
sought. In such an event, changes in the services provided might
occur and such shareholders might no longer be able to avail
themselves of any automatic investment or other services then
being provided by the bank. It is not expected that shareholders
would suffer any adverse financial consequences as a result of
any of these changes. Securities laws of states in which the
Fund's shares are offered for sale may differ from the
interpretations of federal law expressed herein, and banks and
financial institutions selling shares of the Fund may be required
to register as dealers pursuant to state law.
The Plan has been approved by Resources, the initial shareholder
of the Fund, and by the trustees of the Trust, including those
trustees who are not interested persons, as defined in the 1940
Act. The Plan is effective through March 31, 1996 and renewable
annually by a vote of the Trust's Board of Trustees, including a
majority vote of the trustees who are non-interested persons of
the Trust and who have no direct or indirect financial interest
in the operation of the Plan, cast in person at a meeting called
for that purpose. It is also required that the selection and
nomination of such trustees be done by the non-interested
trustees. The Plan and any related agreement may be terminated at
any time, without any penalty, by vote of a majority of the non-
interested trustees on not more than 60 days' written notice, by
Distributors on not more than 60 days' written notice, by any act
that constitutes an assignment of the management agreement with
the Manager or the underwriting agreement with Distributors, or
by vote of a majority of the Fund's outstanding shares.
Distributors or any dealer or other firm may also terminate their
respective distribution or service agreement at any time upon
written notice.
The Plan and any related agreements may not be amended to
increase materially the amount to be spent for distribution
expenses without approval by a majority of the Fund's outstanding
shares, and all material amendments to the Plan or any related
agreements shall be approved by a vote of the non-interested
trustees, cast in person at a meeting called for the purpose of
voting on any such amendment.
Distributors is required to report in writing to the Board of
Trustees at least quarterly on the amounts and purpose of any
payment made under the Plan and any related agreements, as well
as to furnish the Board of Trustees with such other information
as may reasonably be requested in order to enable the Board of
Trustees to make an informed determination of whether the Plan
should be continued.
General Information
Performance
As noted in the Prospectus, the Fund may from time to time quote
various performance figures to illustrate its past performance.
The Fund may occasionally cite statistics to reflect its
volatility or risk.
Performance quotations by investment companies are subject to
rules adopted by the SEC. These rules require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the Fund be
accompanied by certain standardized performance information
computed as required by the SEC. Current yield and average annual
compounded total return quotations used by the Fund are based on
the standardized methods of computing performance mandated by the
SEC. An explanation of those and other methods used by the Fund
to compute or express performance follows.
Total Return
The average annual total return is determined by finding the
average annual compounded rates of return over one-, five- and
ten-year periods, or fractional portion thereof, that would
equate an initial hypothetical $1,000 investment to its ending
redeemable value. The calculation assumes the maximum front-end
sales charge is deducted from the initial $1,000 purchase order
and income dividends and capital gains are reinvested at net
asset value. The quotation assumes the account was completely
redeemed at the end of each one-, five- and ten-year period and
the deduction of all applicable charges and fees. If a change is
made in the sales charge structure, historical performance
information will be restated to reflect the maximum front-end
sales charge currently in effect.
In considering the quotations of total return by the Fund,
investors should remember that the maximum front-end sales charge
reflected in each quotation is a one-time fee (charged on all
direct purchases) which will have its greatest impact during the
early stages of an investor's investment in the Fund. The actual
performance of an investment will be affected less by this charge
the longer an investor retains the investment in the Fund. The
average annual compounded rates of return for the Fund for the
one-year period ending February 28, 1995 was -0.21%, and for the
period from commencement of operations (September 23, 1992) to
February 28, 1995, was 5.68%.
These figures were calculated according to the SEC formula:
P(1+T)n = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the one-, five-, or ten-year periods at
the end of the one-, five- or ten-year periods (or fractional
portion thereof).
As discussed in the Prospectus, the Fund may quote total rates of
return in addition to its average annual total return. Such
quotations are computed in the same manner as the Fund's average
annual compounded rate, except that such quotations will be based
on the Fund's actual return for a specified period rather than on
its average return over one-, five- and ten-year periods, or
fractional portion thereof. The total rate of return for the one-
year period ended February 28, 1995, was -0.21% and for the
period from commencement of operations (September 23, 1992) to
February 28, 1995, was 14.40%.
Yield
Current yield reflects the income per share earned by the Fund's
portfolio investments.
Current yield is determined by dividing the net investment income
per share earned during a 30-day base period by the maximum
offering price per share on the last day of the period and
annualizing the result. Expenses accrued for the period include
any fees charged to all shareholders during the base period. The
yield for the Fund for the 30-day period ended on February 28,
1995 was 5.34%.
These figures were obtained using the following SEC formula:
Yield = 2[(a-b + 1)6 - 1]
cd
where:
a = interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends
d = the maximum offering price per share on the last day of the
period
Tax Equivalent Yield
The Fund may also quote a tax equivalent yield which demonstrates
the taxable yield necessary to produce an after-tax yield
equivalent to that of a fund which invests in tax-exempt
obligations. Such yield is computed by dividing that portion of
the yield of a fund (computed as indicated above) which is tax-
exempt by one minus the highest applicable federal income tax
rate (and adding the product to that portion of the yield of a
fund that is not tax-exempt, if any). The tax equivalent yield
for the Fund for the 30-day period ended on February 28, 1995 was
8.84%.
As of the date of this SAI, the federal income tax rate upon
which the Fund's tax equivalent yield quotations are based was
39.6%. From time to time, as any changes to such rate become
effective, tax equivalent yield quotations advertised by the Fund
will be updated to reflect such changes. The Fund expects updates
may be necessary as tax rates are changed by the federal
government. The advantage of tax-free investments, such as the
Fund, will be enhanced by any tax rate increases. Therefore, the
details of specific tax increases may be used in sales material
for the Fund.
Current Distribution Rate
Current yield and tax equivalent yield, which are calculated
according to a formula prescribed by the SEC, are not indicative
of the amounts which were or will be paid to the Fund's
shareholders. Amounts paid to shareholders are reflected in the
quoted current distribution rate or taxable equivalent
distribution rate. 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 equivalent to the Fund's current distribution
rate (calculated as indicated above). The advertised taxable
equivalent distribution rate will reflect the most current
federal tax rate available to the Fund.
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 over 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 gains, and is calculated over a different period of
time.
Volatility
Occasionally, statistics may be used to specify Fund volatility
or risk. Measures of volatility or risk are generally used to
compare the Fund's net asset value or performance relative to a
market index. One measure of volatility or risk is standard
deviation. Standard deviation is used to measure variability of
net asset value or total return around an average, over a
specified period of time. The premise is that greater volatility
connotes greater risk undertaken in achieving performance.
Other Performance Quotations
With respect to those categories of investors who are permitted
to purchase shares of the Fund at net asset value, sales
literature pertaining to the Fund may quote a "Current
Distribution Rate for Net Asset Value Investments." This rate is
computed by adding the income dividends paid by the Fund during
the last 12 months and dividing that sum by a current net asset
value. Figures for yield, total return and other measures of
performance for net asset value investments may also be quoted.
These will be derived as described elsewhere in this SAI with the
substitution of net asset value for public offering price.
Regardless of the method used, past performance is not
necessarily indicative of future results, but is an indication of
the return to shareholders only for the limited historical period
used.
The Fund may include in its advertising or sales material
information relating to investment objectives and performance
results of funds belonging to the Templeton Group of Funds.
Resources is the parent company of the advisers and underwriter
of both the Franklin Group of Funds(Registered Trademark) and
Templeton Group of Funds.
Comparisons
To help investors better evaluate how an investment in the Fund
might satisfy their investment objective, advertisements and
other materials regarding the Fund may discuss various measures
of Fund performance as reported by various financial
publications. Materials may also compare performance (as
calculated above) to performance as reported by other
investments, indices, and averages. Such comparisons may include,
but are not limited to, the following examples:
a) Salomon Brothers Broad Bond Index or its component indices -
The Broad Index measures yield, price, and total return for
Treasury, Agency, Corporate, and Mortgage bonds.
b) Lehman Brothers Aggregate Bond Index or its component indices
- - The Aggregate Bond Index measures yield, price and total return
for Treasury, Agency, Corporate, Mortgage, and Yankee bonds.
c) Lehman Brothers Municipal Bond Index (LBMBI) or its component
indices - LBMBI measures yield, price and total return for the
municipal bond market.
d) Financial publications: The Wall Street Journal and Business
Week, Financial World, Forbes, Fortune, and Money magazines -
provide performance statistics over specified time periods.
e) Historical data supplied by the research departments of First
Boston Corporation, the J. P. Morgan companies, Salomon Brothers,
Merrill Lynch, Lehman Brothers and Bloomberg, L.P.
f) Lipper - Mutual Fund Performance Analysis, Lipper - Fixed
Income Fund Performance Analysis and Lipper - Mutual Fund Yield
Survey - measure total return and average current yield for the
mutual fund industry and rank individual mutual fund performance
over specified time periods, assuming reinvestment of all
distributions, exclusive of sales charges.
g) Savings & Loan Historical Interest Rates as published by the
U.S. Savings & Loan League Fact Book.
h) CDA Mutual Fund Report, published by CDA Investment
Technologies, Inc. - analyzes price, current yield, risk, total
return, and average rate of return (average annual compounded
growth rate) over specified time periods for the mutual fund
industry.
i) Bond Buyer's 20-Bond Index - an index of municipal bond yields
based upon yields of 20 general obligation bonds maturing in 20
years.
j) Bond Buyer's 40-Bond Index - an index of municipal bond yields
based upon yields of 40 revenue bonds maturing in 30 years.
From time to time, advertisements or information for the Fund may
include a discussion of certain attributes or benefits to be
derived by an investment in the Fund. Such advertisements or
information may include symbols, headlines, or other material
which highlight or summarize the information discussed in more
detail in the communication.
Advertisements or information may also compare the Fund's
performance to the return on certificates of deposit or other
investments. Investors should be aware, however, that an
investment in the Fund involves the risk of fluctuation of
principal value, a risk generally not present in an investment in
a certificate of deposit issued by a bank. For example, as the
general level of interest rates rise, the value of the Fund's
fixed-income investments, as well as the value of its shares
which are based upon the value of such portfolio investments, can
be expected to decrease. Conversely, when interest rates
decrease, the value of the Fund's shares can be expected to
increase. Certificates of deposit are frequently insured by an
agency of the U.S. government. An investment in the Fund is not
insured by any federal, state or private entity.
In assessing such comparisons of performance, an investor should
keep in mind that the composition of the investments in the
reported indices and averages is not identical to the Fund's
portfolio, that the indices and averages are generally unmanaged,
and that the items included in the calculations of such averages
may not be identical to the formula used by the Fund to calculate
its figures. In addition, there can be no assurance that the Fund
will continue this performance as compared to such other
averages.
Other Features and Benefits
Founded in 1947, Franklin is a leader in the tax-free mutual fund
industry, currently offering 42 tax-free funds, including 33
funds free from both federal and state personal income taxes, and
managing more than $40 billion in municipal bond assets for over
half a million investors.
Under current tax laws, municipal securities remain one of the
few investments offering the potential for tax-free income. In
1995, taxes could cost as much as $47 on every $100 earned from a
fully taxable investment (based on the maximum combined 39.6%
federal tax rate and the highest state tax rate of 12% for 1995.)
Franklin tax-free funds, however, offer tax relief through a
professionally managed portfolio of tax-free securities selected
based on their yield, quality and maturity. An investment in a
Franklin tax-free fund can provide an investor with the potential
to earn income free of federal taxes and, depending on the fund,
state and local taxes as well, while supporting state and local
public projects. Franklin tax-free funds may also provide tax-
free compounding, when dividends are reinvested. An investment in
Franklin's tax-free funds can grow more rapidly than a similar
taxable investment.
Municipal securities are generally considered to be creditworthy,
second in quality only to securities issued or guaranteed by the
United States government and its agencies. The market price of
such securities, however, may fluctuate. This fluctuation will
have a direct impact on the net asset value of an investment in
the Fund.
Currently, there are more mutual funds than there are stocks
listed on the Exchange. While many of them have similar
investment objectives, no two are exactly alike. As noted in the
Prospectus, shares of the Fund are generally sold through
securities dealers or other financial institutions. Investment
representatives of such securities dealers or financial
institutions are experienced professionals who can offer advice
on the type of investment suitable to an investor's unique goals
and needs, as well as the types of risks associated with such
investment.
The Fund may help investors achieve various investment goals,
such as accumulating money for retirement, saving for a down
payment on a home, college cost and/or other long-term goals. The
Franklin College Costs Planner may assist an investor in
determining how much money must be invested on a monthly basis in
order to have a projected amount available in the future to fund
a child's college education. (Projected college cost estimates
are based upon current costs published by the College Board.) The
Franklin Retirement Planning Guide leads an investor through the
steps to start a retirement savings program. Of course, an
investment in the Fund cannot guarantee that such goals will be
met.
Miscellaneous Information
The Fund is a member of the Franklin Templeton Group, one of the
largest mutual fund organizations in the United States and may be
considered in a program for diversification of assets. Founded in
1947, Franklin, one of the oldest mutual fund organizations, has
managed mutual funds for over 45 years and now services more than
2.4 million shareholder accounts. In 1992, Franklin, a leader in
managing fixed-income mutual funds and an innovator in creating
domestic equity funds, joined forces with Templeton Worldwide,
Inc., a pioneer in international investing. Together, the
Franklin Templeton Group has over $116 billion in assets under
management for more than 3.8 million shareholder accounts and
offers 111 U.S.-based mutual funds. The Fund may identify itself
by its NASDAQ or CUSIP number.
The Dalbar Surveys, Inc. broker/dealer survey has ranked Franklin
number one in service quality for five of the past seven years.
According to Research and Ratings Review, Volume II, dated
February 28, 1994, Franklin's municipal research team ranked
number 2 out of 1,000 investment advisory firms surveyed by TMS
Holdings, Inc. As of November 14, 1994, this ranking was
unchanged.
According to Strategic Insight, dated November 30, 1994, the
Franklin Florida Tax-Free Income Fund is the largest municipal
bond fund.
From time to time, advertisements or sales material issued by the
Fund may discuss or be based upon information in a recent issue
of the Special Report on Tax Freedom Day published by the Tax
Foundation, a Washington, D.C.-based nonprofit, research and
public education organization. The report illustrates, among
other things, the amount of time, on an annual basis, the average
taxpayer works to satisfy his or her tax obligations to the
federal, state and local taxing authorities.
Access persons of the Franklin Templeton Group, as defined in SEC
Rule 17(j) under the 1940 Act, who are employees of Resources or
its subsidiaries, are permitted to engage in personal securities
transactions subject to the following general restrictions and
procedures: (1) the trade must receive advance clearance from a
compliance officer and must be completed within 24 hours after
this clearance; (2) copies of all brokerage confirmations must be
sent to the compliance officer and within 10 days after the end
of each calendar quarter, a report of all securities transactions
must be provided to the compliance officer; (3) in addition to
items (1) and (2), access persons involved in preparing and
making investment decisions must file annual reports of their
securities holdings each January and also inform the compliance
officer (or other designated personnel) if they own a security
that is being considered for a fund or other client transaction
or if they are recommending a security in which they have an
ownership interest for purchase or sale by a fund or other
client.
The Trust amortizes the organizational expenses attributable to
the Fund over a period of five years from the effective date of
the registration statement covering the Fund. New investors
purchasing shares of the Fund after the effective date of the
Fund's registration statement under the Securities Act of 1933
will bear such expenses during the amortization period.
The shareholders of a Massachusetts business trust could, under
certain circumstances, be held personally liable as partners for
its obligations. The Trust's Declaration of Trust, however,
contains an express disclaimer of shareholder liability for acts
or obligations of the Trust. The Declaration of Trust also
provides for indemnification and reimbursement of expenses out of
Trust assets for any shareholder held personally liable for
obligations of the Trust. The Declaration of Trust provides that
the Trust shall, upon request, assume the defense of any claim
made against any shareholder for any act or obligation of the
Trust and satisfy any judgment thereon. All such rights are
limited to the assets of the fund of which a shareholder holds
shares. The Declaration of Trust further provides that the Trust
may maintain appropriate insurance (for example, fidelity bonding
and errors and omissions insurance) for the protection of the
Trust, its shareholders, trustees, officers, employees and agents
to cover possible tort and other liabilities. Thus, the risk of a
shareholder incurring financial loss on account of shareholder
liability is limited to circumstances in which both inadequate
insurance exists and the Trust itself is unable to meet its
obligations.
Ownership and Authority Disputes
In the event of disputes involving multiple claims of ownership
or authority to control a shareholder's account, the Fund has the
right (but has no obligation) to: (a) freeze the account and
require the written agreement of all persons deemed by the Fund
to have a potential property interest in the account, prior to
executing instructions regarding the account; (b) interplead
disputed funds or accounts with a court of competent
jurisdiction; or (c) surrender ownership of all or a portion of
the account to the Internal Revenue Service in response to a
Notice of Levy.
Appendix - 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 of 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: Municipal bonds which are rated Baa are considered 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: Municipal bonds which are rated Ba are judged to have
predominantly speculative elements and 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: Municipal 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: Municipal 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: Municipal bonds which are rated Ca represent obligations
which are speculative in a high degree. Such issues are often in
default or have other marked shortcomings.
C: Municipal 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. (-): Municipal bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are
rated conditionally. These are bonds secured by (a) earnings of
projects under construction, (b) earnings of projects unseasoned
in operation experience, (c) rentals 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 municipal
bond ratings. The modifier 1 indicates that the security ranks in
the higher end of its generic rating category. The 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: This is the highest rating assigned by S&P to a debt
obligation and indicates an extremely strong capacity to pay
interest.
AA: Municipal bonds rated AA also qualify as high grade
obligations. Capacity to pay principal and interest is very
strong, and in the majority of instances they differ from AAA
issues only in small degree.
A: Municipal bonds rated A have a strong capacity to pay
principal and interest, although they are somewhat more
susceptible to the adverse effects of changes in circumstances
and economic conditions.
BBB: Municipal bonds rated BBB are regarded as having an adequate
capacity to pay principal and interest. Whereas they normally
exhibit protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC: Municipal bonds rated BB, B, CCC and CC are
regarded, on balance, as predominantly speculative with respect
to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligations. BB indicates the
lowest degree of speculation and CC the highest degree of
speculation. While 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, is 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 an adverse impact on these bonds, and therefore impair
timely payment. The likelihood that the ratings of these bonds
will fall below investment grade is higher than for bonds with
higher ratings.
Municipal Notes
Moody's
Moody's ratings for state, municipal and other short-term
obligations are 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, while various 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 and enjoy 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 usually will 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. The relative degree of safety, however, is not as
overwhelming as for issues designated A-1.
A-3: Issues carrying this designation have a satisfactory
capacity for timely payment. They are, however, somewhat more
vulnerable to the adverse effects of changes in circumstances
than obligations carrying the higher designations.
Fitch's Short-term and Commercial Paper Ratings
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. Reflects an assurance of timely
payment only slightly less in degree than issues rated F-1+.
F-2: Good credit quality. A satisfactory degree of assurance for
timely payment, but the margin of safety is not as great as for
issues assigned F-1+ and F-1 ratings.
F-3: Fair credit quality. Have characteristics suggesting that
the degree of assurance for timely payment is adequate; however,
near-term adverse changes could cause these securities to be
rated below investment grade.
F-S: 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.
Financial Statements
The financial statements contained in the Trust's Annual Report
to Shareholders dated February 28, 1995, are incorporated herein
by reference.
FORM N-1A
PART C
Other Information
Item 24 Financial Statements incorporated herein by reference
to the Registrant's Annual Report to Shareholders dated
February 28, 1995 as filed electronically with the
Securities and Exchange Commission on Form Type N-30D
on April 26, 1995.
(a) Financial Statements filed in Part B
(i) Report of Independent Auditors - April 4, 1995.
(ii) Statements of Investments in Securities and Net Assets
- February 28, 1995.
(iii) Statements of Assets and Liabilities - February 28,
1995.
(iv) Statements of Operations - for the year ended February
28, 1995.
(v) Statements of Changes in Net Assets - for the years
ended February 28, 1994 and 1995.
(b) Exhibits:
The following exhibits are attached herewith, except Exhibits
6(ii), 8(iii), 8(iv), 9(ii), which are incorporated by reference
as noted.
(1) copies of the charter as now in effect;
(i) Restated Agreement and Declaration of Trust dated
October 26, 1984
(ii) Certificate of Amendment of Agreement and Declaration
of Trust dated July 16, 1991
(iii)Certificate of Amendment of Agreement and Declaration
of Trust dated April 21, 1992
(iv) Certificate of Amendment of Agreement and Declaration
of Trust dated December 14, 1993
(v) Certificate of Amendment of Agreement and Declaration
of Trust dated March 21, 1995
(2) copies of the existing By-Laws or instruments corresponding
thereto;
(i) By-Laws
(ii) Amendment to By-Laws dated December 8, 1987
(iii)Amendments to By-Laws dated April 21, 1992
(iv) Certificate of Amendment of By-Laws dated December 14,
1993
(v) Certificate of Secretary dated February 28, 1994
(3) copies of any voting trust agreement with respect to more
than five percent of any class of equity securities of the
Registrant;
Not Applicable
(4) specimens or copies of each security issued by the
Registrant, including copies of all constituent instruments,
defining the rights of the holders of such securities, and
copies of each security being registered;
Not Applicable
(5) copies of all investment advisory contracts relating to the
management of the assets of the Registrant;
(i) Management Agreement between Registrant and Franklin
Advisers, Inc. dated December 1, 1986
(6) copies of each underwriting or distribution contract between
the Registrant and a principal underwriter, and specimens or
copies of all agreements between principal underwriters and
dealers:
(i) Form of Amended and Restated Distribution Agreement
between the Registrant and Franklin/Templeton
Distributors, Inc.
(ii) Form of Dealer Agreement between Franklin/Templeton
Distributors, Inc. and securities dealers
Registrant: Franklin Federal Tax-Free Income Fund
Filing: Post-Effective Amendment No. 17 to
Registration on Form N-1A
File No. 2-75925
Filing Date: March 28, 1995
(7) copies of all bonus, profit sharing, pension or other
similar contracts or arrangements wholly or partly for the
benefit of directors or officers of the Registrant in their
capacity as such; any such plan that is not set forth in a
formal document, furnish a reasonably detailed description
thereof;
Not Applicable
(8) copies of all custodian agreements and depository contracts
under Section 17(f) of the 1940 Act, with respect to
securities and similar investments of the Registrant,
including the schedule of renumeration;
(i) Custodian Agreement between Registrant and Bank of
America NT & SA dated March 1, 1985
(ii) Amendment to Custodian Agreement between Registrant
and Bank of America NT & SA dated April 2, 1990
(iii)Form of Custodian Agreements between Registrant and
Citibank Delaware
1.Citicash Management ACH Customer Agreement
2.Citibank Cash Management Services Master Agreement
3.Short Form Bank Agreement - Deposits and
Disbursements of Funds:
Registrant: Franklin Premier Return Fund
Filing: Post-Effective Amendment No. 54 to
Registration on Form N-1A
File No. 2-12647
Filing Date: February 27, 1995
(iv) Amendment to Custodian Agreement between Registrant
and Bank of America NT and SA dated December 1, 1994:
Registrant: Franklin Premier Return Fund
Filing: Post-Effective Amendment No. 54 to
Registration on Form N-1A
File No. 2-12647
Filing Date: February 27, 1995
(9) copies of all other material contracts not made in the
ordinary course of business which are to be performed in
whole or in part at or after the date of filing the
Registration Statement;
(i) Agreement between Registrant and Financial Guaranty
Insurance Company dated March 8, 1985
(ii) Amendment to Agreement between Registrant and
Financial Guaranty Insurance Company
Incorporated by Reference to:
Registrant: Franklin New York Tax-Free Trust
Filing: Post-Effective Amendment No. 12
to Registration on Form N-1A
File No.33-7785
Filing Date: April 25, 1995
(10) an opinion and consent of counsel as to the legality of the
securities being registered, indicating whether they will
when sold be legally issued, fully paid and nonassessable:
(i) Opinion and Consent of Counsel dated April 21, 1995
(11) copies of any other opinions, appraisals or rulings and
consents to the use thereof relied on in the preparation of
this registration statement and required by Section 7 of the
1933 Act:
(i) Consent of Independent Auditors
(12) all financial statements omitted from Item 23:
Not Applicable
(13) copies of any agreements or understandings made in
consideration for providing the initial capital between or
among the Registrant, the underwriter, adviser, promoter or
initial stockholders and written assurances from promoters
or initial stockholders that their purchases were made for
investment purposes without any present intention of
redeeming or reselling:
(i) Letter of Understanding dated September 21, 1992
(ii) Letter of Understanding dated April 12, 1994
(14) copies of the model plan used in the establishment of any
retirement plan in conjunction with which Registrant offers
its securities, any instructions thereto and any other
documents making up the model plan. Such form(s) should
disclose the costs and fees charged in connection therewith;
Not Applicable
(15) copies of any plan entered into by Registrant pursuant to
Rule 12b-1 under the 1940 Act, which describes all material
aspects of the financing of distribution of Registrant's
shares, and any agreements with any person relating to
implementation of such plan.
(i) Class I shares Amended and Restated Distribution Plans
dated July 1, 1993 pursuant to Rule 12b-1 on behalf of
the following funds:
Franklin Alabama Tax-Free Income Fund
Franklin Arizona Insured Tax-Free Income Fund
Franklin Arizona 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 Insured Tax-Free Income Fund
Franklin Florida 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
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
(ii) Form of Class II shares Distribution Plan pursuant to
Rule 12b-1 on behalf of all series of Franklin Tax-
Free Trust
(16) schedule for computation of each performance quotation
provided in the registration statement in response to Item
22 (which need not be audited)
(i) Schedule for computation of performance quotation
(17) Power of Attorney
(i) Power of Attorney dated February 16, 1995
(ii) Certificate of Secretary dated February 16,1995
(27) Financial Data Schedule Computations
EX-27.B-1 Financial Data Schedule for
Franklin Insured Tax-Free Income
Fund
EX-27.B-2 Financial Data Schedule for
Franklin Massachusetts Insured Tax-
Free Income Fund
EX-27.B-3 Financial Data Schedule for
Michigan Insured Tax-Free Income
Fund
EX-27.B-4 Financial Data Schedule for
Minnesota Insured Tax-Free Income
Fund
EX-27.B-5 Financial Data Schedule for
Franklin Ohio Insured Tax-Free
Income Fund
EX-27.B-6 Financial Data Schedule for
Franklin Puerto Rico Insured Tax-
Free Income Fund
EX-27.B-7 Financial Data Schedule for
Franklin High Yield Tax-Free
Income Fund
EX-27.B-8 Financial Data Schedule for
Franklin Pennsylvania Tax-Free
Income Fund
EX-27.B-9 Financial Data Schedule for
Franklin Colorado Tax-Free Income
Fund
EX-27.B-10 Financial Data Schedule for
Franklin Georgia Tax-Free Income
Fund
EX-27.B-11 Financial Data Schedule for
Franklin Missouri Tax-Free Income
Fund
EX-27.B-12 Financial Data Schedule for
Franklin Oregon Tax-Free Income
Fund
EX-27.B-13 Financial Data Schedule for
Franklin Texas Tax-Free Income
Fund
EX-27.B-14 Financial Data Schedule for
Franklin Virginia Tax-Free Income
Fund
EX-27.B-15 Financial Data Schedule for
Franklin Alabama Tax-Free Income
Fund
EX-27.B-16 Financial Data Schedule for
Franklin Florida Tax-Free Income
Fund
EX-27.B-17 Financial Data Schedule for
Franklin Indiana Tax-Free Income
Fund
EX-27.B-18 Financial Data Schedule for
Franklin Louisiana Tax-Free Income
Fund
EX-27.B-19 Financial Data Schedule for
Franklin North Carolina Tax-Free
Income Fund
EX-27.B-20 Financial Data Schedule for
Franklin Arizona Tax-Free Income
Fund
EX-27.B-21 Financial Data Schedule for
Franklin New Jersey Tax-Free
Income Fund
EX-27.B-22 Financial Data Schedule for
Franklin Connecticut Tax-Free
Income Fund
EX-27.B-23 Financial Data Schedule for
Franklin Maryland Tax-Free Income
Fund
EX-27.B-24 Financial Data Schedule for
Franklin Kentucky Tax-Free Income
Fund
EX-27.B-25 Financial Data Schedule for
Franklin Federal Intermediate Term
Tax-Free Income Fund
EX-27.B-26 Financial Data Schedule for
Franklin Arizona Insured Tax-Free
Income Fund
EX-27.B-27 Financial Data Schedule for
Franklin Florida Tax-Free Income
Fund
Item 25 Persons Controlled by or under Common Control with
Registrant
None
Item 26 Number of Holders of Securities
As of February 28, 1995 the number of record holders of each
series of securities of the Registrant were as follows:
Number of Number of
Record Holders Record Holders
Title of Class Class I Class II
Shares of Beneficial
Interest
Alabama Fund 3,724 None
Arizona Insured Fund 467 N/A
Arizona Fund 14,580 None
Colorado Fund 5,621 None
Connecticut Fund 3,983 None
Federal Intermediate Fund 2,096 N/A
Florida Insured Fund 1,140 N/A
Florida Fund 24,047 None
Georgia Fund 3,480 None
High Yield Fund 88,659 None
Indiana Fund 1,645 N/A
Insured Fund 36,601 None
Kentucky Fund 910 N/A
Louisiana Fund 2,548 None
Maryland Fund 4,713 None
Massachusetts Insured Fund 6,799 None
Michigan Insured Fund 28,402 None
Minnesota Insured Fund 13,824 None
Missouri Fund 6,947 None
New Jersey Fund 15,979 None
North Carolina Fund 5,809 None
Ohio Insured Fund 17,838 None
Oregon Fund 9,236 None
Pennsylvania Fund 17,739 None
Puerto Rico Fund 6,578 None
Texas Fund 2,931 None
Virginia Fund 6,895 None
Item 27 Indemnification
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to trustees, officers and
controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment
by the Registrant of expenses incurred or paid by a trustee,
officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such
trustee, officer or controlling person in connection with
securities being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court or appropriate jurisdiction the
question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final
adjudication of such issue.
Item 28 Business and Other Connections of Investment Adviser
The officers and directors of the Registrant's investment
advisor also serve as officers and/or directors for (1) the
advisor's corporate parent, Franklin Resources, Inc., and/or
(2) other investment companies in the Franklin Group of Funds,
or the Templeton Group of Funds. In addition, Charles B.
Johnson is a director of General Host Corporation. For
additional information please see Part B.
Item 29 Principal Underwriters
a) Franklin/Templeton Distributors, Inc., ("Distributors") also
acts as principal underwriter of shares of AGE High Income Fund,
Inc., Franklin Balance Sheet Fund, Franklin Custodian Funds,
Inc., Franklin Equity Fund, Franklin Federal Money Fund, Franklin
Gold Fund, Franklin Municipal Securities Trust, Franklin
California Tax-Free Income Fund, Inc., Franklin New York Tax-Free
Income Fund, Inc., Franklin California Tax-Free Trust, Franklin
Investors Securities Trust, Franklin International Trust,
Franklin Premier Return Fund, Franklin Strategic Mortgage
Portfolio, Franklin New York Tax-Free Trust, Franklin Strategic
Series, Franklin Tax-Advantaged International Bond Fund, Franklin
Tax-Advantaged U.S. Government Securities Fund, Franklin Tax-
Advantaged High Yield Securities Fund, Franklin Managed Trust,
Franklin Federal Tax-Free Income Fund, Institutional Fiduciary
Trust, Franklin Money Fund, Franklin Tax Exempt Money Fund,
Franklin Real Estate Securities Trust, Franklin/Templeton Global
Trust, Templeton Variable Products Series Fund, Templeton Real
Estate Securities Fund, Templeton Growth Fund, Inc., Templeton
Funds, Inc., Templeton Smaller Companies Growth Fund, Inc.,
Templeton Income Trust, Templeton Global Opportunities Trust,
Templeton Institutional Funds, Inc., Templeton American Trust,
Inc., Templeton Capital Accumulator Fund, Inc., Templeton
Developing Markets Trust, Templeton Variable Annuity Fund,
Franklin Templeton Japan Fund, and Templeton Global Investment
Trust.
(b) The information required by this Item 29 with respect to
each director and officer of Distributors is incorporated by
reference to Part B of this N-1A and Schedule A of Form BD filed
by Distributors with the Securities and Exchange Commission
pursuant to the Securities Act of 1934 (SEC File No. 8-5889).
(c) Not Applicable. Registrant's principal underwriter is an
affiliated person of the Registrant.
Item 30 Location of Accounts and Records
The accounts, books or other documents required to be
maintained by Section 31 (a) of the Investment Company Act of
1940 are kept by the Registrant or its shareholder services
agent, Franklin/Templeton Investors Services, Inc., both of
whose address is 777 Mariners Island Blvd., San Mateo, CA.
94404.
Item 31 Management Services
There are no management-related service contracts not discussed
in Part A or Part B.
Item 32 Undertakings
(i) The Registrant hereby undertakes to promptly call a meeting
of shareholders for the purpose of voting upon the question
of removal of any trustee or trustees when requested in
writing to do so by the record holders of not less than 10
per cent of the Registrant's outstanding shares and to
assist its shareholders in the communicating with other
shareholders in accordance with the requirements of Section
16(c) of the Investment Company Act of 1940.
(ii) The Registrant hereby undertakes to comply with the
information requirements in Item 5A of the Form N-1A by
including the required information in the Trust's annual
report and to furnish each person to whom a prospectus is
delivered a copy of the annual report upon request and
without charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933
and the Investment Company Act of 1940, the Registrant certifies
that it meets all of the requirements for effectiveness of this
Post Effective Amendment to its Registration Statement pursuant
to Rule 485(b) under the Securities Act of 1933 and has duly
caused this post-effective amendment to the Registrant's
Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of San Mateo
and the State of California, on the 26th day of April, 1995.
FRANKLIN TAX-FREE TRUST
By: Rupert H. Johnson, Jr.*
Rupert H. Johnson, Jr., President
Pursuant to the requirements of the Securities Act of 1933,
this Amendment to its Registration Amendment has been signed
below by the following persons in the capacities and on the dates
indicated:
Rupert H. Johnson, Jr.* Trustee and Principal
Rupert H. Johnson, Jr. Executive Officer
Dated: April 27, 1995
Martin L. Flanagan* Principal Financial
Martin L. Flanagan Officer
Dated: April 27, 1995
Diomedes L. Tam* Principal Accounting
Diomedes L. Tam Officer
Dated: April 27, 1995
Frank H. Abbott, III* Trustee
Frank H. Abbott, III Dated: April 27, 1995
Harris J. Ashton* Trustee
Harris J. Ashton Dated: April 27, 1995
S. Joseph Fortunato* Trustee
S. Joseph Fortunato Dated: April 27, 1995
David W. Garbellano* Trustee
David W. Garbellano Dated: April 27, 1995
Charles B. Johnson* Trustee
Charles B. Johnson Dated: April 27, 1995
Frank W. T. LaHaye* Trustee
Frank W. T. LaHaye Dated: April 27, 1995
Gordon S. Macklin* Trustee
Gordon S. Macklin Dated: April 27, 1995
*By/s/ Larry L. Greene
Larry L. Greene, Attorney-in-Fact
Pursuant to Powers of Attorney filed herewith
FRANKLIN TAX-FREE TRUST
REGISTRATION STATEMENT
EXHIBITS INDEX
EXHIBIT NO. DESCRIPTION LOCATION
EX-99.B1(i) Restated Agreement and Attached
Declaration of Trust dated
October 26, 1984
EX-99.B1(ii) Certificate of Amendment of Attached
Agreement and Declaration of
Trust dated July 16, 1991
EX-99.B1(iii) Certificate of Amendment of Attached
Agreement and Declaration of
Trust dated April 21, 1992
EX-99.B1(iv) Certificate of Amendment of Attached
Agreement and Declaration of
Trust dated December 14, 1993
EX-99.B1(v) Certificate of Amendment of Attached
Agreement and Declaration of
Trust dated March 21, 1995
EX-99.B2(i) By-Laws Attached
EX-99.B2(ii) Amendment to By-Laws dated Attached
December 8, 1987
EX-99.B2(iii) Amendments to By-Laws dated Attached
April 21, 1992
EX-99.B2(iv) Certificate of Amendment dated Attached
December 14, 1993
EX-99.B2(v) Certificate of Secretary dated Attached
February 28, 1994
EX-99.B5(i) Management Agreement between Attached
Registrant and Franklin
Advisers, Inc. dated December
1, 1986
EX-99.B6(i) Form of Amended and Restated Attached
Distribution Agreement between
Franklin/Templeton
Distributors, Inc.
EX-99.B6(ii) Form of Dealer Agreement *
between Franklin/Templeton
Distributors, Inc. and
securities dealers
EX-99.B8(i) Custodian Agreement between Attached
Registrant and Bank of America
NT & SA dated March 1, 1985
EX-99.B8(ii) Amendment to Custodian Attached
Agreement between Registrant
and Bank of America NT & SA
dated April 2, 1990
EX-99.B8(iii) Form of Custodian Agreements *
between Registrant and
Citibank Delaware
EX-99.B8(iv) Amendment to Custodian *
Agreement between Registrant
and Bank of America NT & SA
dated December 1, 1994
EX-99.B9(i) Agreement between Registrant Attached
and Financial Guaranty
Insurance Company dated March
8, 1985
EX-99.B9(ii) Amendment to Agreement between *
Registrant and Financial
Guaranty Insurance Company
EX-99.B10(i) Opinion and Consent dated Attached
April 21, 1995
EX-99.B11(i) Consent of Independent Attached
Auditors
EX-99.B13(i) Letter of Understanding dated Attached
September 21, 1992
EX-99.B13(ii) Letter of Understanding dated Attached
April 12, 1995
EX-99.B15(i) Class I shares Amended and Attached
Restated Distribution Plans
dated July 1, 1993
EX-99.B15(ii) Form of Class II shares Attached
Distribution Plan pursuant to
Rule 12b-1 on behalf of all
series of Franklin Tax-Free
Trust
EX-99.B16(i) Schedule for computation of Attached
performance quotation
EX-99.B17(i) Power of Attorney dated Attached
February 16, 1995
EX-99.B17(ii) Certificate of Secretary dated Attached
February 16, 1995
EX-27.B-1 Financial Data Schedule for Attached
Franklin Insured Tax-Free
Income Fund
EX-27.B-2 Financial Data Schedule for Attached
Franklin Massachusetts Insured
Tax-Free Income Fund
EX-27.B-3 Financial Data Schedule for Attached
Michigan Insured Tax-Free
Income Fund
EX-27.B-4 Financial Data Schedule for Attached
Minnesota Insured Tax-Free
Income Fund
EX-27.B-5 Financial Data Schedule for Attached
Franklin Ohio Insured Tax-Free
Income Fund
EX-27.B-6 Financial Data Schedule for Attached
Franklin Puerto Rico Insured
Tax-Free Income Fund
EX-27.B-7 Financial Data Schedule for Attached
Franklin High Yield Tax-Free
Income Fund
EX-27.B-8 Financial Data Schedule for Attached
Franklin Pennsylvania Tax-Free
Income Fund
EX-27.B-9 Financial Data Schedule for Attached
Franklin Colorado Tax-Free
Income Fund
EX-27.B-10 Financial Data Schedule for Attached
Franklin Georgia Tax-Free
Income Fund
EX-27.B-11 Financial Data Schedule for Attached
Franklin Missouri Tax-Free
Income Fund
EX-27.B-12 Financial Data Schedule for Attached
Franklin Oregon Tax-Free
Income Fund
EX-27.B-13 Financial Data Schedule for Attached
Franklin Texas Tax-Free Income
Fund
EX-27.B-14 Financial Data Schedule for Attached
Franklin Virginia Tax-Free
Income Fund
EX-27.B-15 Financial Data Schedule for Attached
Franklin Alabama Tax-Free
Income Fund
EX-27.B-16 Financial Data Schedule for Attached
Franklin Florida Tax-Free
Income Fund
EX-27.B-17 Financial Data Schedule for Attached
Franklin Indiana Tax-Free
Income Fund
EX-27.B-18 Financial Data Schedule for Attached
Franklin Louisiana Tax-Free
Income Fund
EX-27.B-19 Financial Data Schedule for Attached
Franklin North Carolina Tax-
Free Income Fund
EX-27.B-20 Financial Data Schedule for Attached
Franklin Arizona Tax-Free
Income Fund
EX-27.B-21 Financial Data Schedule for Attached
Franklin New Jersey Tax-Free
Income Fund
EX-27.B-22 Financial Data Schedule for Attached
Franklin Connecticut Tax-Free
Income Fund
EX-27.B-23 Financial Data Schedule for Attached
Franklin Maryland Tax-Free
Income Fund
EX-27.B-24 Financial Data Schedule for Attached
Franklin Kentucky Tax-Free
Income Fund
EX-27.B-25 Financial Data Schedule for Attached
Franklin Federal Intermediate
Term Tax-Free Income Fund
EX-27.B-26 Financial Data Schedule for Attached
Franklin Arizona Insured Tax-
Free Income Fund
EX-27.B-27 Financial Data Schedule for Attached
Franklin Florida Tax-Free
Income Fund
*Incorporated by Reference
AGREEMENT AND DECLARATION OF TRUST
of
FRANKLIN TAX-FREE TRUST
a Massuchusetts Trust
Dated: September 18, 1984
Amended: October 26, 1984
FRANKLIN TAX-FREE TRUST
AMENDED AND RESTATED
AGREEMENT AND DECLARATION OF TRUST
ARTICLE I Name and Definitions
1. Name
2. Definitions
(a) Trust
(b) Trustees
(c) Shares
(d) Shareholder
(e) 1940 Act
(f) Commission and Principal Underwriter
(g) Declaration of Trust
(h) By-Laws
(i) Series Company
(j) Series
ARTICLE II Purpose of Trust
ARTICLE III Shares
1. Division of Beneficial Interest
2. Ownership of Shares
3. Investments in the Trust
4. Status of Shares and Limitation of Personal Liability
5. Power of Trustees to Change Provisions Relating to
Shares
6. Establishment and Designation of Series
(a) Assets Belonging to Series
(b) Liabilities Belonging to Series
(c) Dividends, Distributions, Redemptions, and
Repurchases
(d) Voting
(e) Equality
(f) Fractions
(g) Exchange Privilege
(h) Combination of Series
(i) Elimination of Series
7. Indemnification of Shareholders
8. Initial Designation of Series
ARTICLE IV The Trustees
1. Number, Election and Tenure
2. Effect of Death, Resignation, etc. of a Trustee
3. Powers
4. Payment of Expenses by the Trust
5. Payment of Expenses by Shareholders
6. Ownership of Assets of the Trust
7. Service Contracts
ARTICLE V Shareholders' Voting Powers and Meetings
1. Voting Powers
2. Voting Power and Meetings
3. Quorum and Required Vote
4. Action by Written Consent
5. Record Dates
6. Additional Provisions
ARTICLE VI Net Asset Value, Distributions, and Redemptions
1. Determination of Net Asset Value, Net Income and
Distributions
2. Redemptions and Repurchases
3. Redemptions at the Option of the Trust
ARTICLE VII Compensation and Limitation of Liability of
Trustees
1. Compensation
2. Limitation of Liability
3. Indemnification
ARTICLE VIII Miscellaneous
1. Trustees, Shareholders, etc. Not Personally Liable;
Notice
2. Trustee's Good Faith Action, Expert Advice, No Bond or
Surety
3. Liability of Third Persons Dealing with Trustees
4. Termination of Trust or Series
5. Merger and Consolidation
6. Filing of Copies, References, Headings
7. Applicable Law
8. Amendments
9. Trust Only
10. Use of the Name "Franklin"
AMENDED AND RESTATED
AGREEMENT AND DECLARATION OF TRUST
OF
FRANKLIN TAX-FREE TRUST
THIS AMENDED AND RESTATED AGREEMENT AND DECLARATION OF TRUST
made at San Mateo, California this 26th day of October, 1984 by
the Trustees hereunder.
WHEREAS the Trustees desire and have agreed to manage all
property coming into their hands as trustees of a Massachusetts
business trust in accordance with the provisions hereinafter set
forth,
NOW, THEREFORE, the Trustees hereby direct that this Amended
and Restated Agreement and Declaration of Trust be filed with the
Secretary of The Commonwealth of Massachusetts and do hereby
declare that they will hold all cash, securities and other
assets, which they may from time to time acquire in any manner as
Trustees hereunder, IN TRUST, and manage and dispose of the same
upon the following terms and conditions for the pro rata benefit
of the holders of Shares in this Trust.
ARTICLE I
Name and Definitions
Section 1. Name. This Trust shall be known as the FRANKLIN
TAX-FREE TRUST and the Trustees shall conduct the business of the
Trust under that name or any other name as they may from time to
time determine.
Section 2. Definitions. Whenever used herein, unless
otherwise required by the context or specifically provided:
(a) The "Trust" refers to the Massachusetts business trust
established by this Agreement and Declaration of Trust, as
amended from time to time;
(b) "Trustees" refers to the Trustees of the Trust named in
Article IV hereof or elected or appointed in accordance with such
Article;
(c) "Shares" means the equal proportionate units of
interest into which the beneficial interest in the Trust or in
the Trust property belonging to any Series of the Trust (as the
context may require) shall be divided from time to time;
(d) "Shareholder" means a record owner of Shares;
(e) The "1940 Act" refers to the Investment Company Act of
1940 and the Rules and Regulations thereunder, all as amended
from time to time;
(f) The terms "Commission" and "Principal Underwriter"
shall have the meanings given them in the 1940 Act.
(g) "Declaration of Trust" shall mean this Agreement and
Declaration of Trust, as amended or restated from time to time;
(h) "By-Laws" shall mean the By-Laws of the Trust as
amended from time to time;
(i) "Series Company" refers to the form of registered open-
end investment company described in Section 18(f)(2) of the 1940
Act or in any successor statutory provision; and
(j) "Series" refers to each Series of Shares established and
designated under or in accordance with the provisions of Article
III.
ARTICLE II
Purpose of Trust
The purpose of the Trust is to provide investors a managed
investment company registered under the 1940 Act and investing
one or more portfolios primarily in securities and debt
instruments.
ARTICLE III
Shares
Section 1. Division of Beneficial Interest. The beneficial
interest in the Trust shall at all times be divided into an
unlimited number of Shares, without par value. Subject to the
provisions of Section 6 of this Article III, each Share shall
have voting rights as provided in Article V hereof, and holders
of the Shares of any Series shall be entitled to receive
dividends, when and as declared with respect thereto in the
manner provided in Article VI, Section 1 hereof. No Shares shall
have any priority or preference over any other Share of the same
Series with respect to dividends or distributions upon
termination of the Trust or of such Series made pursuant to
Article VIII, Section 4 hereof. All dividends and distributions
shall be made ratably among all Shareholders of a particular
Series from the assets belonging to such Series according to the
number of Shares of such Series held of record by such
Shareholder on the record date for any dividend or on the date of
termination, as the case may be. Shareholders shall have no
preemptive or other right to subscribe to any additional Shares
or other securities issued by the Trust or any Series. The
Trustees may from time to time divide or combine the Shares of
any particular Series into a greater or lesser number of Shares
of that Series without thereby changing the proportionate
beneficial interest of the Shares of that Series in the assets
belonging to that Series or in any way affecting the rights of
Shares of any other Series.
Section 2. Ownership of Shares. The ownership of Shares
shall be recorded on the books of the Trust or a transfer or
similar agent for the Trust, which books shall be maintained
separately for the Shares of each Series. No certificates
certifying the ownership of Shares shall be issued except as the
Trustees may otherwise determine from time to time. The Trustees
may make such rules as they consider appropriate for the transfer
of Shares of each Series and similar matters. The record books
of the Trust as kept by the Trust or any transfer or similar
agent, as the case may be, shall be conclusive as to who are the
Shareholders of each Series and as to the number of Shares of
each Series held from time to time by each.
Section 3. Investments in the Trust. The Trustees may
accept investments in the Trust from such persons, at such times,
on such terms, and for such consideration as they from time to
time authorize.
Section 4. Status of Shares and Limitation of Personal
Liability. Shares shall be deemed to be personal property giving
only the rights provided in this instrument. Every Shareholder
by virtue of having become a Shareholder shall be held to have
expressly assented and agreed to the terms hereof and to have
become a party hereto. The death of a Shareholder during the
existence of the Trust shall not operate to terminate the Trust,
nor entitle the representative of any deceased Shareholder to an
accounting or to take any action in court or elsewhere against
the Trust or the Trustees, but entitles such representative only
to the rights of said deceased Shareholder under this Trust.
Ownership of Shares shall not entitle the Shareholder to any
title in or to the whole or any part of the Trust property or
right to call for a partition or division of the same or for an
accounting, nor shall the ownership of Shares constitute the
Shareholders as partners. Neither the Trust nor the Trustees,
nor any officer, employee or agent of the Trust shall have any
power to bind personally any Shareholders, nor, except as
specifically provided herein, to call upon any Shareholder for
the payment of any sum of money or assessment whatsoever other
than such as the Shareholder may at any time personally agree to
pay.
Section 5. Power of Trustees to Change Provisions Relating
to Shares. Notwithstanding any other provision of this
Declaration of Trust and without limiting the power of the
Trustees to amend the Declaration of Trust as provided elsewhere
herein, the Trustees shall have the power to amend this
Declaration of Trust, at any time and from time to time, in such
manner as the Trustees may determine in their sole discretion,
without the need for Shareholder action, so as to add to, delete,
replace or otherwise modify any provisions relating to the Shares
contained in this Declaration of Trust, provided that before
adopting any such amendment without Shareholder approval the
Trustees shall determine that it is consistent with the fair and
equitable treatment of all Shareholders or that Shareholder
approval is not otherwise required by the 1940 Act or other
applicable law.
Without limiting the generality of the foregoing, the
Trustees may, for the above-stated purposes, amend the
Declaration of Trust to:
(a) create one or more Series of Shares (in addition to any
Series already existing or otherwise) with such rights and
preferences and such eligibility requirements for investment
therein as the Trustees shall determine and reclassify any or all
outstanding Shares as shares of particular Series in accordance
with such eligibility requirements;
(b) amend any of the provisions set forth in paragraphs (a)
through (i) of Section 6 of this Article III;
(c) combine one or more Series of Shares into a single
Series on such terms and conditions as the Trustees shall
determine;
(d) change or eliminate any eligibility requirements for
investment in Shares of any Series, including without limitation,
to provide for the issue of Shares of any Series in connection
with any merger or consolidation of the Trust with another trust
or company or any acquisition by the Trust of part or all of the
assets of another trust or investment company;
(e) change the designation of any Series of Shares;
(f) change the method of allocating dividends among the
various Series of Shares;
(g) allocate any specific assets or liabilities of the Trust
or any specific items of income or expense of the Trust to one or
more Series of Shares;
(h) specifically allocate assets to any or all Series of
Shares or create one or more additional Series of Shares which
are preferred over all other Series of Shares in respect of
assets specifically allocated thereto or any dividends paid by
the Trust with respect to any net income, however determined,
earned from the investment and reinvestment of any assets so
allocated or otherwise and provide for any special voting or
other rights with respect to such Series.
Section 6. Establishment and Designation of Series. Except
as set forth in Section 8 of this Article III the establishment
and designation of any other Series of Shares shall be effective
upon the resolution by a majority of the then Trustees, setting
forth such establishment and designation and the relative rights
and preferences of such Series, or as otherwise provided in such
resolution. Such establishment and designation shall be set forth
in an amendment to this Declaration of Trust as provided in
Section 8 of Article VIII.
Shares of each Series established pursuant to this Section
6, unless otherwise provided in the resolution establishing such
Series, shall have the following relative rights and preferences:
(a) Assets Belonging to Series. All consideration received
by the Trust for the issue or sale of Shares of a particular
Series, together with all assets in which such consideration is
invested or reinvested, all income, earnings, profits, and
proceeds thereof from whatever source derived, including, without
limitation, any proceeds derived from the sale, exchange or
liquidation of such assets, and any funds or payments derived
from any reinvestment of such proceeds in whatever form the same
may be, shall irrevocably belong to that Series for all purposes,
subject only to the rights of creditors, and shall be so recorded
upon the books of account of the Trust. Such consideration,
assets, income, earnings, profits and proceeds thereof, from
whatever source derived, including, without limitation, any
proceeds derived from the sale, exchange or liquidation of such
assets, and any funds or payments derived from any reinvestment
of such proceeds, in whatever form the same may be, are herein
referred to as "assets belonging to" that Series. In the event
that there are any assets, income, earnings, profits and proceeds
thereof, funds or payments which are not readily identifiable as
belonging to any particular Series (collectively "General
Assets"), the Trustees shall allocate such General Assets to,
between or among any one or more of the Series in such manner and
on such basis as they, in their sole discretion, deem fair and
equitable, and any General Asset so allocated to a particular
Series shall belong to that Series. Each such allocation by the
Trustees shall be conclusive and binding upon the Shareholders of
all Series for all purposes.
(b) Liabilities Belonging to Series. The assets belonging to
each particular Series shall be charged with the liabilities of
the Trust in respect to that Series and all expenses, costs,
charges and reserves attributable to that Series, and any general
liabilities of the Trust which are not readily identifiable as
belonging to any particular Series shall be allocated and charged
by the Trustees to and among any one or more of the Series in
such manner and on such basis as the Trustees in their sole
discretion deem fair and equitable. The liabilities, expenses,
costs, charges, and reserves so charged to a Series are herein
referred to as "liabilities belonging to" that Series. Each
allocation of liabilities, expenses, costs, charges and reserves
by the Trustee shall be conclusive and binding upon the holders
of all Series for all purposes. Under no circumstances shall the
assets allocated or belonging to any particular Series be charged
with liabilities attributable to any other Series. All persons
who have extended credit which has been allocated to a particular
Series, or who have a claim or contract which has been allocated
to any particular Series, shall look only to the assets of that
particular Series for payment of such credit, claim, or contract.
(c) Dividends, Distributions, Redemptions, and Repurchases.
Notwithstanding any other provisions of this Declaration,
including, without limitation, Article VI, no dividend or
distribution (including, without limitation, any distribution
paid upon termination of the Trust or of any Series) with respect
to, nor any redemption or repurchase of, the Shares of any Series
shall be effected by the Trust other than from the assets
belonging to such Series, nor, except as specifically provided in
Section 7 of this Article III, shall any Shareholder of any
particular Series otherwise have any right or claim against the
assets belonging to any other Series except to the extent that
such Shareholder has such a right or claim hereunder as a
Shareholder of such other Series. The Trustees shall have full
discretion, to the extent not inconsistent with the 1940 Act, to
determine which items shall be treated as income and which items
as capital; and each such determination and allocation shall be
conclusive and binding upon the Shareholders.
(d) Voting. All Shares of the Trust entitled to vote on a
matter shall vote separately by Series. That is, the
Shareholders of each Series shall have the right to approve or
disapprove matters affecting the Trust and each respective Series
as if the Series were separate companies. There are, however, two
exceptions to voting by separate Series. First, if the 1940 Act
requires all Shares of the Trust to be voted in the aggregate
without differentiation between the separate Series, then all the
Trust's Shares shall be entitled to vote on a one-vote-per-Share
basis. Second, if any matter affects only the interests of some
but not all Series, then only such affected Series shall be
entitled to vote on the matter.
(e) Equality. All the Shares of each particular Series
shall represent an equal proportionate interest in the assets
belonging to that Series (subject to the liabilities belonging to
that Series), and each Share of any particular Series shall be
equal to each other Share of that Series.
(f) Fractions. Any fractional Share of a Series shall carry
proportionately all the rights and obligations of a whole share
of that Series, including rights with respect to voting, receipt
of dividends and distributions, redemption of Shares and
termination of the Trust.
(g) Exchange Privilege. The Trustees shall have the
authority to provide that the holders of Shares of any Series
shall have the right to exchange said Shares for Shares of one or
more other Series of Shares in accordance with such requirements
and procedures as may be established by the Trustees.
(h) Combination of Series. The Trustees shall have the
authority, without the approval of the Shareholders of any Series
unless otherwise required by applicable law, to combine the
assets and liabilities belonging to any two or more Series into
assets and liabilities belonging to a single Series.
(i) Elimination of Series. At any time that there are no
Shares outstanding of any particular Series previously
established and designated, the Trustees may amend this
Declaration of Trust to abolish that Series and to rescind the
establishment and designation thereof, such amendment to be
effected in the manner provided in Section 5 of this Article III.
Section 7. Indemnification of Shareholders. In case any
Shareholder or former Shareholder shall be held to be personally
liable solely by reason of his or her being or having been a
Shareholder and not because of his or her acts or omissions or
for some other reason, the Shareholder or former Shareholder (or
his or her heirs, executors, administrators, or other legal
representatives or in the case of a corporation or other entity,
its corporate or other general successor) shall be entitled out
of the assets of the Trust to be held harmless from and
indemnified against all loss and expense arising from such
liability.
Section 8. Initial Designation of Series. Subject to the
relative rights and preferences and other terms of this Agreement
and Declaration of Trust, the Trustees authorize the
establishment of ten Series to be designated as follows: The
Massachusetts Insured Fund, The Michigan Insured Fund, The
Minnesota Insured Fund, the Missouri Insured Fund, The National
Insured Fund, The New Jersey Insured Fund, The Ohio Insured Fund,
The Pennsylvania insured Fund, The Puerto Rico Fund and the Rhode
Island Insured Fund.
ARTICLE IV
The Trustees
Section 1. Number, Election and Tenure. The number of
Trustees shall be eight (8), unless such number shall be changed
from time to time by a written instrument signed by a majority of
the Trustees, provided, however, that the number of Trustees
shall in no event be less than three nor more than 15. The
initial Trustees shall be Frank H. Abbott, III, Harris J. Ashton,
Zadoc W. Brown, Samuel G. Hanson, Henry L. Jamieson, Charles B.
Johnson, Rupert H. Johnson, Jr., and Frank W.T. LaHaye. The
Trustees may fill vacancies in the Trustees or remove Trustees
with or without cause. Each Trustee shall serve during the
continued lifetime of the Trust until he dies, resigns or is
removed, or, if sooner, until the next meeting of Shareholders
called for the purpose of electing Trustees and until the
election and qualification of his successor. Any Trustee may
resign at any time by written instrument signed by him and
delivered to any officer of the Trust or to a meeting of the
Trustees. Such resignation shall be effective upon receipt
unless specified to be effective at some other time. Except to
the extent expressly provided in a written agreement with the
Trust, no Trustee resigning and no Trustee removed shall have any
right to any compensation for any period following his
resignation or removal, or any right to damages on account of
such removal. The Shareholders may fix the number of Trustees
and elect Trustees at any meeting of Shareholders called by the
Trustees for that purpose.
Section 2. Effect of Death, Resignation, etc. of a Trustee.
The death, declination, resignation, retirement, removal, or
incapacity of the Trustees, or any of them, shall not operate to
annul the Trust or to revoke any existing agency created pursuant
to the terms of this Declaration of Trust. Whenever a vacancy in
the number of Trustees shall occur, until such vacancy is filled
as provided in Article IV, Section 1, the Trustees in office,
regardless of their number, shall have all the powers granted to
the Trustees and shall discharge all the duties imposed upon the
Trustees by this Declaration of Trust. A written instrument
certifying the existence of such vacancy signed by a majority of
the Trustees shall be conclusive evidence of such vacancy. In
the event of the death, declination, resignation, retirement,
removal, or incapacity of all the then Trustees within a short
period of time and without the opportunity for at least one
Trustee being able to appoint additional Trustees to fill
vacancies, the Trust's investment adviser or investment advisers
jointly, if there is more than one are empowered to appoint new
Trustees.
Section 3. Powers. Subject to the provisions of this
Declaration of Trust, the business of the Trust shall be managed
by the Trustees, and they shall have all powers necessary or
convenient to carry out that responsibility including the power
to engage in securities transactions of all kinds on behalf of
the Trust. Without limiting the foregoing, the Trustees may
adopt By-Laws not inconsistent with this Declaration of Trust
providing for the regulation and management of the affairs of the
Trust and may amend and repeal them to the extent that such By-
Laws do not reserve that right to the Shareholders; they may fill
vacancies in or remove from their number, and may elect and
remove such officers and appoint and terminate such agents as
they consider appropriate; they may appoint from their own number
and establish and terminate one or more committees consisting of
two or more Trustees which may exercise the powers and authority
of the Trustees to the extent that the Trustees determine; they
may employ one or more custodians of the assets of the Trust and
may authorize such custodians to employ subcustodians and to
deposit all or any part of such assets in a system or systems for
the central handling of securities or with a Federal Reserve
Bank, retain a transfer agent or a Shareholder servicing agent,
or both, provide for the distribution of Shares by the Trust,
through one or more Principal Underwriters or otherwise, set
record dates for the determination of Shareholders with respect
to various matters, and in general delegate such authority as
they consider desirable to any officer of the Trust, to any
committee of the Trustees and to any agent or employee of the
Trust or to any such custodian, transfer or Shareholder servicing
agent, or Principal Underwriter. Any determination as to what is
in the interests of the Trust made by the Trustees in good faith
shall be conclusive. In construing the provisions of this
Declaration of Trust, the presumption shall be in favor of a
grant of power to the Trustees.
Without limiting the foregoing, the Trustees shall have
power and authority:
(a) To invest and reinvest cash, to hold cash uninvested,
and to subscribe for, invest in, reinvest in, purchase or
otherwise acquire, own, hold, pledge, sell, assign, transfer,
exchange, distribute, lend or otherwise deal in or dispose of
contracts for the future acquisition or delivery of fixed income
or other securities, and securities of every nature and kind,
including, without limitation, all types of bonds, debentures,
stocks, negotiable or non-negotiable instruments, obligations,
evidences of indebtedness, certificates of deposit or
indebtedness, commercial paper, repurchase agreements, bankers'
acceptances, and other securities of any kind, issued, created,
guaranteed, or sponsored by any and all persons, including,
without limitation, states, territories, and possessions of the
United States and the District of Columbia and any political
subdivision, agency, or instrumentality thereof, any foreign
government or any political subdivision of the U.S. Government or
any foreign government, or any international instrumentality, or
by any bank or savings institution, or by any corporation or
organization organized under the laws of the United States or of
any state, territory, or possession thereof, or by any
corporation or organization organized under any foreign law, or
in "when issued" contracts for any such securities, to change the
investments of the assets of the Trust; and to exercise any and
all rights, powers, and privileges of ownership or interest in
respect of any and all such investments of every kind and
description, including, without limitation, the right to consent
and otherwise act with respect thereto, with power to designate
one or more persons, firms, associations, or corporations to
exercise any of said rights, powers, and privileges in respect of
any of said instruments;
(b) To sell, exchange, lend, pledge, mortgage, hypothecate,
lease, or write options with respect to or otherwise deal in any
property rights relating to any or all of the assets of the
Trust;
(c) To vote or give assent, or exercise any rights of
ownership, with respect to stock or other securities or property;
and to execute and deliver proxies or powers of attorney to such
person or persons as the Trustees shall deem proper, granting to
such person or persons such power and discretion with relation to
securities or property as the Trustees shall deem proper;
(d) To exercise powers and right of subscription or
otherwise which in any manner arise out of ownership of
securities;
(e) To hold any security or property in a form not
indicating any trust, whether in bearer, unregistered or other
negotiable form, or in its own name or in the name of a custodian
or subcustodian or a nominee or nominees or otherwise;
(f) To consent to or participate in any plan for the
reorganization, consolidation or merger of any corporation or
issuer of any security which is held in the Trust; to consent to
any contract, lease, mortgage, purchase or sale of property by
such corporation or issuer; and to pay calls or subscriptions
with respect to any security held in the Trust;
(g) To join with other security holders in acting through a
committee, depositary, voting trustee or otherwise, and in that
connection to deposit any security with, or transfer any security
to, any such committee, depositary or trustee, and to delegate to
them such power and authority with relation to any security
(whether or not so deposited or transferred) as the Trustees
shall deem proper, and to agree to pay, and to pay, such portion
of the expenses and compensation of such committee, depositary or
trustee as the Trustees shall deem proper;
(h) To compromise, arbitrate or otherwise adjust claims in
favor of or against the Trust or any matter in controversy,
including but not limited to claims for taxes;
(i) To enter into joint ventures, general or limited
partnerships and any other combinations or associations;
(j) To borrow funds or other property;
(k) To endorse or guarantee the payment of any notes or
other obligations of any person; to make contracts of guaranty or
suretyship, or otherwise assume liability for payment thereof;
(l) To purchase and pay for entirely out of Trust property
such insurance as they may deem necessary or appropriate for the
conduct of the business, including, without limitation, insurance
policies insuring the assets of the Trust or payment of
distributions and principal on its portfolio investments, and
insurance policies insuring the Shareholders, Trustees, officers,
employees, agents, investment advisers, principal underwriters,
or independent contractors of the Trust, individually against all
claims and liabilities of every nature arising by reason of
holding, being or having held any such office or position, or by
reason of any action alleged to have been taken or omitted by any
such person as Trustee, officer employee, agent, investment
adviser, principal underwriter, or independent contractor,
including any action taken or omitted that may be determined to
constitute negligence, whether or not the Trust would have the
power to indemnify such person against liability; and
(m) to pay pensions as deemed appropriate by the Trustees
and to adopt, establish and carry out pension, profit-sharing,
share bonus, share purchase, savings, thrift and other
retirement, incentive and benefit plans, trusts and provisions,
including the purchasing of life insurance and annuity contracts
as a means of providing such retirement and other benefits, for
any or all of the Trustees, officers, employees and agents of the
Trust.
The Trustees shall not be limited to investing in
obligations maturing before the possible termination of the Trust
or one or more of its Series. The Trustees shall not in any way
be bound or limited by any present or future law or custom in
regard to investment by fiduciaries. The Trustees shall not be
required to obtain any court order to deal with any assets of the
Trust or take any other action hereunder.
Section 4. Payment of Expenses by the Trust. The Trustees
are authorized to pay or cause to be paid out of the principal or
income of the Trust, or partly out of the principal and partly
out of income, as they deem fair, all expenses, fees, charges,
taxes and liabilities incurred or arising in connection with the
Trust, or in connection with the management thereof, including,
but not limited to, the Trustees' compensation and such expenses
and charges for the services of the Trust's officers, employees,
investment adviser or manager, principal underwriter, auditors,
counsel, custodian, transfer agent, Shareholder servicing agent,
and such other agents or independent contractors and such other
expenses and charges as the Trustees may deem necessary or proper
to incur.
Section 5. Payment of Expenses by Shareholders. The
Trustees shall have the power, as frequently as they may
determine, to cause each Shareholder, or each Shareholder of any
particular Series, to pay directly, in advance or arrears, for
charges of the Trust's custodian or transfer, Shareholder
servicing or similar agent, an amount fixed from time to time by
the Trustees, by setting off such charges due from such
Shareholder from declared but unpaid dividends owed such
Shareholder and/or by reducing the number of shares in the
account of such Shareholder by that number of full and/or
fractional Shares which represents the outstanding amount of such
charges due from such Shareholder.
Section 6. Ownership of Assets of the Trust. Title to all of
the assets of the Trust shall at all times be considered as
vested in the Trustees.
Section 7. Service Contracts
(a) Subject to such requirements and restrictions as may be
set forth in the By-Laws, the Trustees may, at any time and from
time to time, contract for exclusive or nonexclusive advisory
and/or management services for the Trust or for any Series with
Franklin Distributors, Inc. or any other corporation, trust,
association or other organization (the "Manager"); and any such
contract may contain such other terms as the Trustees may
determine, including without limitation, authority for the
Manager to determine from time to time without prior consultation
with the Trustees what investments shall be purchased, held, sold
or exchanged and what portion, if any, of the assets of the Trust
shall be held uninvested and to make changes in the Trust's
investments.
(b) The Trustees may also, at any time and from time to
time, contract with Franklin Distributors, Inc., the Manager, or
any other corporation, trust, association or other organization,
appointing it exclusive or nonexclusive distributor or Principal
Underwriter for the Shares of one or more of the Series. Every
such contract shall comply with such requirements and
restrictions as may be set forth in the By-Laws; and any such
contract may contain such other terms as the Trustees may
determine.
(c) The Trustees are also empowered, at any time and from
time to time, to contract with Franklin Administrative Services,
Inc., or any other corporations, trusts, associations or other
organizations, appointing it or them the transfer agent and/or
shareholder servicing agent for the Trust or one or more of its
Series. Every such contract shall comply with such requirements
and restrictions as may be set forth in the By-Laws or stipulated
by resolution of the Trustees.
(d)The fact that:
(i) any of the Shareholders, Trustees, or officers of
the Trust is a shareholder, director, officer, partner,
trustee, employee, manager, adviser, principal underwriter,
distributor or affiliate or agent of or for any corporation,
trust, association, or other organization, or for any parent
or affiliate of any organization with which an advisory or
management contract, or principal underwriter's or
distributor's contract, or transfer, shareholder servicing
or other agency contract may have been or may hereafter be
made, or that any such organization, or any parent or
affiliate thereof, is a Shareholder or has an interest in
the Trust, or that
(ii) any corporation, trust, association or other
organization with which an advisory or management contract
or principal underwriter's or distributor's contract, or
transfer, shareholder servicing or other agency contract may
have been or may hereafter be made also has an advisory or
management contract, or principal underwriter's or
distributor's contract, or transfer, Shareholder servicing
or other agency contract with one or more other
corporations, trust, associations, or other organizations,
or has other business or interests,
shall not affect the validity of any such contract or disqualify
any Shareholder, Trustee or officer of the Trust from voting upon
or executing the same or create any liability or accountability
to the Trust or its Shareholders.
ARTICLE V
Shareholders' Voting Powers and Meetings
Section 1. Voting Powers. Subject to the provisions of
Article III, Section 6(d), the Shareholders shall have power to
vote only (i) for the election of Trustees as provided in Article
IV, Section 1, (ii) to the same extent as the stockholders of a
California business corporation as to whether or not a court
action, proceeding or claim should or should not be brought or
maintained derivatively or as a class action on behalf of the
Trust or the Shareholders, (iii) with respect to the termination
of the Trust or any Series to the extent and as provided in
Article VIII, Section 4, and (iv) with respect to such additional
matters relating to the Trust as may be required by this
Declaration of Trust, the By-Laws or any registration of the
Trust with the Commission (or any successor agency) or any state,
or as the Trustees may consider necessary or desirable. Each
whole Share shall be entitled to one vote as to any matter on
which it is entitled to vote and each fractional Share shall be
entitled to a proportionate fractional vote. There shall be no
cumulative voting in the election of Trustees. Shares may be
voted in person or by proxy. A proxy with respect to Shares held
in the name of two or more persons shall be valid if executed by
any one of them unless at or prior to exercise of the proxy the
Trust receives a specific written notice to the contrary from any
one of them. A proxy purporting to be executed by or on behalf
of a Shareholder shall be deemed valid unless challenged at or
prior to its exercise and the burden of proving invalidity shall
rest on the challenger. At any time when no Shares of a Series
are outstanding, the Trustees may exercise all rights of
Shareholders of that Series with respect to matters affecting
that Series, take any action required by law, this Declaration of
Trust or the By-Laws to be taken by the Shareholders.
Section 2. Voting Power and Meetings. Meetings of the
Shareholders may be called by the Trustees for the purpose of
electing Trustees as provided in Article IV, Section 1 and for
such other purposes as may be prescribed by law, by this
Declaration of Trust or by the By-Laws. Meetings of the
Shareholders may also be called by the Trustees from time to time
for the purpose of taking action upon any other matter deemed by
the Trustees to be necessary or desirable. A meeting of
Shareholders may be held at any place designated by the Trustees.
Written notice of any meeting of Shareholders shall be given or
caused to be given by the Trustees by mailing such notice at
least seven days before such meeting, postage prepaid, stating
the time and place of the meeting, to each Shareholder at the
Shareholder's address as it appears on the records of the Trust.
Whenever notice of a meeting is required to be given to a
Shareholder under this Declaration of Trust or the By-Laws, a
written waiver thereof, executed before or after the meeting by
such Shareholder or his attorney thereunto authorized and filed
with the records of the meeting, shall be deemed equivalent to
such notice.
Section 3. Quorum and Required Vote. Except when a larger
quorum is required by applicable law, by the By-Laws or by this
Declaration of Trust, forty percent (40%) of the Shares entitled
to vote shall constitute a quorum at a Shareholders' meeting.
When any one or more Series is to vote as a single class separate
from any other Shares which are to vote on the same matters as a
separate class or classes, forty percent (40%) of the Shares of
each such Series entitled to vote shall constitute a quorum at a
Shareholder's meeting of that Series. Any meeting of
Shareholders may be adjourned from time to time by a majority of
the votes properly cast upon the question, whether or not a
quorum is present, and the meeting may be held as adjourned
within a reasonable time after the date set for the original
meeting without further notice. Subject to the provisions of
Article III, Section 6(d), when a quorum is present at any
meeting, a majority of the Shares voted shall decide any
questions and a plurality shall elect a Trustee, except when a
larger vote is required by any provision of this Declaration of
Trust or the By-Laws or by applicable law.
Section 4. Action by Written Consent. Any action taken by
Shareholders may be taken without a meeting if Shareholders
holding a majority of the Shares entitled to vote on the matter
(or such larger proportion thereof as shall be required by any
express provision of this Declaration of Trust or by the By-Laws)
and holding a majority (or such larger proportion as aforesaid)
of the Shares of any Series entitled to vote separately on the
matter consent to the action in writing and such written consents
are filed with the records of the meetings of Shareholders. Such
consent shall be treated for all purposes as a vote taken at a
meeting of Shareholders.
Section 5. Record Dates. For the purpose of determining
the Shareholders of any Series who are entitled to vote or act at
any meeting or any adjournment thereof, the Trustees may from
time to time fix a time, which shall be not more than 75 days
before the date of any meeting of Shareholders, as the record
date for determining the Shareholders of such Series having the
right to notice of and to vote at such meeting and any
adjournment thereof, and in such case only Shareholders of record
on such record date shall have such right, notwithstanding any
transfer of shares on the books of the Trust after the record
date. For the purpose of determining the Shareholders of any
Series who are entitled to receive payment of any dividend or of
any other distribution, the Trustees may from time to time fix a
date, which shall be before the date for the payment of such
dividend or such other payment, as the record date for
determining the Shareholders of such Series having the right to
receive such dividend or distribution. Without fixing a record
date the Trustees may for voting and/or distribution purposes
close the register or transfer books for one or more Series for
all or any part of the period between a record date and a meeting
of Shareholders or the payment of a distribution. Nothing in
this section shall be construed as precluding the Trustees from
setting different record dates for different Series.
Section 6. Additional Provisions. The By-Laws may include
further provisions for Shareholders' votes and meetings and
related matters.
ARTICLE VI
Net Asset Value, Distributions, and Redemptions
Section 1. Determination of Net Asset Value, Net Income,
and Distributions. Subject to Article III, Section 6 hereof, the
Trustees, in their absolute discretion, may prescribe and shall
set forth in the By-Laws or in a duly adopted vote of the
Trustees such bases and time for determining the per Share or net
asset value of the Shares of any Series or net income
attributable to the Shares of any Series, or the declaration and
payment of dividends and distributions on the Shares of any
Series, as they may deem necessary or desirable.
Section 2. Redemptions and Repurchases. The Trust shall
purchase such Shares as are offered by any Shareholder for
redemption, upon the presentation of a proper instrument of
transfer together with a request directed to the Trust or a
person designated by the Trust that the Trust purchase such
Shares or in accordance with such other procedures for redemption
as the Trustees may from time to time authorize; and the Trust
will pay therefor the net asset value thereof, as determined in
accordance with the By-Laws and applicable law, next determined.
Payment for said Shares shall be made by the Trust to the
Shareholder within seven days after the date on which the request
is made in proper form. The obligation set forth in this Section
2 is subject to the provision that in the event that any time the
New York Stock Exchange is closed for other than weekends or
holidays, or if permitted by the rules of the Commission during
periods when trading on the Exchange is restricted or during any
emergency which makes it impracticable for the Trust to dispose
of the investments of the applicable Series or to determine
fairly the value of the net assets belonging to such Series or
during any other period permitted by order of the Commission for
the protection of investors, such obligations may be suspended or
postponed by the Trustees.
The redemption price may in any case or cases be paid wholly
or partly in kind if the Trustees determine that such payment is
advisable in the interest of the remaining Shareholders of the
Series for which the Shares are being redeemed. Subject to the
foregoing, the fair value, selection and quantity of securities
or other property so paid or delivered as all or part of the
redemption price may be determined by or under authority of the
Trustees. In no case shall the Trust be liable for any delay of
any corporation or other person in transferring securities
selected for delivery as all or part of any payment in kind.
Section 3. Redemptions at the Option of the Trust. The
Trust shall have the right at its option and at any time to
redeem Shares of any Shareholder at the net asset value thereof
as described in Section 1 of this Article VI: (i) if at such
time such Shareholder owns Shares of any Series having an
aggregate net asset value of less than an amount, not to exceed
$1,000, determined from time to time by the Trustees; or (ii) to
the extent that such Shareholder owns Shares equal to or in
excess of a percentage determined from time to time by the
Trustees of the outstanding Shares of the Trust or of any Series.
ARTICLE VII
Compensation and Limitation of Liability of Trustees
Section 1. Compensation. The Trustees as such shall be
entitled to reasonable compensation from the Trust, and they may
fix the amount of such compensation. Nothing herein shall in any
way prevent the employment of any Trustee for advisory,
management, legal, accounting, investment banking or other
services and payment for the same by the Trust.
Section 2. Limitation of Liability. The Trustees shall not
be responsible or liable in any event for any neglect or
wrongdoing of any officer, agent, employee, manager or Principal
Underwriter of the Trust, nor shall any Trustee be responsible
for the act or omission of any other Trustee, but nothing herein
contained shall protect any Trustee against any liability to
which he would otherwise be subject by reason of wilful
misfeasance, bad faith, gross negligence or reckless disregard of
the duties involved in the conduct of his office.
Every note, bond, contract, instrument, certificate or
undertaking and every other act or thing whatsoever issued,
executed or done by or on behalf of the Trust or the Trustees or
any of them in connection with the Trust shall be conclusively
deemed to have been issued, executed or done only in or with
respect to their or his capacity as Trustees or Trustee, and such
Trustees or Trustee shall not be personally liable thereon.
Section 3. Indemnification. The Trustees shall be entitled
and empowered to the fullest extent permitted by law to purchase
insurance for and to provide by resolution or in the By-Laws for
indemnification out of Trust assets for liability and for all
expenses reasonably incurred or paid or expected to be paid by a
Trustee or officer in connection with any claim, action, suit or
proceeding in which he becomes involved by virtue of his capacity
or former capacity with the Trust. The provisions, including any
exceptions and limitations concerning indemnification, may be set
forth in detail in the By-Laws or in a resolution of the
Trustees.
ARTICLE VIII
Miscellaneous
Section 1. Trustees, Shareholders, etc. Not Personally
Liable; Notice. All persons extending credit to, contracting
with or having any claim against the Trust or any Series shall
look only to the assets of the Trust, or, to the extent that the
liability of the Trust may have been expressly limited by
contract to the assets of a particular Series, only to the assets
belonging to the relevant Series, for payment under such credit,
contract or claim; and neither the Shareholders nor the Trustees,
nor any of the Trust's officers, employees or agents, whether
past, present or future, shall be personally liable therefor.
Nothing in this Declaration of Trust shall protect any Trustee
against any liability to which such Trustee would otherwise be
subject by reason or wilful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the
conduct of the office of Trustee.
Every note, bond, contract, instrument, certificate or
undertaking made or issued on behalf of the Trust by the
Trustees, by any officers or officer or otherwise may include a
notice that this Declaration of Trust is on file with the
Secretary of The Commonwealth of Massachusetts and may recite
that the note, bond, contract, instrument, certificate, or
undertaking was executed or made by or on behalf of the Trust or
by them as Trustee or Trustees or as officers or officer or
otherwise and not individually and that the obligations of such
instrument are not binding upon any of them or the Shareholders
individually but are binding only upon the assets and property of
the Trust or upon the assets belonging to the Series for the
benefit of which the Trustees have caused the note, bond,
contract, instrument, certificate or undertaking to be made or
issued, and may contain such further recital as he or they may
deem appropriate, but the omission of any such recital shall not
operate to bind any Trustee or Trustees or officer or officers or
Shareholders or any other person individually.
Section 2. Trustee's Good Faith Action, Expert Advice, No
Bond or Surety. The exercise by the Trustees of their powers and
discretions hereunder shall be binding upon everyone interested.
A Trustee shall be liable for his own wilful misfeasance, bad
faith, gross negligence or reckless disregard of the duties
involved in the conduct of the office of Trustee, and for nothing
else, and shall not be liable for errors of judgment or mistakes
of fact or law. The Trustees may take advice of counsel or other
experts with respect to the meaning and operation of this
Declaration of Trust, and shall be under no liability for any act
or omission in accordance with such advice or for failing to
follow such advice. The Trustees shall not be required to give
any bond as such, nor any surety if a bond is required.
Section 3. Liability of Third Persons Dealing with
Trustees. No person dealing with the Trustees shall be bound to
make any inquiry concerning the validity of any transaction made
or to be made by the Trustees or to see to the application of any
payments made or property transferred to the Trust or upon its
order.
Section 4. Termination of Trust or Series. Unless
terminated as provided herein, the Trust shall continue without
limitation of time. The Trust may be terminated at any time by
vote of at least two-thirds (66-2/3%) of the Shares of each
Series entitled to vote, voting separately by Series, or by the
Trustees by written notice to the Shareholders. Any Series may be
terminated at any time by vote of at least two-thirds (66- 2/3%)
of the Shares of that Series or by the Trustees by written notice
to the Shareholders of that Series.
Upon termination of the Trust (or any Series, as the case
may be), after paying or otherwise providing for all charges,
taxes, expenses and liabilities belonging, severally, to each
Series (or the applicable Series, as the case may be), whether
due or accrued or anticipated as may be determined by the
Trustees, the Trust shall, in accordance with such procedures as
the Trustees consider appropriate, reduce the remaining assets
belonging, severally, to each Series (or the applicable Series,
as the case may be), to distributable form in cash or shares or
other securities, or any combination thereof, and distribute the
proceeds belonging to each Series (or the applicable Series, as
the case may be), to the Shareholders of that Series, as a
Series, ratably according to the number of Shares of that Series
held by the several Shareholders on the date of termination.
Section 5. Merger and Consolidation. The Trustees may
cause the Trust or one or more of its Series to be merged into or
consolidated with another Trust or company or the Shares
exchanged under or pursuant to any state or Federal statute, if
any, or otherwise to the extent permitted by law. Such merger or
consolidation or share exchange must be authorized by vote of a
majority of the outstanding Shares of the Trust as a whole or any
affected Series, as may be applicable; provided that in all
respects not governed by statute or applicable law, the Trustees
shall have power to prescribe the procedure necessary or
appropriate to accomplish a sale of assets, merger or
consolidation.
Section 6. Filing of Copies, References, Headings. The original
or a copy of this instrument and of each amendment hereto shall
be kept at the office of the Trust where it may be inspected by
any Shareholder. A copy of this instrument and of each amendment
hereto shall be filed by the Trust with the Secretary of The
Commonwealth of Massachusetts and with any other governmental
office where such filing may from time to time be required.
Anyone dealing with the Trust may rely on a certificate by an
officer of the Trust as to whether or not any such amendments
have been made and as to any matters in connection with the Trust
hereunder; and, with the same effect as if it were the original,
may rely on a copy certified by an officer of the Trust to be a
copy of this instrument or of any such amendments. In this
instrument and in any such amendment, references to this
instrument, and all expressions like "herein", "hereof" and
"hereunder", shall be deemed to refer to this instrument as
amended or affected by any such amendments. Headings are placed
herein for convenience of reference only and shall not be taken
as a part hereof or control or affect the meaning, construction
or effect of this instrument. This instrument may be executed in
any number of counterparts each of which shall be deemed an
original.
Section 7. Applicable Law. This Agreement and Declaration
of Trust is created under and is to be governed by and construed
and administered according to the laws of The Commonwealth of
Massachusetts. The Trust shall be of the type commonly called a
Massachusetts business trust, and without limiting the provisions
hereof, the Trust may exercise all powers which are ordinarily
exercised by such a trust.
Section 8. Amendments. This Declaration of Trust may be
amended at any time by an instrument in writing signed by a
majority of the then Trustees.
Section 9. Trust Only. It is the intention of the Trustees
to create only the relationship of Trustee and beneficiary
between the Trustees and each Shareholder from time to time. It
is not the intention of the Trustees to create a general
partnership, limited partnership, joint stock association,
corporation, bailment, or any form of legal relationship other
than a trust. Nothing in this Agreement and Declaration of Trust
shall be construed to make the Shareholders, either by themselves
or with the Trustees, partners or members of a joint stock
association.
Section 10. Use of the Name "Franklin". Franklin
Distributors, Inc. ("Distributors") has consented to the use by
the Trust of the indentifying word or name "Franklin" in the name
of the Trust. Such consent is conditioned upon the employment of
Distributors, its successors or any affiliate thereof, as Manager
of the Trust. As between the Trust and itself, Distributors
controls the use of the name of the Trust insofar as such name
contains "Franklin." The name or identifying word "Franklin" may
be used from time to time in other connections and for other
purposes by Distributors or affiliated entities. Distributors
may require the Trust to cease using "Franklin" in the name of
the Trust if the Trust ceases to employ, for any reason,
Distributors, an affiliate, or any successor as Manager of the
Trust.
IN WITNESS WHEREOF, a majority of the Trustees as aforesaid
do hereto set their hands this 26th day of October, 1984.
/s/ Frank H. Abbott, III
Frank H. Abbott, III Harris H. Ashton
/s/ Zadoc W. Brown /s/ Samuel G. Hanson
Zadoc W. Brown Samuel G. Hanson
/s/ Henry L. Jamieson /s/ Charles B. Johnson
Henry L. Jamieson Charles B. Johnson
/s/ Rupert H. Johnson, Jr. /s/ Frank W.T. LaHaye
Rupert H. Johnson, Jr. Frank W.T. LaHaye
CERTIFICATE OF AMENDMENT
OF
AGREEMENT AND DECLARATION OF TRUST
FOR THE
FRANKLIN TAX-FREE TRUST
The undersigned certify that:
1. They constitute a majority of the Trustees of the Franklin
Tax-Free Trust, a Massachusetts business trust; and
2. They hereby adopt the following amendments to the Agreement
and Declaration of Trust of this Trust:
a) Article III, Section 8, is hereby amended to read as
follows:
"Section 8. Designation of Series. Subject to the
relative rights and preferences and other terms of this
Declaration of Trust, the Trust shall have Twenty-Four
(24) Series, designated as follows:
Franklin Alabama Tax-Free Income Fund
Franklin Arizona Tax-Free Income Fund
Franklin Colorado Tax-Free Income Fund
Franklin Connecticut Tax-Free Income Fund
Franklin Florida 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
b) Article III is further amended by the deletion of the
following text from the first paragraph of Section 6:
"Such establishment and designation shall be set
forth in an amendment to this Declaration of Trust as
provided in Section 8 of Article VIII."
c) Article III is further amended by the addition of a new
Section 6(i), to read as follows:
"(i) Elimination of Series. At any time that
there are no Shares outstanding of any particular
Series previously established and designated, the
Trustees may amend this Declaration of Trust by a
resolution approved by a majority of the Board of
Trustees thereby abolishing that Series and rescinding
the establishment and designation thereof."
d) Article III is further amended by deleting Section 9 in
its entirety.
3. It is the determination of the Trustees that approval of the
shareholders of the Trust is not required by the Investment
Company Act of 1940, as amended or other applicable law.
This amendment is made pursuant to Article III, Section 5 of
the Agreement and Declaration of Trust which empowers the
Trustees to change provisions relating to shares of the
Trust.
We declare under penalty of perjury that the matters set forth in
this certificate are true and correct of our own knowledge.
Dated: July 16, 1991
/s/ Frank H. Abbott, III /s/ Harris J. Ashton
Frank H. Abbott, III Harris J. Ashton
/s/ S. Joseph Fortunato /s/ David W. Garbellano
S. Joseph Fortunato David W. Garbellano
/s/ Henry L. Jamieson /s/ Charles B. Johnson
Henry L. Jamieson /s/ Charles B. Johnson
/s/ Rupert H. Johnson, Jr. /s/ Edmund H. Kerr
Rupert H. Johnson, Jr. Edmund H. Kerr
/s/ Frank W.T. LaHaye
Frank W.T. LaHaye
CERTIFICATE OF AMENDMENT
OF
AGREEMENT AND DECLARATION OF TRUST
OF
FRANKLIN TAX-FREE TRUST
The undersigned certify that:
1. They constitute a majority of the Trustees of the FRANKLIN
TAX-FREE TRUST (the "Trust"), a Massachusetts trust.
2. The Agreement and Declaration of Trust of the Trust, dated
September 18, 1984 is hereby amended by deleting the first
sentence of Section 5 of Article V in its entirety and
inserting in lieu thereof the following sentence:
For the purpose of determining the Shareholders of any
Series who are entitled to vote or act at any meeting
or any adjournment thereof, the Trustees may from time
to time fix a time, which shall be not more than 90
days before the date of any meeting of Shareholders, as
the record date for determining the Shareholders of
such Series having the right to notice of and to vote
at such meeting and any adjournment thereof, and in
such case only Shareholders of record on such record
date shall have such right, notwithstanding any
transfer of shares on the books of the Trust after the
record date.
3. It is the determination of the Trustees that the amendment
is consistent with the fair and equitable treatment of all
Shareholders of the Trust and that approval of the
Shareholders of the Trust is not required by the Investment
Company Act of 1940, as amended, or other applicable law.
This Amendment is made pursuant to Article III, Section 5 of
the Agreement and Declaration of Trust which empowers the
Trustees to change provisions relating to shares of the
Trust.
We declare under penalty of perjury that the matters set
forth in this certificate are true and correct of our own
knowledge.
Dated 4/21/92
/s/ Charles B. Johnson /s/ Frank H. Abbott, III
Charles B. Johnson Frank H. Abbott, III
/s/ Henry L. Jamieson /s/ Harris J. Ashton
Henry L. Jamieson Harris J. Ashton
/s/ Rupert H. Johnson, Jr. /s/ Edmund H. Kerr
Rupert H. Johnson, Jr. Edmund H. Kerr
/s/ Frank W.T. LaHaye /s/ David W. Garbellano
Frank W.T. LaHaye David W. Garbellano
/s/ S. Joseph Fortunato
S. Joseph Fortunato
CERTIFICATE OF AMENDMENT
OF
AGREEMENT AND DECLARATION OF TRUST
OF
FRANKLIN TAX-FREE TRUST
The undersigned certify that:
1. They constitute a majority of the Trustees of Franklin
Tax-Free Trust, a Massachusetts business trust.
2. They hereby adopt the following amendment to the
Agreement and Declaration of Trust of this Trust:
The first sentence of Article IV, Section 1 is amended
as follows:
The number of trustees shall be eight (8), unless such
number shall be changed from time to time by a written
instrument signed by a majority of the Trustees,
provided, however, that the number of Trustees shall in
no event be less than three (3) nor more than fifteen
(15).
In all other respects, said Article IV, Section 1 is to
remain unchanged.
We declare under penalty of perjury that the matters
set forth in this certificate are true and correct to the best of
our own knowledge.
Dated December 14, 1993
/s/ Frank H. Abbott, III /s/ Harris J. Ashton
Frank H. Abbott, III Harris J. Ashton
/s/ S. Joseph Fortunato /s/ David W. Garbellano
S. Joseph Fortunato David W. Garbellano
/s/ Charles B. Johnson /s/ Rupert H. Johnson, Jr.
Charles B. Johnson Rupert H. Johnson, Jr.
/s/ Frank W.T. LaHaye
Frank W.T. LaHaye Gordon S. Macklin
CERTIFICATE OF AMENDMENT
OF
AGREEMENT AND DECLARATION OF TRUST
OF
FRANKLIN TAX-FREE TRUST
The undersigned certify that:
They constitute a majority of the Trustees of
FRANKLIN TAX-FREE TRUST, a Massachusetts business trust (the
"Trust").
They hereby adopt the following amendment to the
Agreement and Declaration of Trust of the Trust, which deletes in
its entirety the Section of the Agreement and Declaration of
Trust entitled "Section 1. Division of Beneficial Interest." of
Article III and replaces such Section of Article III with the
following:
"Section 1. Division of Beneficial Interest.
The beneficial interest in the Trust shall at all times
be divided into an unlimited number of Shares, without
par value. The Trustees may authorize the division of
the Shares into separate Series and the division of
Series into separate classes or sub-series of Shares
(subject to any applicable rule, regulation or order of
the Commission or other applicable law or regulation).
The different Series and classes shall be established
and designated and shall have such preference,
conversion or other rights, voting powers,
restrictions, limitations as to dividends,
qualifications, terms and conditions of redemption and
other characteristics as the Trustees may determine.
Notwithstanding the provisions of Section 6(d) of this
Article III or any other provision of this Agreement
and Declaration of Trust, if any matter submitted to
shareholders for a vote affects only the interests of
one class of a Series then only such affected class
shall be entitled to vote on the matter. Each Share of
a Series shall have equal rights with each other Share
of that Series with respect to the assets of the Trust
pertaining to that Series. Notwithstanding any other
provision of this Agreement and Declaration of Trust,
the dividends payable to the holders of any Series (or
class) (subject to any applicable rule, regulation or
order of the Commission or any other applicable law or
regulation) shall be determined by the Trustees and
need not be individually declared, but may be declared
and paid in accordance with a formula adopted by the
Trustees. Except as otherwise provided herein, all
references in this Agreement and Declaration of Trust
to Shares or Series of Shares shall apply without
discrimination to the Shares of each Series.
Shareholders shall have no preemptive or other right to
subscribe to any additional Shares or other securities
issued by the Trust or any Series or class. The
Trustees may from time to time divide or combine the
Shares of any particular Series or class into a greater
or lesser number of Shares of that Series or class
without thereby changing the proportionate beneficial
interest of the Shares of that Series or class in the
assets belonging to that Series or class or in any way
affecting the rights of Shares of any other Series or
class."
It is the determination of the Trustees that
approval of the shareholders of the Trust is not required by the
Investment Company Act of 1940, as amended, or other applicable
law. This Amendment is made pursuant to Article III, Section 5
of this Agreement and Declaration of Trust which empowers the
Trustees to change provisions relating to Shares of the Trust.
We declare under penalty of perjury that the matters
set forth in this certificate are true and correct of our own
knowledge.
Dated March 21, 1995
/s/ Frank H.Abbott, III /s/ David W. Garbellano
Frank H. Abbott, III David W. Garbellano
/s/ Harris J. Ashton /s/ Charles B. Johnson
Harris J. Ashton Charles B. Johnson
/s/ S. Joseph Fortunato /s/ Rupert H. Johnson, Jr.
S. Joseph Fortunato Rupert H. Johnson, Jr.
/s/ Frank W. T. LaHaye /s/ Gordon S. Macklin
Frank W.T. LaHaye Gordon S. Macklin
BY-LAWS
OF
FRANKLIN TAX-FREE TRUST
A Massachusetts Business Trust
ARTICLE I
OFFICES
Section 1. PRINCIPAL OFFICE. The Board of Trustees shall
fix the location of the principal executive office of the Trust
at any place within or outside The Commonwealth of Massachusetts.
Section 2. OTHER OFFICES. The Board of Trustees may at any
time establish branch or subordinate offices at any place or
places where the Trust intends to do business.
ARTICLE II
MEETINGS OF SHAREHOLDERS
Section 1. PLACE OF MEETINGS. Meetings of shareholders
shall be held at any place within or outside The Commonwealth of
Massachusetts designated by the Board of Trustees. In the
absence of any such designation, shareholders' meetings shall be
held at the principal executive office of the Trust.
Section 2. CALL OF MEETING. A meeting of the shareholders
may be called at any time by the Board of Trustees or by the
chairman of the Board or by the president.
Section 3. NOTICE OF SHAREHOLDERS' MEETING. All notices of
meetings of shareholders shall be sent or otherwise given in
accordance with Section 4 of this Article II not less than ten
(10) nor more than seventy-five (75) days before the date of the
meeting. The notice shall specify (i) the place, date and hour
of the meeting, and (ii) the general nature of the business to be
transacted. The notice of any meeting at which trustees are to
be elected also shall include the name of any nominee or nominees
whom at the time of the notice are intended to be presented for
election.
If action is proposed to be taken at any meeting for
approval of (i) a contract or transaction in which a trustee has
a direct or indirect financial interest, (ii) an amendment of the
Declaration of Trust, (iii) a reorganization of the Trust, or
(iv) a voluntary dissolution of the Trust, the notice shall also
state the general nature of that proposal.
Section 4. MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE.
Notice of any meeting of shareholders shall be given either
personally or by first-class mail or telegraphic or other written
communication, charges prepaid, addressed to the shareholder at
the address of that shareholder appearing on the books of the
Trust or its transfer agent or given by the shareholder to the
Trust for the purpose of notice. If no such address appears on
the Trust's books or is given, notice shall be deemed to have
been given if sent to that shareholder by first-class mail or
telegraphic or other written communication to the Trust's
principal executive office, or if published at least once in a
newspaper of general circulation in the county where that office
is located. Notice shall be deemed to have been given at the
time when delivered personally or deposited in the mail or sent
by telegram or other means of written communication.
If any notice addressed to a shareholder at the address of
that shareholder appearing on the books of the Trust is returned
to the Trust by the United States Postal Service marked to
indicate that the Postal Service is unable to deliver the notice
to the shareholder at that address, all future notices or reports
shall be deemed to have been duly given without further mailing
if these shall be available to the shareholder on written demand
of the shareholder at the principal executive office of the Trust
for a period of one year from the date of the giving of the
notice.
An affidavit of the mailing or other means of giving any
notice of any shareholder's meeting shall be executed by the
secretary, assistant secretary or any transfer agent of the Trust
giving the notice and shall be filed and maintained in the minute
book of the Trust.
Section 5. ADJOURNED MEETING; NOTICE. Any shareholder's
meeting, whether or not a quorum is present, may be adjourned
from time to time by the vote of the majority of the shares
represented at that meeting, either in person or by proxy.
When any meeting of shareholders is adjourned to another
time or place, notice need not be given of the adjourned meeting
at which the adjournment is taken, unless a new record date of
the adjourned meeting is fixed or unless the adjournment is for
more than sixty (60) days from the date set for the original
meeting, in which case the Board of Trustees shall set a new
record date. Notice of any such adjourned meeting shall be given
to each shareholder of record entitled to vote at the adjourned
meeting in accordance with the provisions of Sections 3 and 4 of
this Article II. At any adjourned meeting, the Trust may
transact any business which might have been transacted at the
original meeting.
Section 6. VOTING. The shareholders entitled to vote at
any meeting of shareholders shall be determined in accordance
with the provisions of the Declaration of Trust, as in effect at
such time. The shareholders' vote may be by voice vote or by
ballot, provided, however, that any election for trustees must be
by ballot if demanded by any shareholder before the voting has
begun. On any matter other than elections of trustees, any
shareholder may vote part of the shares in favor of the proposal
and refrain from voting the remaining shares or vote them against
the proposal, but if the shareholder fails to specify the number
of shares which the shareholder is voting affirmatively, it will
be conclusively presumed that the shareholder's approving vote is
with respect to the total shares that the shareholder is entitled
to vote on such proposal.
Section 7. WAIVER OF NOTICE BY CONSENT OF ABSENT
SHAREHOLDERS. The transactions of the meeting of shareholders,
however called and noticed and wherever held, shall be as valid
as though had at a meeting duly held after regular call and
notice if a quorum be present either in person or by proxy and if
either before or after the meeting each person entitled to vote
who was not present in person or by proxy signs a written waiver
of notice or a consent to a holding of the meeting or an approval
of the minutes. The waiver of notice or consent need not specify
either the business to be transacted or the purpose of any
meeting of shareholders.
Attendance by a person at a meeting shall also constitute a
waiver of notice of that meeting, except when the person objects
at the beginning of the meeting to the transaction of any
business because the meeting is not lawfully called or convened
and except that attendance at a meeting is not a waiver of any
right to object to the consideration of matters not included in
the notice of the meeting if that objection is expressly made at
the beginning of the meeting.
Section 8. SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A
MEETING. Any action which may be taken at any meeting of
shareholders may be taken without a meeting and without prior
notice if a consent in writing setting forth the action so taken
is signed by the holders of outstanding shares having not less
than the minimum number of votes that would be necessary to
authorize or take that action at a meeting at which all shares
entitled to vote on that action were present and voted. All such
consents shall be filed with the Secretary of the Trust and shall
be maintained in the Trust's records. Any shareholder giving a
written consent or the shareholder's proxy holders or a
transferee of the shares or a personal representative of the
shareholder or their respective proxy holders may revoke the
consent by a writing received by the Secretary of the Trust
before written consents of the number of shares required to
authorize the proposed action have been filed with the Secretary.
If the consents of all shareholders entitled to vote have
not been solicited in writing and if the unanimous written
consent of all such shareholders shall not have been received,
the Secretary shall give prompt notice of the action approved by
the shareholders without a meeting. This notice shall be given
in the manner specified in Section 4 of this Article II. In the
case of approval of (i) contracts or transactions in which a
trustee has a direct or indirect financial interest, (ii)
indemnification of agents of the Trust, and (iii) a
reorganization of the Trust, the notice shall be given at least
ten (10) days before the consummation of any action authorized by
that approval.
Section 9. RECORD DATE FOR SHAREHOLDER NOTICE, VOTING AND
GIVING CONSENTS. For purposes of determining the shareholders
entitled to notice of any meeting or to vote or entitled to give
consent to action without a meeting, the Board of Trustees may
fix in advance a record date which shall not be more than seventy-
five (75) days nor less than ten (10) days before the date of any
such meeting as provided in the Declaration of Trust.
If the Board of Trustees does not so fix a record date:
(a) The record date for determining shareholders entitled
to notice of or to vote at a meeting of shareholders
shall be at the close of business on the business day
next preceding the day on which notice is given or if
notice is waived, at the close of business on the
business day next preceding the day on which the
meeting is held.
(b) The record date for determining shareholders entitled
to give consent to action in writing without a meeting,
(i) when no prior action by the Board of Trustees has
been taken, shall be the day on which the first written
consent is given, or (ii) when prior action of the
Board of Trustees has been taken, shall be at the close
of business on the day on which the Board of Trustees
adopt the resolution relating to that action or the
seventy-fifth day before the date of such other action,
whichever is later.
Section 10. PROXIES. Every person entitled to vote for
trustees or on any other matter shall have the right to do so
either in person or by one or more agents authorized by a written
proxy signed by the person and filed with the Secretary of the
Trust. A proxy shall be deemed signed if the shareholder's name
is placed on the proxy (whether by manual signature, typewriting,
telegraphic transmission or otherwise) by the shareholder or the
shareholder's attorney-in-fact. A validly executed proxy which
does not state that it is irrevocable shall continue in full
force and effect unless (i) revoked by the person executing it
before the vote pursuant to that proxy by a writing delivered to
the Trust stating that the proxy is revoked or by a subsequent
proxy executed by or attendance at the meeting and voting in
person by the person executing that proxy; or (ii) written notice
of the death or incapacity of the maker of that proxy is received
by the Trust before the vote pursuant to that proxy is counted;
provided however, that no proxy shall be valid after the
expiration of eleven (11) months from the date of the proxy
unless otherwise provided in the proxy. The revocability of a
proxy that states on its face that it is irrevocable shall be
governed by the provisions of the California General Corporation
Law.
Section 11. INSPECTORS OF ELECTION. Before any meeting of
shareholders, the Board of Trustees may appoint any persons other
than nominees for office to act as inspectors of election at the
meeting or its adjournment. If no inspectors of election are so
appointed, the chairman of the meeting may and on the request of
any shareholder or a shareholder's proxy shall, appoint
inspectors of election at the meeting. The number of inspectors
shall be either one (1) or three (3). If inspectors are
appointed at a meeting on the request of one or more shareholders
or proxies, the holders of a majority of shares or their proxies
present at the meeting shall determine whether one (1) or three
(3) inspectors are to be appointed. If any person appointed as
inspector fails to appear or fails or refuses to act, the
chairman of the meeting may and on the request of any shareholder
or a shareholder's proxy, shall appoint a person to fill the
vacancy.
These inspectors shall:
(a) Determine the number of shares outstanding and the
voting power of each, the shares represented at the
meeting, the existence of a quorum and the
authenticity, validity and effect of proxies;
(b) Receive votes, ballots or consents;
(c) Hear and determine all challenges and questions in any
way arising in connection with the right to vote;
(d) Count and tabulate all votes or consents;
(e) Determine when the polls shall close;
(f) Determine the result; and
(g) Do any other acts that may be proper to conduct the
election or vote with fairness to all shareholders.
ARTICLE III
TRUSTEES
Section 1. POWERS. Subject to the applicable provisions of
the Declaration of Trust and these By-Laws relating to action
required to be approved by the shareholders or by the outstanding
shares, the business and affairs of the Trust shall be managed
and all powers shall be exercised by or under the direction of
the Board of Trustees.
Section 2. NUMBER AND QUALIFICATION OF TRUSTEES. The
authorized number of trustees shall be eight (8), until changed
by a duly adopted amendment to the Declaration of Trust and these
By-Laws.
Section 3. VACANCIES. Vacancies in the Board of Trustees
may be filled by a majority of the remaining trustees, though
less than a quorum, or by a sole remaining trustee, unless the
Board of Trustees calls a meeting of shareholders for the
purposes of electing trustees. In the event that at any time
less than a majority of the trustees holding office at that time
were so elected by the holders of the outstanding voting
securities of the Trust, the Board of Trustees shall forthwith
cause to be held as promptly as possible, and in any event within
sixty (60) days, a meeting of such holders for the purpose of
electing trustees to fill any existing vacancies in the Board of
Trustees, unless such period is extended by order of the United
States Securities and Exchange Commission.
Notwithstanding the above, whenever and for so long as the
Trust is a participant in or otherwise has in effect a Plan under
which the Trust may be deemed to bear expenses of distributing
its shares as that practice is described in Rule 12b-1 under the
Investment Company Act of 1940, then the selection and nomination
of the trustees who are not interested persons of the Trust (as
that term is defined in the Investment Company Act of 1940) shall
be, and is, committed to the discretion of such disinterested
trustees.
Section 4. PLACE OF MEETINGS AND MEETINGS BY TELEPHONE. All
meetings of the Board of Trustees may be held at any place within
or outside The Commonwealth of Massachusetts that has been
designated from time to time by resolution of the Board. In the
absence of such a designation, regular meetings shall be held at
the principal executive office of the Trust. Any meeting,
regular or special, may be held by conference telephone or
similar communication equipment, so long as all trustees
participating in the meeting can hear one another and all such
trustees shall be deemed to be present in person at the meeting.
Section 5. REGULAR MEETINGS. Regular meetings of the Board
of Trustees shall be held without call at such time as shall from
time to time be fixed by the Board of Trustees. Such regular
meetings may be held without notice.
Section 6. SPECIAL MEETINGS. Special meetings of the Board
of Trustees for any purpose or purposes may be called at any time
by the chairman of the board or the president or any vice
president or the secretary or any two (2) trustees.
Notice of the time and place of special meetings shall be
delivered personally or by telephone to each trustee or sent by
first-class mail or telegram, charges prepaid, addressed to each
trustee at that trustee's address as it is shown on the records
of the Trust. In case the notice is mailed, it shall be
deposited in the United States mail at least four (4) days before
the time of the holding of the meeting. In case the notice is
delivered personally or by telephone or to the telegraph company,
it shall be given at least forty-eight (48) hours before the time
of the holding of the meeting. Any oral notice given personally
or by telephone may be communicated either to the trustee or to a
person at the office of the trustee who the person giving the
notice has reason to believe will promptly communicate it to the
trustee. The notice need not specify the purpose of the meeting
or the place if the meeting is to be held at the principal
executive office of the Trust.
Section 7. QUORUM. A majority of the authorized number of
trustees shall constitute a quorum for the transaction of
business, except to adjourn as provided in Section 10 of this
Article III. Every act or decision done or made by a majority of
the trustees present at a meeting duly held at which a quorum is
present shall be regarded as the act of the Board of Trustees,
subject to the provisions of the Declaration of Trust. A meeting
at which a quorum is initially present may continue to transact
business notwithstanding the withdrawal of trustees if any action
taken is approved by at least a majority of the required quorum
for that meeting.
Section 8. WAIVER OF NOTICE. Notice of any meeting need
not be given to any trustee who either before or after the
meeting signs a written waiver of notice, a consent to holding
the meeting, or an approval of the minutes. The waiver of notice
or consent need not specify the purpose of the meeting. All such
waivers, consents, and approvals shall be filed with the records
of the Trust or made a part of the minutes of the meeting. Notice
of a meeting shall also be deemed given to any trustee who
attends the meeting without protesting before or at its
commencement the lack of notice to that trustee.
Section 9. ADJOURNMENT. A majority of the trustees
present, whether or not constituting a quorum, may adjourn any
meeting to another time and place.
Section 10. NOTICE OF ADJOURNMENT. Notice of the time and
place of holding an adjourned meeting need not be given unless
the meeting is adjourned for more than forty-eight (48) hours, in
which case notice of the time and place shall be given before the
time of the adjourned meeting in the manner specified in Section
7 of this Article III to the trustees who were present at the
time of the adjournment.
Section 11. ACTION WITHOUT A MEETING. Any action required
or permitted to be taken by the Board of Trustees may be taken
without a meeting if a majority of the members of the Board of
Trustees shall individually or collectively consent in writing to
that action. Such action by written consent shall have the same
force and effect as a majority vote of the Board of Trustees.
Such written consent or consents shall be filed with the minutes
of the proceedings of the Board of Trustees.
Section 12. FEES AND COMPENSATION OF TRUSTEES. Trustees
and members of committees may receive such compensation, if any,
for their services and such reimbursement of expenses as may be
fixed or determined by resolution of the Board of Trustees. This
Section 12 shall not be construed to preclude any trustee from
serving the Trust in any other capacity as an officer, agent,
employee, or otherwise and receiving compensation for those
services.
ARTICLE IV
COMMITTEES
Section 1. COMMITTEES OF TRUSTEES. The Board of Trustees
may by resolution adopted by a majority of the authorized number
of trustees designate one or more committees, each consisting of
two (2) or more trustees, to serve at the pleasure of the Board.
The Board may designate one or more trustees as alternate members
of any committee who may replace any absent member at any meeting
of the committee. Any committee to the extent provided in the
resolution of the Board, shall have the authority of the Board,
except with respect to:
(a) the approval of any action which under applicable law
also requires shareholders' approval or approval of the
outstanding shares, or requires approval by a majority
of the entire Board or certain members of said Board;
(b) the filling of vacancies on the Board of Trustees or in
any committee;
(c) the fixing of compensation of the trustees for serving
on the Board of Trustees or on any committee;
(d) the amendment or repeal of the Declaration of Trust or
of the By-Laws or the adoption of new By-Laws;
(e) the amendment or repeal of any resolution of the Board
of Trustees which by its express terms is not so
amendable or repealable;
(f) a distribution to the shareholders of the Trust, except
at a rate or in a periodic amount or within a
designated range determined by the Board of Trustees;
or
(g) the appointment of any other committees of the Board of
Trustees or the members of these committees.
Section 2. MEETINGS AND ACTION OF COMMITTEES. Meetings and
action of committees shall be governed by and held and taken in
accordance with the provisions of Article III of these By-Laws,
with such changes in the context thereof as are necessary to
substitute the committee and its members for the Board of
Trustees and its members, except that the time of regular
meetings of committees may be determined either by resolution of
the Board of Trustees or by resolution of the committee. Special
meetings of committees may also be called by resolution of the
Board of Trustees, and notice of special meetings of committees
shall also be given to all alternate members who shall have the
right to attend all meetings of the committee. The Board of
Trustees may adopt rules for the government of any committee not
inconsistent with the provisions of these By-Laws.
ARTICLE V
OFFICERS
Section 1. OFFICERS. The officers of the Trust shall be a
president, a secretary, and a treasurer. The Trust may also
have, at the discretion of the Board of Trustees, a chairman of
the Board, one or more vice presidents, one or more assistant
secretaries, one or more assistant treasurers, and such other
officers as may be appointed in accordance with the provisions of
Section 3 of this Article V. Any number of offices may be held
by the same person.
Section 2. ELECTION OF OFFICERS. The officers of the
Trust, except such officers as may appointed in accordance with
the provisions of Section 3 or Section 5 of this Article V, shall
be chosen by the Board of Trustees, and each shall serve at the
pleasure of the Board of Trustees, subject to the rights, if any,
of an officer under any contract of employment.
Section 3. SUBORDINATE OFFICERS. The Board of Trustees may
appoint and may empower the president to appoint such other
officers as the business of the Trust may require, each of whom
shall hold office for such period, have such authority and
perform such duties as are provided in these By-Laws or as the
Board of Trustees may from time to time determine.
Section 4. REMOVAL AND RESIGNATION OF OFFICERS. Subject to
the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without
cause, by the Board of Trustees at any regular or special meeting
of the Board of Trustees or except in the case of an officer upon
whom such power of removal may be conferred by the Board of
Trustees.
Any officer may resign at any time by giving written notice
to the Trust. Any resignation shall take effect at the date of
the receipt of that notice or at any later time specified in that
notice; and unless otherwise specified in that notice, the
acceptance of the resignation shall not be necessary to make it
effective. Any resignation is without prejudice to the rights,
if any, of the Trust under any contract to which the officer is a
party.
Section 5. VACANCIES IN OFFICES. A vacancy in any office
because of death, resignation, removal, disqualification or other
cause shall be filled in the manner prescribed in these By-Laws
for regular appointment to that office.
Section 6. CHAIRMAN OF THE BOARD. The chairman of the
board, if such an officer is elected, shall if present preside at
meetings of the Board of Trustees and exercise and perform such
other powers and duties as may be from time to time assigned to
him by the Board of Trustees or prescribed by the By-Laws.
Section 7. PRESIDENT. Subject to such supervisory powers,
if any, as may be given by the Board of Trustees to the chairman
of the board, if there be such an officer, the president shall be
the chief executive officer of the Trust and shall, subject to
the control of the Board of Trustees, have general supervision,
direction and control of the business and the officers of the
Trust. He shall preside at all meetings of the shareholders and
in the absence of the chairman of the board or if there be none,
at all meetings of the Board of Trustees. He shall have the
general powers and duties of management usually vested in the
office of president of a corporation and shall have such other
powers and duties as may be prescribed by the Board of Trustees
or these By-Laws.
Section 8. VICE PRESIDENTS. In the absence or disability of
the president, the vice presidents, if any, in order of their
rank as fixed by the Board of Trustees or if not ranked, a vice
president designated by the Board of Trustees, shall perform all
the duties of the president and when so acting shall have all
powers of and be subject to all the restrictions upon the
president. The vice presidents shall have such other powers and
perform such other duties as from time to time may be prescribed
for them respectively by the Board of Trustees or by these By-
Laws and the president or the chairman of the board.
Section 9. SECRETARY. The secretary shall keep or cause to
be kept at the principal executive office of the Trust or such
other place as the Board of Trustees may direct a book of minutes
of all meetings and actions of trustees, committees of trustees
and shareholders with the time and place of holding, whether
regular or special, and if special, how authorized, the notice
given, the names of those present at trustees' meetings or
committee meetings, the number of shares present or represented
at shareholders' meetings, and the proceedings.
The secretary shall keep or cause to be kept at the
principal executive office of the Trust or at the office of the
Trust's transfer agent or registrar, as determined by resolution
of the Board of Trustees, a share register or a duplicate share
register showing the names of all shareholders and their
addresses, the number and classes of shares held by each, the
number and date of certificates issued for the same and the
number and date of cancellation of every certificate surrendered
for cancellation.
The secretary shall give or cause to be given notice of all
meetings of the shareholders and of the Board of Trustees
required by these By-Laws or by applicable law to be given and
shall have such other powers and perform such other duties as may
be prescribed by the Board of Trustees or by these By-Laws.
Section 10. TREASURER. The treasurer shall be the chief
financial officer of the Trust and shall keep and maintain or
cause to be kept and maintained adequate and correct books and
records of accounts of the properties and business transactions
of the Trust, including accounts of its assets, liabilities,
receipts, disbursements, gains, losses, capital, retained
earnings and shares. The books of account shall at all
reasonable times be open to inspection by any trustee.
The treasurer shall deposit all monies and other valuables
in the name and to the credit of the Trust with such depositaries
as may be designated by the Board of Trustees. He shall disburse
the funds of the Trust as may be ordered by the Board of
Trustees, shall render to the president and trustees, whenever
they request it, an account of a1l of his transactions as chief
financial officer and of the financial condition of the Trust and
shall have other powers and perform such other duties as may be
prescribed by the Board of Trustees or these By-Laws.
ARTICLE VI
INDEMNIFICATION OF TRUSTEES, OFFICERS,
EMPLOYEES AND OTHER AGENTS
Section 1. AGENTS, PROCEEDINGS AND EXPENSES. For the
purpose of this Article, "agent" means any person who is or was a
trustee, officer, employee or other agent of this Trust or is or
was serving at the request of this Trust as a trustee, director,
officer, employee or agent of another foreign or domestic
corporation, partnership, joint venture, trust or other.
enterprise or was a trustee, director, officer, employee or agent
of a foreign or domestic corporation which was a predecessor of
another enterprise at the request of such predecessor entity;
"proceeding" means any threatened, pending or completed action or
proceeding, whether civil, criminal, administrative or
investigative; and "expenses" includes without limitation
attorney's fees and any expenses of establishing a right to
indemnification under this Article.
Section 2. ACTIONS OTHER THAN BY TRUST. This Trust shall
indemnify any person who was or is a party or is threatened to be
made a party to any proceeding (other than an action by or in the
right of this Trust) by reason of the fact that such person is or
was an agent of this Trust, against expenses, judgments, fines,
settlements and other amounts actually and reasonably incurred in
connection with such proceeding if that person acted in good
faith and in a manner that person reasonably believed to be in
the best interests of this Trust and in the case of a criminal
proceeding, had no reasonable cause to believe the conduct of
that person was unlawful. The termination of any proceeding by
judgment, order, settlement, conviction or upon a plea of nolo
contendere or its equivalent shall not of itself create a
presumption that the person did not act in good faith and in a
manner which the person reasonably believed to be in the best
interests of this Trust or that the person had reasonable cause
to believe that the person's conduct was unlawful.
Section 3. ACTIONS BY THE TRUST. This Trust shall
indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action by or
in the right of this Trust to procure a judgment in its favor by
reason of the fact that that person is or was an agent of this
Trust, against expenses actually and reasonably incurred by that
person in connection with the defense or settlement of that
action if that person acted in good faith, in a manner that
person believed to be in the best interests of this Trust and
with such care, including reasonable inquiry, as an ordinarily
prudent person in a like position would use under similar
circumstances.
Section 4. EXCLUSION OF INDEMNIFICATION. Notwithstanding
any provision to the contrary contained herein, there shall be no
right to indemnification for any liability arising by reason of
willful misfeasance, bad faith, gross negligence, or the reckless
disregard of the duties involved in the conduct of the agent's
office with this Trust.
No indemnification shall be made under Sections 2 or 3 of
this Article:
(a) In respect of any claim, issue or matter as to which
that person shall have been adjudged to be liable in
the performance of that person's duty to this Trust,
unless and only to the extent that the court in which
that action was brought shall determine upon
application that in view of all the circumstances of
the case, that person was not liable by reason of the
disabling conduct set forth in the preceding paragraph
and is fairly and reasonably entitled to indemnity for
the expenses which the court shall determine; or
(b) Of amounts paid in settling or otherwise disposing of a
threatened or pending action, with or without court
approval, or of expenses incurred in defending a
threatened or pending action which is settled or
otherwise disposed of without court approval, unless
the required approval set forth in Section 6 of this
Article is obtained.
Section 5. SUCCESSFUL DEFENSE BY AGENT. To the extent that
an agent of this Trust has been successful on the merits in
defense of any proceeding referred to in Sections 2 or 3 of this
Article or in defense of any claim, issue or matter therein,
before the court or other body before whom the proceeding was
brought, the agent shall be indemnified against expenses actually
and reasonably incurred by the agent in connection therewith,
provided that the Board of Trustees, including a majority who are
disinterested, non-party trustees, also determines that based
upon a review of the facts, the agent was not liable by reason of
the disabling conduct referred to in Section 4 of this Article.
Section 6. REQUIRED APPROVAL. Except as provided in
Section 5 of this Article, any indemnification under this Article
shall be made by this Trust only if authorized in the specific
case on a determination that indemnification of the agent is
proper in the circumstances because the agent has met the
applicable standard of conduct set forth in Sections 2 or 3 of
this Article and is not prohibited from indemnification because
of the disabling conduct set forth in Section 4 of this Article,
by:
(a) A majority vote of a quorum consisting of trustees who
are not parties to the proceeding and are not
interested persons of the Trust (as defined in the
Investment Company Act of 1940); or
(b) A written opinion by an independent legal counsel.
Section 7. ADVANCE OF EXPENSES. Expenses incurred in
defending any proceeding may be advanced by this Trust before the
final disposition of the proceeding on receipt of an undertaking
by or on behalf of the agent to repay the amount of the advance
unless it shall be determined ultimately that the agent is
entitled to be indemnified as authorized in this Article,
provided the agent provides a security for his undertaking, or a
majority of a quorum of the disinterested, non-party trustees, or
an independent legal counsel in a written opinion, determine that
based on a review of readily available facts, there is reason to
believe that said agent ultimately will be found entitled to
indemnification.
Section 8. OTHER CONTRACTUAL RIGHTS. Nothing contained in
this Article shall affect any right to indemnification to which
persons other than trustees and officers of this Trust or any
subsidiary hereof may be entitled by contract or otherwise.
Section 9. LIMITATIONS. No indemnification or advance
shall be made under this Article, except as provided in Sections
5 or 6 in any circumstances where it appears:
(a) That it would be inconsistent with a provision of the
Declaration of Trust, a resolution of the shareholders,
or an agreement in effect at the time of accrual of the
alleged cause of action asserted in the proceeding in
which the expenses were incurred or other amounts were
paid which prohibits or otherwise limits
indemnification; or
(b) That it would be inconsistent with any condition
expressly imposed by a court in approving a settlement.
Section 10. INSURANCE. Upon and in the event of a
determination by the Board of Trustees of this Trust to purchase
such insurance, this Trust shall purchase and maintain insurance
on behalf of any agent of this Trust against any liability
asserted against or incurred by the agent in such capacity or
arising out of the agent's status as such, but only to the extent
that this Trust would have the power to indemnify the agent
against that liability under the provisions of this Article.
Section 11. FIDUCIARIES OF EMPLOYEE BENEFIT PLAN. This
Article does not apply to any proceeding against any trustee,
investment manager or other fiduciary of an employee benefit plan
in that person's capacity as such, even though that person may
also be an agent of this Trust as defined in Section 1 of this
Article. Nothing contained in this Article shall limit any right
to indemnification to which such a trustee, investment manager,
or other fiduciary may be entitled by contract or otherwise which
shall be enforceable to the extent permitted by applicable law
other than this Article.
ARTICLE VII
RECORDS AND REPORTS
Section 1. MAINTENANCE AND INSPECTION OF SHARE REGISTER.
This Trust shall keep at its principal executive office or at the
office of its transfer agent or registrar, if either be appointed
and as determined by resolution of the Board of Trustees, a
record of its shareholders, giving the names and addresses of all
shareholders and the number and series of shares held by each
shareholder.
Section 2. MAINTENANCE AND INSPECTION OF BY-LAWS. The
Trust shall keep at its principal executive office the original
or a copy of these By-Laws as amended to date, which shall be
open to inspection by the shareholders at all reasonable times
during office hours.
Section 3. MAINTENANCE AND INSPECTION OF OTHER RECORDS.
The accounting books and records and minutes of proceedings of
the shareholders and the Board of Trustees and any committee or
committees of the Board of Trustees shall be kept at such place
or places designated by the Board of Trustees or in the absence
of such designation, at the principal executive office of the
Trust. The minutes shall be kept in written form and the
accounting books and records shall be kept either in written form
or in any other form capable of being converted into written
form. The minutes and accounting books and records shall be open
to inspection upon the written demand of any shareholder or
holder of a voting trust certificate at any reasonable time
during usual business hours for a purpose reasonably related to
the holder's interests as a shareholder or as the holder of a
voting trust certificate. The inspection may be made in person
or by an agent or attorney and shall include the right to copy
and make extracts.
Section 4. INSPECTION BY TRUSTEES. Every trustee shall
have the absolute right at any reasonable time to inspect all
books, records, and documents of every kind and the physical
properties of the Trust. This inspection by a trustee may be
made in person or by an agent or attorney and the right of
inspection includes the right to copy and make extracts of
documents.
Section 5. FINANCIAL STATEMENTS. A copy of any financial
statements and any income statement of the Trust for each
quarterly period of each fiscal year and accompanying balance
sheet of the Trust as of the end of each such period that has
been prepared by the Trust shall be kept on file in the principal
executive office of the Trust for at least twelve (12) months and
each such statement shall be exhibited at all reasonable times to
any shareholder demanding an examination of any such statement or
a copy shall be mailed to any such shareholder.
The quarterly income statements and balance sheets referred
to in this section shall be accompanied by the report, if any, of
any independent accountants engaged by the Trust or the
certificate of an authorized officer of the Trust that the
financial statements were prepared without audit from the books
and records of the Trust.
ARTICLE VIII
GENERAL MATTERS
Section 1. CHECKS, DRAFTS, EVIDENCE OF INDEBTEDNESS. All
checks, drafts, or other orders for payment of money, notes or
other evidences of indebtedness issued in the name of or payable
to the Trust shall be signed or endorsed by such person or
persons and in such manner as from time to time shall be
determined by resolution of the Board of Trustees.
Section 2. CONTRACTS AND INSTRUMENTS; HOW EXECUTED. The
Board of Trustees, except as otherwise provided in these By-Laws,
may authorize any officer or officers, agent or agents, to enter
into any contract or execute any instrument in the name of and on
behalf of the Trust and this authority may be general or confined
to specific instances; and unless so authorized or ratified by
the Board of Trustees or within the agency power of an officer,
no officer, agent, or employee shall have any power or authority
to bind the Trust by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
Section 3. CERTIFICATES FOR SHARES. A certificate or
certificates for shares of beneficial interest in any series of
the Trust shall be issued to each shareholder when any of these
shares are fully paid. All certificates shall be signed in the
name of the Trust by the chairman of the board or the president
or vice president and by the treasurer or an assistant treasurer
or the secretary or any assistant secretary, certifying the
number of shares and the series of shares owned by the
shareholders. Any or all of the signatures on the certificate
may be facsimile. In case any officer, transfer agent, or
registrar who has signed or whose facsimile signature has been
placed on a certificate shall have ceased to be that officer,
transfer agent, or registrar before that certificate is issued,
it may be issued by the Trust with the same effect as if that
person were an officer, transfer agent or registrar at the date
of issue. Notwithstanding the foregoing, the Trust may adopt and
use a system of issuance, recordation and transfer of its shares
by electronic or other means.
Section 4. LOST CERTIFICATES. Except as provided in this
Section 4, no new certificates for shares shall be issued to
replace an old certificate unless the latter is surrendered to
the Trust and cancelled at the same time. The Board of Trustees
may in case any share certificate or certificate for any other
security is lost, stolen, or destroyed, authorize the issuance of
a replacement certificate on such terms and conditions as the
Board of Trustees may require, including a provision for
indemnification of the Trust secured by a bond or other adequate
security sufficient to protect the Trust against any claim that
may be made against it, including any expense or liability on
account of the alleged loss, theft, or destruction of the
certificate or the issuance of the replacement certificate.
Section 5. REPRESENTATION OF SHARES OF OTHER ENTITIES. The
chairman of the board, the president or any vice president or any
other person authorized by resolution of the Board of Trustees or
by any of the foregoing designated officers, is authorized to
vote on behalf of the Trust any and all shares of any corporation
or corporations, partnership, trusts, or other entities, foreign
or domestic, standing in the name of the Trust. The authority
granted to these officers to vote or represent on behalf of the
Trust any and all shares held by the Trust in any form of entity
may be exercised by any of these officers in person or by any
person authorized to do so by a proxy duly executed by these
officers.
ARTICLE IX
AMENDMENTS
Section 1. AMENDMENT BY SHAREHOLDERS. New By-Laws may be
amended or repealed by the affirmative vote or written consent of
a majority of the outstanding shares entitled to vote, except as
otherwise provided by applicable law or by the Declaration of
Trust or these By-Laws.
Section 2. AMENDMENT BY TRUSTEES. Subject to the right of
shareholders as provided in Section 1 of this Article to adopt,
amend or repeal By-Laws, and except as otherwise provided by
applicable law or by the Declaration of Trust, these By-Laws may
be adopted, amended, or repealed by the Board of Trustees.
CERTIFICATE OF AMENDMENT
OF
BY-LAWS
FRANKLIN TAX-FREE TRUST
The undersigned certify that:
They constitute a majority of the Trustees of Franklin Tax-
Free Trust, a Massachusetts business trust.
They hereby adopt the following amendment to the By-Laws of
this Trust:
Article III, Section 2 is amended to read as follows:
Section 2. NUMBER AND QUALIFICATION OF TRUSTEES. "The
authorized number of trustees shall be nine (9), until
changed by a duly adopted amendment to the Declaration
of Trust and these By-Laws.
We declare under penalty of perjury that the matters set forth in
this certificate are true and correct of our own knowledge.
Dated: December 8, 1987
/s/ Frank H. Abbott, III /s/ Harris J. Ashton
Frank H. Abbott, III Harris J. Ashton
/s/ Zadoc W. Brown /s/Samuel G. Hanson
Zadoc W. Brown Samuel G. Hanson
/s/ Henry L. Jamieson /s/ Charles B. Johnson
Henry L. Jamieson Charles B. Johnson
/s/ Rupert H. Johnson, Jr. /s/ Frank W.T. LaHaye
Rupert H. Johnson, Jr. Frank W.T. LaHaye
AMENDMENT TO BY-LAWS
OF
FRANKLIN TAX-FREE TRUST
A Massachusetts Business Trust
In accordance with Section 2 of Article IX of the By-
Laws of Franklin Tax-Free Trust (the "Trust"), the undersigned do
hereby amend the By-Laws of the Trust by deleting the first
paragraph of Section 9 of Article II in its entirety and
inserting in lieu thereof the following paragraph:
Section 9. RECORD DATE FOR SHAREHOLDER NOTICE, VOTING
AND GIVING CONSENTS. For purposes of determining the
shareholders entitled to notice of any meeting or to vote or
entitled to give consent to action without a meeting, the
Board of Trustees may fix in advance a record date which
shall not be more than ninety (90) days nor less than ten
(10) days before the date of any such meeting as provided in
the Declaration of Trust.
Dated: 4/21/92
/s/ Charles B. Johnson /s/ Frank H. Abbott, III
Charles B. Johnson Frank H. Abbott, III
/s/ Henry L. Jamieson /s/ Harris J. Ashton
Henry L. Jamieson Harris J. Ashton
/s/ Rupert H. Johnson, Jr. /s/ Edmund H. Kerr
Rupert H. Johnson, Jr. Edmund H. Kerr
/s/ Frank W. T. LaHaye /s/ David W. Garbellano
Frank W.T. LaHaye David W. Garbellano
/s/ S. Joseph Fortunato
S. Joseph Fortunato
CERTIFICATE OF AMENDMENT
OF
BY-LAWS
FRANKLIN TAX-FREE TRUST
The undersigned certify that:
1. They constitute a majority of the Trustees of Franklin Tax-
Free Trust, a Massachusetts business trust.
2. They hereby adopt the following amendment to the By-Laws of
this Trust:
Article III, Section 2 is amended to read as follows:
Section 2. NUMBER AND QUALIFICATION OF TRUSTEES. The
authorized number of trustees shall be eight (8), until
changed by a duly adopted amendment to these By-Laws.
We declare under penalty of perjury that the matters set forth in
this certificate are true and correct to the best of our own
knowledge.
Dated: December 14, 1993
/s/ Frank H. Abbott, III /s/ Harris J. Ashton
Frank H. Abbott, III Harris J. Ashton
/s/ S. Joseph Fortunato /s/ David W. Garbellano
S. Joseph Fortunato David W. Garbellano
/s/ Charles B. Johnson /s/ Rupert H. Johnson, Jr.
Charles B. Johnson Rupert H. Johnson, Jr.
/s/ Frank W.T. LaHaye /s/ Gordon S. Macklin
Frank W.T. LaHaye Gordon S. Macklin
CERTIFICATE OF SECRETARY
I, Deborah R. Gatzek, Secretary of Franklin Tax-Free Trust
(the "Trust"), a business trust organized under the laws of the
State of Massachusetts, do hereby certify that the following
resolution was adopted by a majority of the trustees present at a
meeting held at the offices of the Trust at 777 Mariners Island
Boulevard, San Mateo, California, on January 18, 1994.
WHEREAS, the Trustees have determined that it is necessary
to amend Section 4 of Article II of the Trust's By-Laws in
order to remove the specification of using first class mail
for notice of any meeting of shareholders; it is
RESOLVED, that in accordance with Article IX, Section 2, of
the Trust's By-Laws, such By-Laws are hereby amended by
deleting reference to first class mail in the first
paragraph of Section 4 of Article II so that such paragraph
now reads as follows:
Section 4. MANNER OF GIVING NOTICE; AFFIDAVIT OF
NOTICE. Notice of any meeting of shareholders shall be
given either personally or by mail or telegraphic or
other written communication, charges prepaid, addressed
to the shareholder appearing on the books of the Trust
or its transfer agent or given by the shareholder to
the Trust for the purpose of notice. If no such address
appears on the Trust's books or is given, notice shall
be deemed to have been given if sent to that
shareholder by mail or telegraphic or other written
communication to the Trust's principal executive
office, or if published at least once in a newspaper of
general circulation in the county where that office is
located. Notice shall be deemed to have been given at
the time when delivered personally or deposited in the
mail or sent by telegram or other means of written
communication.
and it is
FURTHER RESOLVED, that the officers of the Trust be, and
they hereby are, authorized and directed to execute and
deliver any and all documents and take any and all other
actions that they may deem necessary or advisable in order
to effectuate the foregoing resolution.
I declare under penalty of perjury that the matters set forth in
this certificate are true and correct of my own knowledge.
Dated: February 28, 1994
/s/ Deborah R. Gatzek
Deborah R. Gatzek
Secretary
FRANKLIN TAX-FREE TRUST
MANAGEMENT AGREEMENT
THIS MANAGEMENT AGREEMENT made between FRANKLIN TAX-FREE TRUST, a
Massachusetts business trust, hereinafter called the "Trust" and
FRANKLIN ADVISERS, INC., a California Corporation, hereinafter
called the "Manager."
WHEREAS, the Trust has been organized and operates as an
investment company registered under the Investment Company Act of
1940 for the purpose of investing and reinvesting its assets in
securities, as set forth in its Agreement and Declaration of
Trust, its By-Laws and its Registration Statements under the
Investment Company Act of 1940 and the Securities Act of 1933,
all as heretofore amended and supplemented; and the Trust desires
to avail itself of the services, information, advice, assistance
and facilities of an investment manager and to have an investment
manager perform various management, statistical, research,
investment advisory and other services for each of the Funds
currently or hereafter organized as separate series of the Trust
(the "Funds"); and,
WHEREAS, the Manager is registered as an investment adviser under
the Investment Advisor's Act of 1940, is engaged in the business
of rendering management, investment advisory, counselling and
supervisory services to investment companies and other investment
counselling clients, and desires to provide these services to the
Funds.
NOW THEREFORE, in consideration of the terms and conditions
hereinafter set forth, it is agreed as follows:
1. Employment of the Manager. The Trust hereby employs the
Manager to manage the investment and reinvestment of each Fund's
assets and to administer its affairs, subject to the direction of
the Board of Trustees and the officers of the Trust, for the
period and on the terms hereinafter set forth. The Manager hereby
accepts such employment and agrees during such period to render
the services and to assume the obligations herein set forth for
the compensation herein provided. The Manager shall for all
purposes herein be deemed to be an independent contractor and
shall, except as expressly provided or authorized (whether herein
or otherwise), have no authority to act for or represent the
Trust in any way or otherwise be deemed an agent of the Funds or
the Trust.
2. Obligations of and Services to be Provided by the Manager. The
Manager undertakes to provide the services hereinafter set forth
and to assume the following obligations:
A. Office Space, Furnishings, Facilities, Equipment, and
Personnel. The Manager shall furnish to the Trust and the
Funds adequate (i) office space, which may be space within
the offices of the Manager or in such other place as may be
agreed upon from time to time, (ii) office furnishings,
facilities and equipment as may be reasonably required for
managing the affairs and conducting the business of the
Trust and the Funds, including complying with the securities
reporting requirements of the United States and the various
states in which the Trust does business, conducting
correspondence and other communications with the
shareholders of the Funds, maintaining all internal
bookkeeping, accounting and auditing services and records in
connection with the Funds' investment and business
activities, and computing net asset value. The Manager shall
employ or provide and compensate the executive, secretarial
and clerical personnel necessary to provide such services.
The Manager shall also compensate all officers and employees
of the Trust who are officers or employees of the Manager.
B. Investment Management Services.
(a) The Manager shall manage the assets of each Fund subject
to and in accordance with the investment objectives and
policies of each Fund and any directions which the Trust's
Board of Trustees may issue from time to time. In pursuance
of the foregoing, the Manager shall make all determinations
with respect to the investment of the assets of each Fund
and the purchase and sale of their portfolio securities, and
shall take such steps as may be necessary to implement the
same. Such determinations and services shall also include
determining the manner in which voting rights, rights to
consent to corporate action and any other rights pertaining
to the Funds' portfolio securities shall be exercised. The
Manager shall render regular reports to the Trust, at
regular meetings of the Board of Trustees and at such other
times as may be reasonably requested by the Trust's Board of
Trustees, of (i) the decisions which it has made with
respect to the investment of the assets of each Fund and the
purchase and sale of their portfolio securities, (ii) the
reasons for such decisions and (iii) the extent to which
those decisions have been implemented.
(b) The Manager, subject to and in accordance with any
directions which the Trust's Board of Trustees may issue
from time to time, shall place, in the name of the Funds,
orders for the execution of the Funds' portfolio
transactions. When placing such orders, the Manager shall
seek to obtain the best net price and execution for the
Funds, but this requirement shall not be deemed to obligate
the Manager to place any order solely on the basis of
obtaining the lowest commission rate if the other standards
set forth in this section have been satisfied. The parties
recognize that there are likely to be many cases in which
different brokers are equally able to provide such best
price and execution and that, in selecting among such
brokers with respect to particular trades, it is desirable
to choose those brokers who furnish research, statistical
quotations and other information to the Funds and the
Manager in accord with the standards set forth below.
Moreover, to the extent that it continues to be lawful to do
so and so long as the Board determines that the Funds will
benefit, directly or indirectly, by doing so, the Manager
may place orders with a broker who charges a commission for
that transaction which is in excess of the amount of
commission that another broker would have charged for
effecting that transaction, provided that the excess
commission is reasonable in relation to the value of
"brokerage and research services" (as defined in Section
28(e)(3) of the Securities Exchange Act of 1934) provided by
that broker. Accordingly, the Trust and the Manager agree
that the Manager shall select brokers for the execution of
the Funds' portfolio transactions from among:
(i) Those brokers and dealers who provide quotations
and other services to the Funds, specifically including
the quotations necessary to determine the Funds' net
assets, in such amount of total brokerage as may
reasonably be required in light of such services;
(ii) Those brokers and dealers who supply research,
statistical and other data to the Manager or its
affiliates which the Manager or its affiliates may
lawfully and appropriately use in their investment
advisory capacities, which relate directly to portfolio
securities, actual or potential, of the Funds or which
place the Manager in a better position to make
decisions in connection with the management of the
Funds' assets and portfolios, whether or not such data
may also be useful to the Manager and its affiliates in
managing other portfolios or advising other clients, in
such amount of total brokerage as may reasonably be
required.
Provided that the Trust's officers are satisfied that the
best execution is obtained, the sale of shares of any of the
Funds may also be considered as a factor in the selection of
broker-dealers to execute the Funds' portfolio transactions.
(c) When the Manager has determined that any Fund should
tender securities pursuant to a "tender offer solicitation,"
Franklin Distributors, Inc. ("Distributors") shall be
designated as the "tendering dealer" so long as it is
legally permitted to act in such capacity under the Federal
securities laws and rules thereunder and the rules of any
securities exchange or association of which it may be a
member. Neither the Manager nor Distributors shall be
obligated to make any additional commitments of capital,
expense or personnel beyond that already committed (other
than normal periodic fees or payments necessary to maintain
its corporate existence and membership in the National
Association of Securities Dealers, Inc.) as of the date of
this Agreement and this Agreement shall not obligate the
Manager or Distributors (i) to act pursuant to the foregoing
requirement under any circumstances in which they might
reasonably believe that liability might be imposed upon them
as a result of so acting, or (ii) to institute legal or
other proceedings to collect fees which may be considered to
be due from others to it as a result of such a tender,
unless the Trust shall enter into an agreement with the
Manager to reimburse them for all expenses connected with
attempting to collect such fees including legal fees and
expenses and that portion of the compensation due to their
employees which is attributable to the time involved in
attempting to collect such fees.
(d) The Manager shall render regular reports to the Trust,
not more frequently than quarterly, of how much total
brokerage business has been placed by the Manager with
brokers falling into each of the foregoing categories and
the manner in which the allocation has been accomplished.
(e) The Manager agrees that no investment decision will be
made or influenced by a desire to provide brokerage for
allocation in accordance with the foregoing, and that the
right to make such allocation of brokerage shall not
interfere with the Manager's paramount duty to obtain the
best net price and execution for each of the Funds.
C. Provision of Information Necessary for Preparation of
Securities Registration Statements, Amendments and Other
Materials. The Manager, its officers and employees will make
available and provide accounting and statistical information
required by the Underwriter of the Funds in the preparation
of registration statements, reports and other documents
required by Federal and state securities laws and with such
information as the Underwriter may reasonably request for
use in the preparation of such documents or of other
materials necessary or helpful for the underwriting and
distribution of the Funds' shares.
D. Other Obligations and Services. The Manager shall make
available its officers and employees to the Board of
Trustees and officers of the Trust for consultation and
discussions regarding the administrative management of the
Funds and their investment activities.
3. Expenses of the Funds. It is understood that each Fund will
pay all of its own expenses other than those expressly assumed by
the Manager herein, which expenses payable by the Funds shall
include:
A. Fees to the Manager as provided herein;
B. Expenses of all audits by independent public accountants;
C. Expenses of transfer agent, registrar, custodian, dividend
disbursing agent and shareholder record-keeping services;
D. Expenses of obtaining quotations for calculating the value
of each Funds' net assets;
E. Salaries and other compensation of any of its executive
officers who are not officers, trustees, stockholders or
employees of the Manager;
F. Taxes levied against the Trust or any Fund;
G. Brokerage fees and commissions in connection with the
purchase and sale of portfolio securities for each Fund;
H. Costs, including the interest expense, of borrowing money;
I. Costs incident to meetings of the Board of Trustees, reports
to the Trust to its shareholders, the filing of reports with
regulatory bodies and the maintenance of the Trust's legal
existence;
J. Legal fees, including the legal fees related to the
registration and continued qualification of each Funds'
shares for sale;
K. Costs of printing share certificates representing shares of
each Fund;
L. Trustees' fees and expenses to trustees who are not
directors, officers, employees or stockholders of the
Manager or any of its affiliates;
M. Trade association dues; and
N. Its pro rata portion of the fidelity bond insurance premium.
4. Compensation of the Manager. Each Fund shall pay a monthly
management fee in cash to the Manager based upon a percentage of
the value of the respective Fund's net assets, calculated as set
forth below, on the first business day of each month in each year
as compensation for the services rendered and obligations assumed
by the Manager during the preceding month. The initial management
fee under this Agreement shall be payable on the first business
day of the first month following the effective date of this
Agreement, and shall be reduced by the amount of any advance
payments made by the Trust relating to the previous month.
A. For purposes of calculating such fee, the value of the net
assets of each Fund shall be the net assets computed as of
the close of business on the last business day of the month
preceding the month in which the payment is being made,
determined in the same manner as such Fund uses to compute
the value of its net assets in connection with the
determination of the net asset value of such Fund's shares,
all as set forth more fully in such Fund's current
prospectus. The rate of the monthly management fee payable
by each Fund shall be as follows:
5/96 of 1% of the value of its net assets up to and
including $100,000,000; and
1/24 of 1% of the value of its net assets over
$100,000,000 up to and including $250,000,000; and
9/240 of 1% of the value of its net assets in excess of
$250,000,000.
B. The Management fee payable by each Fund shall be reduced or
eliminated to the extent that Distributors has actually
received cash payments of tender offer solicitation fees
less certain costs and expenses incurred in connection
therewith; and to the extent necessary to comply with the
limitations on expenses which may be borne by the each Fund
as set forth in the laws, regulations and administrative
interpretations of those states in which the Funds' shares
are registered.
C. If this Agreement is terminated prior to the end of any
month for any Fund, the monthly management, fee for such
Fund shall be prorated for the portion of any month in which
this Agreement is in effect which is not a complete month
according to the proportion which the number of calendar
days in the fiscal quarter during which the Agreement is in
effect bears to the number of calendar days in the month,
and shall be payable within 10 days after the date of
termination.
5. Activities of the Manager. The services of the Manager to
the Funds hereunder are not to be deemed exclusive, and the
Manager and any of its affiliates shall be free to render similar
services to others. Subject to and in accordance with the
Agreement and Declaration of Trust and By-Laws of the Trust and
to Section 10(a) of the Investment Company Act of 1940, it is
understood that Trustees, officers, agents and shareholders of
the Trust are or may be interested in the Manager or its
affiliates as trustees, directors, officers, agents or
stockholders, and that directors, officers, agents or
stockholders of the Manager or its affiliates are or may be
interested in the Trust as Trustees, officers, agents,
shareholders or otherwise, that the Manager or its affiliates may
be interested in the Funds as shareholders or otherwise; and that
the effect of any such interests shall be governed by said
Agreement and Declaration of Trust, the By-Laws and the
Investment Company Act of 1940.
6. Liabilities of the Manager.
A. In the absence of willful misfeasance, bad faith, gross
negligence, or reckless disregard of obligations or duties
hereunder on the part of the Manager, the Manager shall not
be subject to liability to the Trust or any of the Funds or
to any shareholder of the Funds for any act or omission in
the course of, or connected with, rendering services
hereunder or for any losses that may be sustained in the
purchase, holding or sale of any security by any of the
Funds.
B. Notwithstanding the foregoing, the Manager agrees to
reimburse the Funds for any and all costs, expenses, and
counsel and trustees' fees reasonably incurred by the Funds
in the preparation, printing and distribution of proxy
statements, amendments to its Registration Statement,
holdings of meetings of its shareholders or Trustees, the
conduct of factual investigations, any legal or
administrative proceedings (including any applications for
exemptions or determinations by the Securities and Exchange
Commission) which the Funds incur as the result of action or
inaction of the Manager or any of its affiliates or any of
their officers, directors, employees or shareholders where
the action or inaction necessitating such expenditures (i)
is directly or indirectly related to any transactions or
proposed transaction in the shares or control of the Manager
or its affiliates (or litigation related to any pending or
proposed or future transaction in such shares or control)
which shall have been undertaken without the prior, express
approval of the Trust's Board of Trustees; or, (ii) is
within the control of the Manager or any of its affiliates
or any of their officers, trustees, employees or
shareholders. The Manager shall not be obligated pursuant to
the provisions of this Subsection 6(B), to reimburse the
Funds for any expenditures related to the institution of an
administrative proceeding or civil litigation by the Trust
or a Funds shareholder seeking to recover all or a portion
of the proceeds derived by any shareholder of the Manager or
any of its affiliates from the sale of his shares of the
Manager, or similar matters. So long as this Agreement is in
effect the Manager shall pay to the Funds the amount due for
expenses subject to this Subsection 6(B) Agreement within 30
days after a bill or statement has been received by the
Manager therefor. This provision shall not be deemed to be a
waiver of any claim the Funds may have or may assert against
the Manager or others for costs, expenses or damages
heretofore incurred by the Funds or for costs, expenses or
damages the Funds may hereafter incur which are not
reimbursable to it hereunder.
C. No provision of this Agreement shall be construed to protect
any Trustee or officer of the Trust, or director or officer
of the Manager, from liability in violation of Sections
17(h) and (i) of the Investment Company Act of 1940.
7. Renewal and Termination.
A. This Agreement shall become effective on the date written
below and shall continue in effect for two (2) years. The
Agreement is renewable annually thereafter for each Fund for
successive periods not to exceed one (1) year (i) by a vote
of a majority of the outstanding voting securities of each
Fund or by a vote of the Board of Trustees of the Trust, and
(ii) by a vote of a majority of the Trustees of the Trust
who are not parties to the Agreement or interested persons
of any parties to the Agreement (other than as Trustees of
the Trust) cast in person at a meeting called for the
purpose of voting on the Agreement.
B. This Agreement.
(i) may at any time be terminated with respect to any of the
Funds without the payment of any penalty either by vote of
the Board of Trustees of the Trust or by vote of a majority
of the outstanding voting securities of the Fund seeking to
terminate the Agreement, on 30 days' written notice to the
Manager;
(ii) shall immediately terminate with respect to all of the
Funds in the event of its assignment; and
(iii) may at any time be terminated by the Manager with
respect to any of the Funds on 30 days' written notice to
the applicable Fund.
C. As used in this Section the terms "assignment," "interested
person" and "vote of a majority of the outstanding voting
securities" shall have the meanings set forth for any such
terms in the Investment Company Act of 1940, as amended.
D. Any notice under this Agreement shall be given in writing
addressed and delivered, or mailed post-paid, to the other
party at any office of such party.
8. Severability. If any provision of this Agreement shall be
held or made invalid by a court decision, statute, rule or
otherwise, the remainder of this Agreement shall not be affected
thereby.
9. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of California.
10. Limitation of Liability. The Manager acknowledges that it has
received notice of and accepts the limitations of the Trust's
liability as set forth in Article VIII of its Agreement and
Declaration of Trust. The Manager agrees that the Trust's
obligations hereunder shall be limited to the assets of each
Fund, and that the Manager shall not seek satisfaction of any
such obligation from any shareholders of the Funds nor from any
trustee, officer, employee or agent of the Trust.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed and effective on the 1st day of December, 1986.
FRANKLIN TAX-FREE TRUST
By: /s/ Charles B. Johnson
FRANKLIN ADVISERS, INC.
By: /s/ Rupert H. Johnson, Jr.
FRANKLIN TAX-FREE TRUST
777 Mariners Island Blvd.
San Mateo, California 94404
Franklin/Templeton Distributors, Inc.
777 Mariners Island Blvd.
San Mateo, California 94404
Re: Amended and Restated Distribution Agreement
Gentlemen:
We (the "Fund") are a corporation or business trust operating as
an open-end management investment company or "mutual fund", which
is registered under the Investment Company Act of 1940 (the "1940
Act") and whose shares are registered under the Securities Act of
1933 (the "1933 Act"). We desire to issue one or more series or
classes of our authorized but unissued shares of capital stock or
beneficial interest (the "Shares") to authorized persons in
accordance with applicable Federal and State securities laws.
The Fund's Shares may be made available in one or more separate
series, each of which may have one or more classes.
You have informed us that your company is registered as a broker-
dealer under the provisions of the Securities Exchange Act of
1934 and that your company is a member of the National
Association of Securities Dealers, Inc. You have indicated your
desire to act as the exclusive selling agent and distributor for
the Shares. We have been authorized to execute and deliver this
Distribution Agreement ("Agreement") to you by a resolution of
our Board of Directors or Trustees ("Board") passed at a meeting
at which a majority of Board members, including a majority who
are not otherwise interested persons of the Fund and who are not
interested persons of our investment adviser, its related
organizations or with you or your related organizations, were
present and voted in favor of the said resolution approving this
Agreement.
1. Appointment of Underwriter. Upon the execution of this
Agreement and in consideration of the agreements on your part
herein expressed and upon the terms and conditions set forth
herein, we hereby appoint you as the exclusive sales agent for
our Shares and agree that we will deliver such Shares as you may
sell. You agree to use your best efforts to promote the sale of
Shares, but are not obligated to sell any specific number of
Shares.
However, the Fund and each series retain the right to make
direct sales of its Shares without sales charges consistent with
the terms of the then current prospectus and applicable law, and
to engage in other legally authorized transactions in its Shares
which do not involve the sale of Shares to the general public.
Such other transactions may include, without limitation,
transactions between the Fund or any series or class and its
shareholders only, transactions involving the reorganization of
the Fund or any series, and transactions involving the merger or
combination of the Fund or any series with another corporation or
trust.
2. Independent Contractor. You will undertake and
discharge your obligations hereunder as an independent contractor
and shall have no authority or power to obligate or bind us by
your actions, conduct or contracts except that you are authorized
to promote the sale of Shares. You may appoint sub-agents or
distribute through dealers or otherwise as you may determine from
time to time, but this Agreement shall not be construed as
authorizing any dealer or other person to accept orders for sale
or repurchase on our behalf or otherwise act as our agent for any
purpose.
3. Offering Price. Shares shall be offered for sale at a
price equivalent to the net asset value per share of that series
and class plus any applicable percentage of the public offering
price as sales commission or as otherwise set forth in our then
current prospectus. On each business day on which the New York
Stock Exchange is open for business, we will furnish you with the
net asset value of the Shares of each available series and class
which shall be determined in accordance with our then effective
prospectus. All Shares will be sold in the manner set forth in
our then effective prospectus and statement of additional
information, and in compliance with applicable law.
4. Compensation.
A. Sales Commission. You shall be entitled to charge
a sales commission on the sale or redemption, as appropriate, of
each series and class of each Fund's Shares in the amount of any
initial, deferred or contingent deferred sales charge as set
forth in our then effective prospectus. You may allow any sub-
agents or dealers such commissions or discounts from and not
exceeding the total sales commission as you shall deem advisable,
so long as any such commissions or discounts are set forth in our
current prospectus to the extent required by the applicable
Federal and State securities laws. You may also make payments to
sub-agents or dealers from your own resources, subject to the
following conditions: (a) any such payments shall not create any
obligation for or recourse against the Fund or any series or
class, and (b) the terms and conditions of any such payments are
consistent with our prospectus and applicable federal and state
securities laws and are disclosed in our prospectus or statement
of additional information to the extent such laws may require.
B. Distribution Plans. You shall also be entitled to
compensation for your services as provided in any Distribution
Plan adopted as to any series and class of any Fund's Shares
pursuant to Rule 12b-1 under the 1940 Act.
5. Terms and Conditions of Sales. Shares shall be offered
for sale only in those jurisdictions where they have been
properly registered or are exempt from registration, and only to
those groups of people which the Board may from time to time
determine to be eligible to purchase such shares.
6. Orders and Payment for Shares. Orders for Shares shall
be directed to the Fund's shareholder services agent, for
acceptance on behalf of the Fund. At or prior to the time of
delivery of any of our Shares you will pay or cause to be paid to
the custodian of the Fund's assets, for our account, an amount in
cash equal to the net asset value of such Shares. Sales of
Shares shall be deemed to be made when and where accepted by the
Fund's shareholder services agent. The Fund's custodian and
shareholder services agent shall be identified in its prospectus.
7. Purchases for Your Own Account. You shall not purchase
our Shares for your own account for purposes of resale to the
public, but you may purchase Shares for your own investment
account upon your written assurance that the purchase is for
investment purposes and that the Shares will not be resold except
through redemption by us.
8. Sale of Shares to Affiliates. You may sell our Shares
at net asset value to certain of your and our affiliated persons
pursuant to the applicable provisions of the federal securities
statutes and rules or regulations thereunder (the "Rules and
Regulations"), including Rule 22d-1 under the 1940 Act, as
amended from time to time.
9. Allocation of Expenses. We will pay the expenses:
(a) Of the preparation of the audited and
certified financial statements of our company to
be included in any Post-Effective Amendments
("Amendments") to our Registration Statement under
the 1933 Act or 1940 Act, including the prospectus
and statement of additional information included
therein;
(b) Of the preparation, including legal
fees, and printing of all Amendments or
supplements filed with the Securities and Exchange
Commission, including the copies of the
prospectuses included in the Amendments and the
first 10 copies of the definitive prospectuses or
supplements thereto, other than those necessitated
by your (including your "Parent's") activities or
Rules and Regulations related to your activities
where such Amendments or supplements result in
expenses which we would not otherwise have
incurred;
(c) Of the preparation, printing and
distribution of any reports or communications
which we send to our existing shareholders; and
(d) Of filing and other fees to Federal and
State securities regulatory authorities necessary
to continue offering our Shares.
You will pay the expenses:
(a) Of printing the copies of the
prospectuses and any supplements thereto and
statements of additional information which are
necessary to continue to offer our Shares;
(b) Of the preparation, excluding legal
fees, and printing of all Amendments and
supplements to our prospectuses and statements of
additional information if the Amendment or
supplement arises from your (including your
"Parent's") activities or Rules and Regulations
related to your activities and those expenses
would not otherwise have been incurred by us;
(c) Of printing additional copies, for use
by you as sales literature, of reports or other
communications which we have prepared for
distribution to our existing shareholders; and
(d) Incurred by you in advertising,
promoting and selling our Shares.
10. Furnishing of Information. We will furnish to you such
information with respect to each series and class of Shares, in
such form and signed by such of our officers as you may
reasonably request, and we warrant that the statements therein
contained, when so signed, will be true and correct. We will
also furnish you with such information and will take such action
as you may reasonably request in order to qualify our Shares for
sale to the public under the Blue Sky Laws of jurisdictions in
which you may wish to offer them. We will furnish you with
annual audited financial statements of our books and accounts
certified by independent public accountants, with semi-annual
financial statements prepared by us, with registration statements
and, from time to time, with such additional information
regarding our financial condition as you may reasonably request.
11. Conduct of Business. Other than our currently
effective prospectus, you will not issue any sales material or
statements except literature or advertising which conforms to the
requirements of Federal and State securities laws and regulations
and which have been filed, where necessary, with the appropriate
regulatory authorities. You will furnish us with copies of all
such materials prior to their use and no such material shall be
published if we shall reasonably and promptly object.
You shall comply with the applicable Federal and State
laws and regulations where our Shares are offered for sale and
conduct your affairs with us and with dealers, brokers or
investors in accordance with the Rules of Fair Practice of the
National Association of Securities Dealers, Inc.
12. Redemption or Repurchase Within Seven Days. If Shares
are tendered to us for redemption or repurchase by us within
seven business days after your acceptance of the original
purchase order for such Shares, you will immediately refund to us
the full sales commission (net of allowances to dealers or
brokers) allowed to you on the original sale, and will promptly,
upon receipt thereof, pay to us any refunds from dealers or
brokers of the balance of sales commissions reallowed by you. We
shall notify you of such tender for redemption within 10 days of
the day on which notice of such tender for redemption is received
by us.
13. Other Activities. Your services pursuant to this
Agreement shall not be deemed to be exclusive, and you may render
similar services and act as an underwriter, distributor or dealer
for other investment companies in the offering of their shares.
14. Term of Agreement. This Agreement shall become
effective on the date of its execution, and shall remain in
effect for a period of two (2) years. The Agreement is renewable
annually thereafter, with respect to the Fund or, if the Fund has
more than one series, with respect to each series, for successive
periods not to exceed one year (i) by a vote of (a) a majority of
the outstanding voting securities of the Fund or, if the Fund has
more than one series, of each series, or (b) by a vote of the
Board, and (ii) by a vote of a majority of the members of the
Board who are not parties to the Agreement or interested persons
of any parties to the Agreement (other than as members of the
Board), cast in person at a meeting called for the purpose of
voting on the Agreement.
This Agreement may at any time be terminated by the
Fund or by any series without the payment of any penalty, (i)
either by vote of the Board or by vote of a majority of the
outstanding voting securities of the Fund or any series on 90
days' written notice to you; or (ii) by you on 90 days' written
notice to the Fund; and shall immediately terminate with respect
to the Fund and each series in the event of its assignment.
15. Suspension of Sales. We reserve the right at all times
to suspend or limit the public offering of Shares upon two days'
written notice to you.
16. Miscellaneous. This Agreement shall be subject to the
laws of the State of California and shall be interpreted and
construed to further promote the operation of the Fund as an open-
end investment company. This Agreement shall supersede all
Distribution Agreements and Amendments previously in effect
between the parties. As used herein, the terms "Net Asset
Value," "Offering Price," "Investment Company," "Open-End
Investment Company," "Assignment," "Principal Underwriter,"
"Interested Person," "Parent," "Affiliated Person," and "Majority
of the Outstanding Voting Securities" shall have the meanings set
forth in the 1933 Act or the 1940 Act and the Rules and
Regulations thereunder.
Nothing herein shall be deemed to protect you against any
liability to us or to our securities holders to which you would
otherwise be subject by reason of willful misfeasance, bad faith
or gross negligence in the performance of your duties hereunder,
or by reason of your reckless disregard of your obligations and
duties hereunder.
If the foregoing meets with your approval, please acknowledge
your acceptance by signing each of the enclosed copies, whereupon
this will become a binding agreement as of the date set forth
below.
Very truly yours,
FRANKLIN TAX-FREE TRUST
By:_______________________________
Accepted:
Franklin/Templeton Distributors, Inc.
By:__________________________________
DATED: _______________
AGREEMENT
AGREEMENT, made as of March 1, 1985, between Franklin Tax-
Free Trust a Massachusetts Business Trust (hereinafter called the
"Fund") and Bank of America NT & SA, a national banking
association (hereinafter called the "Custodian").
WITNESSETH:
WHEREAS, the Fund is registered as an investment
company under the Investment Company Act of 1940, as amended (the
"1940 Act"), as a diversified, open-end management company and
desires that its securities and cash shall be held and
administered by the Custodian pursuant to the terms of this
Agreement; and
WHEREAS, the Custodian has an aggregate capital,
surplus, and undivided profits in excess of Two Million Dollars
($2,000,000), and has its functions and physical facilities
supervised by federal authority and is ready and willing to serve
pursuant to and subject to the terms of this Agreement:
NOW, THEREFORE, in consideration of the mutual
agreements herein made, the Fund, and Custodian agree as follows:
Sec. 1. Definitions:
The word "securities" as used herein includes stocks,
shares, bonds, debentures, notes, mortgages and other obligations
and any certificates, receipts, warrants or other instruments
representing rights to receive, purchase, or subscribe for the
same, or evidencing or representing any other rights or interests
therein, or in any property or assets.
The term "proper instructions" shall mean a request or
direction by telephone or any other communication device from an
authorized Fund designee to be followed by a certification in
writing signed in the name of the Fund by any two of the
following persons: the Chairman of the Executive Committee, the
President, a Vice-President, the Secretary and Treasurer of the
Fund, or any other persons duly authorized to sign by the Board
of Trustees of the Fund and for whom authorization has been
communicated in writing to the Custodian. The term "proper
officers" shall mean the officers authorized above to give proper
instructions.
Sec. 2. Names, Titles and Signatures of Authorized Signers:
An officer of the Fund will certify to Custodian the
names and signatures of those persons authorized to sign in
accordance with Sec. 1 hereof, and on a timely basis, of any
changes which thereafter may occur.
Sec. 3. Receipt and Disbursement of Money:
A. Custodian shall open and maintain a separate account
or accounts in the name of the Fund, subject only to draft or
order by Custodian acting pursuant to the terms of this Agreement
("Direct Demand Deposit Account"). Custodian shall hold in such
account or accounts, subject to the provisions hereof, all cash
received by it from or for the accounts of the Fund. This shall
include, without limitation, the proceeds from the sale of shares
of the capital stock of the Fund which shall be received along
with proper instructions from the Fund. All such payments
received by Custodian shall be converted to Federal Funds no
later than the day after receipt and deposited to such Direct
Demand Deposit Account.
B. Custodian shall make payments of cash to, or for the
account of, the Fund from such cash or Direct Demand Deposit
Account only (a) for the purchase of securities for the portfolio
of the Fund upon the delivery of such securities to Custodian
registered in the name of the Custodian or of the nominee or
nominees thereof, in the proper form for transfer, (b) for the
redemption of shares of the capital stock of the Fund, (c) for
the payment of interest, dividends, taxes, management or
supervisory fees or any operating expenses (including, without
limitations thereto, insurance premiums, fees for legal,
accounting and auditing services), (d) for payments in connection
with the conversion, exchange or surrender of securities owned or
subscribed to by the Fund held by or to be delivered to
Custodian; or (e) for other proper Fund purposes. Before making
any such payment Custodian shall receive and may rely upon,
proper instructions requesting such payment and setting forth the
purposes of such payment.
Custodian is hereby authorized to endorse and collect
for the account of the Fund all checks, drafts or other orders
for the payment of money received by Custodian for the account of
the Fund.
Sec. 4. Holding of Securities:
Custodian shall hold all securities received by it for
the account of the Fund, pursuant to the provisions hereof, in
accordance with the provisions of Section 17(f) of the Investment
Company Act of 1940 and the regulations thereunder. All such
securities are to be held or disposed of by the Custodian for,
and subject at all times to the proper instructions of, the Fund,
pursuant to the terms of this Agreement. The Custodian shall have
no power of authority to assign, hypothecate, pledge or otherwise
dispose of any such securities and investments, except pursuant
to the proper instructions of the Fund and only for the account
of the Fund as set forth in Sec. 5 of this Agreement.
Sec. 5. Transfer, Exchange or Delivery, of Securities:
Custodian shall have sole power to release or to
deliver any securities of the Fund held by it pursuant to this
Agreement. Custodian agrees to transfer, exchange, or deliver
securities held by it hereunder only (a) for the sales of such
securities for the account of the Fund upon receipt by Custodian
of payment therefor, (b) when such securities are called,
redeemed or retired or otherwise become payable, (c) for
examination by any broker selling any such securities in
accordance with "street delivery" custom, (d) in exchange for or
upon conversion into other securities alone or other securities
and cash whether pursuant to any plan or merger, consolidation,
reorganization, recapitalization or readjustment, or otherwise,
(e) upon conversion of such securities pursuant to their terms
into other securities, (f) upon exercise of subscription,
purchase or other similar rights represented by such securities,
(g) for the purpose of exchanging interim receipts or temporary
securities for definitive securities, (h) for the purpose of
redeeming in kind shares of beneficial interest of the Fund upon
delivery thereof to Custodian, or (i) for other proper Fund
purposes. Any securities or cash receivable in exchange for such
deliveries made by Custodian, shall be deliverable to Custodian.
Before making any such transfer, exchange or delivery, the
Custodian shall receive, and may rely upon, proper instructions
authorizing such transfer, exchange or delivery and setting forth
the purpose thereof.
Sec. 6. Other Actions of Custodians:
(a) The Custodian shall collect, receive and deposit
income dividends, interest and other payments or distribution of
cash or property of whatever kind with respect to the securities
held hereunder; receive and collect securities received as a
distribution upon portfolio securities as a result of a stock
dividend, share split-up, reorganization, recapitalization,
consolidation, merger, readjustment, distribution of rights and
other items of like nature, or otherwise, and execute ownership
and other certificates and affidavits for all federal and state
tax purposes in connection with the collection of coupons upon
corporate securities, setting forth in any such certificate or
affidavit the name of the Fund as owner of such securities; and
do all other things necessary or proper in connection with the
collection, receipt and deposit of such income and securities,
including without limiting the generality of the foregoing,
presenting for payment all coupons and other income items
requiring presentation and presenting for payment all securities
which may be called, redeemed, retired or otherwise become
payable. Amounts to be collected hereunder shall be credited to
the account of the Fund according to the following formula:
(1) Periodic interest payments and final payments on
maturities of Federal instruments such as U.S. Treasury bills,
bonds and notes; interest payments and final payments on
maturities of other money market instruments including tax-exempt
money market instruments payable in federal or depository funds;
and payments on final maturities of GNMA instruments, shall be
credited to the account of the Fund on payable or maturity date.
(2) Dividends on equity securities and interest
payments, and payments on final maturities of municipal bonds
(except called bonds) shall be credited to the account of the
Fund on payable or maturity date plus one.
(3) Payments for the redemption of called bonds,
including called municipal bonds shall be credited to the account
of the Fund on the payable date except that called municipal
bonds paid in other than Federal or depository funds shall be
credited on payable date plus one.
(4) Periodic payments of interest and/or of partial
principal on GNMA instruments (other than payments on final
maturity) shall be credited to the account of the Fund on payable
date plus three.
(5) Proceeds of insurance in lieu of any payments on
municipal securities in default shall be credited to the account
of the Fund on date of receipt.
(6) Should the Custodian fail to credit the account of
the Fund on the date specified in paragraphs (1) - (5) above, the
Fund may at its option, require compensation from the Custodian
of foregone interest (at the rate of prime plus one) and for
damages, if any.
(b) Payments to be received or to be paid in connection
with purchase and sale transactions shall be debited or credited
to the account of the Fund on the contract settlement date with
the exception of "when-issued" municipal bonds. Payments to be
made for purchase by the Fund of when-issued municipal bonds
shall be debited to the account of the Fund on actual settlement
date.
(1) In the event a payment is wrongfully debited to the
account of the Fund due to an error by the Custodian, the
Custodian will promptly credit such amount to the Fund, plus
interest (prime plus one) and damages, if any.
(2) In the event a payment is credited to the account
of the Fund and the Custodian is unable to deliver securities
being sold due to an error on the part of the Fund, such payment
shall be debited to the account of the Fund, and an appropriate
charge for costs of the transaction may be sent by the Custodian
to the Fund.
Sec. 7. Reports by Custodian:
Custodian shall each business day furnish the Fund with
a statement summarizing all transactions and entries for the
account of the Fund for the preceding day. At the end of every
month Custodian shall furnish the Fund with a list of the
portfolio securities showing the quantity of each issue owned,
the cost of each issue and the market value of each issue at the
end of each month. Such monthly report shall also contain
separate listings of (a) unsettled trades and (b) when-issued
securities. Custodian shall furnish such other reports as may be
mutually agreed upon from time-to-time.
Sec. 8. Compensation:
Custodian shall be paid as compensation for its
services pursuant to this Agreement such compensation as may from
time-to-time be agreed upon in writing between the two parties.
Sec. 9. Liabilities and Indemnifications:
(a) Custodian shall not be liable for any action taken
in good faith upon any proper instructions herein described or
certified copy of any resolution of, the Board of Trustees of the
Fund, and may rely on the genuineness of any such document which
it may in good faith believe to have been validly executed.
(b) The Fund agrees to indemnify and hold harmless the
Custodian and its nominee from all taxes, charges, expenses,
assessments, claims and liabilities (including counsel fees)
incurred or assigned against it or its nominee in connection with
the performance of this Agreement, except such as may arise from
negligent action, negligent failure to act or willful misconduct
of Custodian or its nominee.
Sec. 10. Records:
The Custodian hereby acknowledges that all of the records
it shall prepare and maintain pursuant to this Agreement shall be
the property of the Fund and, if and to the extent applicable, of
the principal underwriter of the shares of the Fund, and that
upon proper instructions of the Fund or such principal
underwriter, if any, or both, it shall:
(a) Deliver said records to the Fund, principal
underwriter or a successor custodian, as appropriate:
(b) Provide the auditors of the Fund or principal
underwriter or any securities regulatory agency with a copy of
such records without charge; and provide the Fund and successor
custodian with a reasonable number of reports and copies of such
records at a mutually agreed upon charge appropriate to the
circumstances.
(c) Permit any securities regulatory agency to inspect
or copy during normal business hours of the Custodian any such
records.
Sec. 11. Appointment of Agents:
(a) The Custodian shall have the authority, in its
discretion, to appoint an agent or agents to do and perform any
acts or things for and on behalf of the Custodian, pursuant at
all times to its instructions, as the Custodian is permitted to
do under this Agreement.
(b) Any agent or agents appointed to have physical
custody of securities held under this Agreement or any part
thereof must be: (1) a bank or banks, as that term is defined in
Section 2(a)(5) of the 1940 Act, having an aggregate, surplus and
individual profits of not less than $2,000,000 (or such greater
sum as may then be required by applicable laws), or (2) a
securities depository, (the "Depository") as that term is defined
in Rule 17f-4 under the 1940 Act, upon proper instructions from
the Fund and subject to any applicable regulations, or (3) the
book-entry system of the U.S. Treasury Department and Federal
Reserve Board, (the "System") upon proper instructions and
subject to any applicable regulations.
(c) With respect to portfolio securities deposited or
held in the System or the Depository, Custodian shall:
1) hold such securities in a nonproprietary account
which shall not include securities owned by
Custodian;
2) on each day on which there is a transfer to or
from the Fund in such portfolio securities, send a
written confirmation to the Fund;
3) upon receipt by Custodian, send promptly to Fund
(i) a copy of any reports Custodian receives from
the System or the Depository concerning internal
accounting controls, and (ii) a copy of such
reports on Custodian's systems of internal
accounting controls as Fund may reasonably
request.
(d) The delegation of any responsibilities or
activities by the Custodian to any agent or agents shall not
relieve the Custodian from any liability which would exist if
there were no such delegation.
Sec. 12. Assignment and Termination:
(a) This Agreement may not be assigned by the Fund or
the Custodian without written consent of the other party.
(b) Either the Custodian or the Fund may terminate this
Agreement without payment of any penalty at any time upon one
hundred twenty (120) days written notice thereof delivered by the
one to the other, and upon the expiration of said one hundred
twenty (120) days, this Agreement shall terminate; provided,
however, that this Agreement shall continue thereafter for such
period as may be necessary for the complete divestiture of all
assets held hereinunder, as next herein provided. In the event of
such termination, the Custodian will immediately upon the receipt
or transmittal of such notice, as the case may be, commence and
prosecute diligently to completion the transfer of all cash and
the delivery of all portfolio securities, duly endorsed, to the
successor of the Custodian when appointed by the Fund. The Fund
shall select such successor custodian within sixty (60) days
after the giving of such notice of termination, and the
obligation of the Custodian named herein to deliver and transfer
over said assets directly to such successor custodian shall
commence as soon as such successor is appointed and shall
continue until completed, as aforesaid. At any time after
termination hereof the Fund may have access to the records of the
administration of this custodianship whenever the same may be
necessary.
(c) If, after termination of the services of the
Custodian, no successor custodian has been appointed within the
period above provided, the Custodian may deliver the cash and
securities owned by the Fund to a bank or trust company of its
own selection having an aggregate capital, surplus and undivided
profits of not less than Two Million Dollars ($2,000,000) (or
such greater sum as may then be required by the laws and
regulations governing the conduct by the Fund of its business as
an investment company) and having its functions and physical
facilities supervised by federal or state authority, to be held
as the property of the Fund under the terms similar to those on
which they were held by the retiring Custodian, whereupon such
bank or trust company so selected by the Custodian shall become
the successor custodian with the same effect as though selected
by the Board of Trustees of the Fund.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement.
Franklin Tax-Free Trust
/s/ Harmon E. Burns
Attest:
/s/ Deborah R. Gatzek
Bank of America, NT & SA
/s/ Frank Valenti
Attest:
/s/ illegible
FRANKLIN
GROUP OF FUNDS
(FRANKLIN LOGO)
777 Mariners Island Blvd.
San Mateo, CA 94404-1585
415/570-3000
April 2, 1990
Lee D. Harbert, Vice President & Mgr.
Bank of America NT & SA
555 California St. 4th Floor
San Francisco, CA 94104
Dear Lee:
This will confirm our agreement to modify the Custodian
Agreement for the funds listed below as follows:
Section 6(a) (4) will be modified to read: "Periodic
payments of interest and/or of partial principal on GNMA
instruments (other than payments on final maturity) shall be
credited to the account of the Fund on payable date plus two."
FRANKLIN GROUP OF FUNDS
Franklin Investors Securities Trust
Franklin Tax-Free Trust
Franklin California Tax-Free Income Fund, Inc.
Franklin Federal Tax-Free Income Fund
AGE High Income Fund, Inc.
Franklin New York Tax-Free Income Fund, Inc.
Franklin Equity Fund
Franklin California Tax-Free Trust
Institutional Fiduciary Trust
Franklin Gold Fund
Franklin Tax-Exempt Money Fund
Franklin Pennsylvania Investors Fund
Franklin Money Fund
Franklin Federal Money Fund
Franklin Custodian Funds, Inc.
Franklin Option Fund
Franklin Tax-Advantaged U.S. Government Securities Fund
Franklin Tax-Advantaged High Yield Securities Fund
Franklin Managed Trust
Franklin Valuemark Funds
Franklin Government Securities Trust
Franklin New York Tax-Exempt Money Fund
Franklin Balance Sheet Investment Fund
Please sign the enclosed copy of this letter in the space
indicated and return it to me. If you have any questions,
please call me.
Sincerely,
/s/ Deborah R. Gatzek
Deborah R. Gatzek
Approved and agreed:
/s/ Lee D. Harbert
By: Lee D. Harbert
AGREEMENT
This Agreement is made this 8th day of March, 1985 by and
between FRANKLIN TAX-FREE TRUST, a Massachusetts business trust
with principal offices at 155 Bovet Road, San Mateo, California
94404 ("Franklin") and FINANCIAL GUARANTY INSURANCE COMPANY, a
New York stock insurance company, with principal offices at 175
Water Street, New York, New York 10038 ("Financial Guaranty"),
with reference to the following facts:
A. Franklin is a diversified, open-end investment company
(mutual fund), organized as a Massachusetts business trust.
Franklin currently consists of six separate Funds (collectively
the "Funds"): The National Insured Fund, The Massachusetts
Insured Fund, The Michigan Insured Fund, The Minnesota Insured
Fund, The Ohio Insured Fund, and The Puerto Rico Fund. Each of
the Funds issues a separate series of Franklin's shares and will
maintain a totally separate investment portfolio. The Puerto Rico
Fund will not be an insured Fund. (The other Funds named herein,
together with any other insured Funds for different states, are
referred to collectively as the "Insured Funds.")
B. The National Insured Fund will invest primarily in
securities of states, territories, and possessions of the United
States and the District of Columbia and their political
subdivisions, agencies, and instrumentalities, the interest on
which is exempt from federal income taxes (referred to herein as
"municipal securities" or "bonds"). Each state fund will invest
primarily in municipal securities of their respective state or
territory and its municipalities, political subdivisions and
public authorities, the interest on which is exempt from federal
income taxes and the personal income taxes of their respective
state or territory. Franklin desires to have certain of the
Insured Funds' investments in municipal securities be covered by
portfolio insurance guaranteeing their scheduled payment of
interest and of principal while held by the Insured Funds.
C. Financial Guaranty is in the business of providing
insurance and financial guaranties for a variety of investment
instruments. Financial Guaranty desires to provide to Franklin
the portfolio insurance described in the preceding paragraph (B).
In consideration of the mutual covenants and conditions set
forth below, Franklin and Financial Guaranty agree as follows:
1. Agreement to Insure.
1.1 Financial Guaranty agrees to insure the municipal
securities purchased in accordance with the terms of this
Agreement from time to time by Franklin for the Insured Funds,
which municipal securities Financial Guaranty has approved in
advance of such purchase as eligible for insurance.
1.2 Franklin may, but shall not be required to purchase
insurance from Financial Guaranty for any municipal securities
covered by insurance obtained by the issuer and applicable to the
securities purchased by Franklin, regardless of the insurance
company providing such insurance.
1.3 Franklin may, but shall not be required to purchase
insurance from Financial Guaranty on any municipal securities
where the payment of interest and principal is guaranteed by an
agency or instrumentality of the U.S. Government, or on any short-
term instruments, such as Project Notes or tax exempt commercial
paper, which have the highest rating issued by Moody's and
Standard & Poor's.
2. Issuance of Master Policies.
2.1 Financial Guaranty agrees to issue a master insurance
policy ("the Master Policy") for each Insured Fund on the date
Franklin informs Financial Guaranty it desires to have Financial
Guaranty issue a Master Policy for a given Insured Fund. (The
form of the Master Policy is attached hereto as Exhibit "1.") A
schedule will be issued by Financial Guaranty and attached to and
made a part of each Master Policy which lists all bonds insured
in a given Insured Fund ("Schedule A"). Each Schedule A will list
the following information for each insured bond in the given
Fund: item number, par value, full name of issuer, full name of
bond, interest rate, date of bond, stated maturity date of bond,
CUSIP number, secondary market premium rate, annual premium rate,
annual premium amount, date bond first insured under policy, and
date bond sold (including, for all purposes in this Agreement,
municipal securities not delivered or paid prior to maturity). As
bonds are added to and/or sold from the Insured Funds, Financial
Guaranty agrees to issue updated addendums to Schedule A
reflecting such deletions and/or additions. Financial Guaranty
agrees to deliver to Franklin updated Schedule A's on a monthly
basis for each Insured Fund. In addition, Financial Guaranty
agrees to provide Franklin for each Insured Fund on a monthly
basis a summary which contains the same information specified
above for inclusion in Schedule A but on a cumulative basis for
all insured bonds which have been sold by an Insured Fund.
2.2 Financial Guaranty's obligation to insure any particular
bond which it has agreed to insure is subject only to Franklin's
becoming the bondholder (within the meaning of the Master
Policies) (i) on or before the 100th day following the Purchase
Date or (ii) on or before the 150th day following the Purchase
Date in the case of "when, as and if issued" bonds which the
issuer thereof has failed timely to deliver in definitive form to
the original purchasers thereof. So long as Franklin becomes the
bondholder on or before the 100th or 150th day following the
Purchase Date, as the case may be, such municipal security shall
be insured as of the Purchase Date.
3. Exclusivity of Insurance.
3.1 Financial Guaranty agrees not to provide any other
mutual fund group until at least August 1, 1985, with a mutual
fund insurance program containing a secondary market insurance
conversion option which it is providing to Franklin under this
Agreement. However, Franklin agrees that Financial Guaranty may
provide an insurance program to two other mutual fund groups with
which it has been negotiating: The Scudder Group and The Vanguard
Group.
3.2 With respect to any insurance purchased on municipal
securities by Franklin, Franklin agrees to acquire such insurance
only from Financial Guaranty, subject to Franklin's rights under
Section 8.3 herein.
4. Premium Payment.
4.1 Financial Guaranty agrees to provide Franklin on the
fifth business day of each month with a premium payment statement
for each Insured Fund containing an accounting of the premium due
for that month, including adjustments for (i) any premium refund
due Franklin because of the sale of bond(s) by an Insured Fund
during the previous month (including bonds for which Secondary
Market Insurance has been purchased), (ii) any additional premium
due Financial Guaranty because of a purchase of bond(s) by an
Insured Fund during the previous month, and (iii) any single
premium due for Secondary Market Insurance acquired during the
prior month.
4.2 Franklin agrees to pay Financial Guaranty on behalf of
each Insured Fund within five business days of Franklin's receipt
of the premium statement provided for in Section 4.1, one-twelfth
(1/12) of the aggregate of the annual premiums for the bonds
listed on the Schedule A to the Master Policy for each such
Insured Fund as of the last business day of the prior month.
4.3 If Financial Guaranty does not receive the premium
payment within five business days of Franklin's receipt of the
premium statement, then Financial Guaranty agrees to notify
Franklin that it has not received said premium payment by the end
of the sixth business day following Franklin's receipt of the
premium statement. All premium payments due Financial Guaranty
which are received by Financial Guaranty on or before the close
of business on the fifth business day following Franklin's
receipt of the premium statement shall not be considered late.
However, if a premium payment is received after the fifth
business day following Franklin's receipt of the premium
statement, Franklin agrees to pay Financial Guaranty in addition
to the premium due, interest at a rate equal to that rate of
interest publicly announced as its base rate from time to time by
Citibank, N.A. in New York, New York, plus one percent per annum
for each 24-hour period or portion thereof payment of the premium
is delayed after the fifth business day following Franklin's
receipt of the premium statement.
4.4 Financial Guaranty agrees that once an Insured Fund
purchases a bond and begins paying a premium for that bond based
upon a stated annual premium rate, neither the annual premium
rate nor the secondary market premium rate for that bond can be
changed by Financial Guaranty so long as the bond is owned by
Franklin and insured by Financial Guaranty under one of the
Master Policies of the Insured Funds or the Secondary Market
Policy referred to in Section 9 herein.
4.5 With each premium payment, Franklin shall, to the extent
Franklin has notice thereof, notify Financial Guaranty as to any
bond which has been paid prior to maturity, defeased (whether
legally or economically), sold by an Insured Fund or never
purchased by such Fund during the preceding thirty days. Such
notification must specify the amount of bonds affected and
identify such bonds by their item number in Schedule A to the
applicable Master Policy. Such notification shall be deemed
sufficient for purposes of entitling Franklin to any premium
refunds pursuant to the Master Policies. No such notice need be
given as to bonds with respect to which Financial Guaranty has
previously been notified to the same effect.
5. Definitions.
Financial Guaranty and Franklin agree that the following
definitions shall apply to the interpretation of the Master
Policies and the interpretation of this Agreement.
5.1 "Approved List" is the then current list of municipal
securities or bonds, including premium rate and allocation
information, which Financial Guaranty will insure under the terms
of the Master Policies if Franklin purchases such municipal
securities or bonds.
5.2 "Bonds" or "municipal securities" are all of the
municipal securities or bonds purchased by Franklin which are
insured under one of the Master Policies issued to the Insured
Funds.
5.3 "Interest Coupons" are the coupons, if any, attached to
each of the bonds.
5.4 "Policy Period" is the period of time commencing with
the policy effective date of a given Master Policy and continuing
until the date of cancellation of said Master Policy under
Section 8.1, 8.2, or 8.3 herein.
5.5 "Policy Effective Date" is the first day on which
Franklin has coverage under a given Master Policy issued to an
Insured Fund. Each Master Policy takes effect at 12:01 Pacific
Standard Time on the policy effective date.
5.6 "Purchase Date" is the date on which an Insured Fund
purchases a municipal security and is the first day on which such
municipal security is insured under a given Master Policy.
5.7 In addition to the definitions contained in the Master
Policies and any endorsements thereto, "Due for Payment," when
referring to the principal of a bond, does not refer to any
extension or delay in payment by reason of court order,
legislation, or governmental action of any nature.
6. Bond Purchase Allocations.
Financial Guaranty agrees to provide Franklin by a method
capable of producing a written record with an allocation of bonds
which Franklin may purchase and have insured by Financial
Guaranty during any calendar quarter. Once Financial Guaranty
makes the allocation, it agrees not to reduce an allocation for
any bond during the course of that quarter for which the
allocation is made. Furthermore, if Franklin exhausts its
allocation for a given bond during a quarter and if it desires to
purchase additional amounts of said bond during the quarter,
Financial Guaranty agrees to use its best efforts to increase
Franklin's allocation of said bonds so as to allow Franklin to
make the additional purchases. However, Financial Guaranty
reserves the right to remove from the allocation lists of all its
clients, any bond the credit of which, in the judgment of
Financial Guaranty, materially deteriorated after it made the
quarterly allocations.
7. Financial Guaranty Broadcast Network.
Financial Guaranty agrees to provide Franklin with access to
its broadcast network system which will communicate to Franklin
the Approved List of bond issues eligible for insurance.
Financial Guaranty further agrees to incur all costs in providing
Franklin with access to and use of the broadcast network, except
for the receiving terminal at Franklin. If the broadcast network
is not in place and operational at the time the Master Policies
are issued, Financial Guaranty agrees to pay any and all costs
associated in communicating in another mode its Approved List of
bond issues on a regular, timely basis to Franklin up to the time
the broadcast network is, in fact, in place and operational.
8. Cancellation of Master Policies.
8.1 Each Master Policy is non-cancellable by Financial
Guaranty except for non-payment of premium. If Financial Guaranty
has not received a premium payment for any bond by the 15th
business day following the date on which it was due, agrees to
notify Franklin again of Franklin's nonpayment. If Financial
Guaranty has not received any such overdue premium payment on or
before the next succeeding premium due date, then the Master
Policy(ies) of the Insured Fund(s) with respect only to the bond
or bonds for which the premium payment has not been received
shall be cancelled. The effective date of such cancellation shall
be as of the date on which the premium payment was originally due
and all such bonds previously insured thereunder shall have
ceased to be insured as of that date.
8.2 Franklin reserves the right to cancel any Master Policy
upon sixty (60) days' prior written notice to Financial Guaranty.
8.3 Franklin reserves the right upon thirty (30) days' prior
written notice to Financial Guaranty to discontinue insuring
bonds under any or all of the Master Policies which Franklin
purchases after the effective date of the notice. If Franklin
discontinues insuring bonds with Financial Guaranty, it shall
have the right to continue to pay premiums to Financial Guaranty
and thereby keep any and/or all of the Master Policies in force
for the bonds which it had purchased and previously insured under
a Master Policy prior to the effective date of the notice. In
this situation, a Master Policy will terminate (i) on the date on
which the last principal payment of the last bonds, together with
accrued interest, are received by Franklin or (ii) on the date
the last bond insured under a Master Policy is sold by Franklin,
whichever occurs later. During the period of time in which
Franklin keeps the Master Policies in force, it shall also retain
the right to purchase a Secondary Market Policy for any bonds
insured under such Master Policy.
9. Secondary Market Insurance Conversion Option.
9.1 Financial Guaranty hereby grants Franklin the right to
purchase, on a bond-by-bond basis for each and every bond owned
by Franklin which is insured under one of the Master Policies,
Financial Guaranty's Municipal Bond Secondary Market Insurance
Policy ("Secondary Market Policy") in substantially the form
attached to this Agreement as Exhibit "2." The premium with
respect to any Secondary Market Policy for any bond is payable
with the premium payment due in the next succeeding month
following the month in which the bond was sold.
9.2 Franklin's right to purchase the Secondary Market Policy
shall apply to each and every bond held by Franklin under one or
more of the Master Policies, regardless of whether Franklin
intends to hold or sell such bond and regardless of the then
existing credit status or rating of the issuer of said bond.
9.3 Contemporaneously with the issuance of a Secondary
Market Policy for any bond, the coverage of such bond under one
or more Master Policies shall cease and such bond shall be
treated as sold for purposes of the accounting therefor in
Section 4.1 herein and no further premium shall be due under the
Master Policy or Policies.
10. Approval of Bond Purchase Request.
Financial Guaranty agrees to use its best efforts to
promptly research, investigate, and approve or disapprove any
request of Franklin to purchase a bond which is not on Financial
Guaranty's then current Approved List.
11. Time for Payment by Fiscal Agent.
Financial Guaranty will cause its Fiscal Agent to pay
Franklin any principal and/or interest due Franklin because of
nonpayment by an issuer within 30 calendar days after Financial
Guaranty has paid the Fiscal Agent under the provisions of
paragraph 2 of each Master Policy, so long as the evidence
requirements under such paragraph are met. Within 15 days of
Financial Guaranty's payment to the Fiscal Agent, Financial
Guaranty is to ascertain if there are any problems between
Franklin and the Fiscal Agent with respect to the necessary
evidence Franklin is to provide the Fiscal Agent. If there are
any problems, Financial Guaranty agrees to work with Franklin and
the Fiscal Agent to resolve such problems so that the Fiscal
Agent can make payment within the 30-calendar-day period.
12. Confidentiality: Financial Guaranty Staff.
12.1 Financial Guaranty hereby agrees that its staff, while
employed by Financial Guaranty, will not reveal to any other
Financial Guaranty clients, directly or indirectly, the amount
and/or types of municipal bonds purchased by Franklin. In
addition, Financial Guaranty agrees that its staff will not
reveal to other Financial Guaranty clients any information
received from Franklin's staff, as a result of the relationship
between Financial Guaranty and Franklin created under this
Agreement, regarding Franklin's business, trading strategy and/or
business practices, and/or any other information which might
lessen Franklin's competitive place in the mutual fund market.
12.2 So that it can fulfill its obligations under Section
12.1, Financial Guaranty further agrees to institute an internal
confidentiality program. Financial Guaranty also agrees that a
part of its internal confidentiality program will inform its
staff members of their obligation to keep confidential all
information they obtain about Franklin after they leave the
employ of Financial Guaranty.
13. Confidentiality: Franklin Staff.
13.1 Franklin hereby agrees that its staff, while employed
by Franklin, will not reveal to any individuals and/or entities
outside Franklin, directly or indirectly, any information
concerning the names of the bonds and the issuers on Financial
Guaranty's Approved List or concerning its Broadcast System,
which information the staff obtains as a result of the
relationship between Financial Guaranty and Franklin created
under this Agreement.
13.2 So that it can fulfill its obligations under Section
13.1, Franklin further agrees to institute an internal
confidentiality program. Franklin also agrees that a part of its
internal confidentiality program will inform its staff members of
their obligation to keep confidential the information they obtain
about Financial Guaranty's Approved List after they leave the
employ of Franklin.
14. Information Notification.
Financial Guaranty agrees promptly to provide Franklin in
writing, from time to time or upon the reasonable written request
of Franklin, with (a) any information concerning any change which
would make the statements in the Registration Statement of
Franklin on Form N-1A ("Registration Statement") under the
caption "Insurance" relating to Financial Guaranty and the Master
Policies fail to present accurately and fairly the summary
information set forth therein or omit any material fact with
respect to the description of Financial Guaranty relevant to the
material terms of the Master Policies and/or Financial Guaranty's
ability to meet its obligations under the Master Policies and (b)
any information concerning any material adverse change in
Financial Guaranty's financial condition since the date of the
financial information relating to Financial Guaranty which was
included in the Registration Statement. The purpose for providing
this information to Franklin is to keep the information in the
Registration Statement current for so long as the Prospectus and
Statement of Additional Information in such Registration
Statement, as amended or supplemented, is required to be
delivered in connection with the offer, sale, or resale of shares
of the Funds.
15. General Provisions.
15.1 Headings. Headings and subheadings are provided in this
Agreement for convenience only and are not to be taken to modify
in any way the provisions with which they are associated or any
other provisions.
15.2 Severability of Provisions. If any provision of this
Agreement is held to be unenforceable or in conflict with the law
of any state or of the United States of America, the remainder of
this Agreement is to be considered valid and enforceable
according to its terms, and the Agreement is to be construed as
if such unenforceable provision(s) had never been contained in
it.
15.3 Waiver. A waiver of any breach of any provision of this
Agreement is not to be construed as a continuing waiver of other
breaches of the same or other provisions of this Agreement.
Furthermore, performance of any obligation required of a party
under this Agreement may be waived only by written waiver signed
by the other party. Such a waiver is to be effective only with
respect to the specific obligations described in the waiver.
15.4 Remedy. Unless specifically provided in this Agreement,
no remedy available to either party under this Agreement is
intended to be exclusive of any other remedy. Furthermore, each
and every remedy is to be cumulative and is to be in addition to
every other remedy provided under this Agreement or available at
law or in equity.
15.5 Amendments. All amendments or modifications of this
Agreement are to be binding upon the parties so long as such
amendments are in writing and executed by both parties.
15.6 Successor and Assigns. This Agreement is to be binding
upon and inure to the benefit of each of the parties, and, except
as otherwise provided in this Agreement, to their respective
legal successors and assigns.
15.7 Attorneys' Fees. If any action at law or in equity is
necessary to enforce or interpret the terms of this Agreement,
the prevailing party is to be entitled to reasonable attorneys'
fees, costs, and necessary disbursements in addition to any other
relief to which such party is entitled.
15.8 General Assurances. The parties agree to execute,
acknowledge, and deliver all such further instruments and do all
such other acts as may be appropriate in order to carry out the
intent and purposes of this Agreement, including the intent and
purposes of any applicable exhibit to it.
15.9 Notices. Any notice, request, or communication required
under this Agreement is to be in writing and is for all purposes
deemed to be fully given if sent by telegram, if delivered
personally, or if mailed, postage prepaid, return receipt
requested by certified or registered mail, to the respective
parties at the addresses set forth at the beginning of this
Agreement. Either party may change its address for the purposes
of this Agreement by giving the other party written notice of its
new address. A communication, if received after the date on which
it is due, will nevertheless be considered timely if it was
mailed at least seven (7) days prior to the date on which it was
due.
15.10 Counterparts. This Agreement may be executed in one or
more counterparts, each of which is to be deemed an original, but
all such counterparts together constitute one and the same
instrument.
15.11 Force Majeure. Neither party will be liable in damages
or will be considered in breach for any delay or default in
performing under this Agreement if such delay or default is
caused by conditions beyond its control, including but not
limited to acts of God, government restriction, wars or
insurrections, strikes, fires, floods, severe weather, work
stoppages, lockouts, lack of materials, default of a common
carrier, or similar occurrences.
15.12 Governing law. This Agreement is to be interpreted and
construed, and the legal relations created by it are to be
determined, in accordance with the laws of the State of New York.
15.13 Entire Agreement. This Agreement and the Exhibits
thereto constitute the sole and only Agreement of the parties
with respect to the subject matter hereof. They supercede any and
all prior or contemporaneous oral or written Agreements,
proposals, understandings, promises, negotiations,
representations, or communications between the parties relating
to this Agreement and all past course of dealing or industry
custom, all of which are merged herein. If any provision in the
Financial Guaranty Operations Manual is in conflict with this
Agreement, this Agreement will control.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first above written.
FRANKLIN TAX-FREE TRUST
By: illegible
Title:
FINANCIAL GUARANTY INSURANCE COMPANY
By: illegible
Title: President
Exhibit 1
Financial Guaranty Insurance
Company
175 Water Street
New York, New York 10038
Telephone (212) 607-3000
Municipal Bond Mutual Fund Portfolio Insurance Policy
Name of Mutual Fund: Policy Number:
Control Number:
Premium: As shown on Schedule
A hereto
Financial Guaranty Insurance Company* ("Financial Guaranty"),
a New York stock insurance company, in consideration of the
payment of the premium shown on Schedule A hereto and subject to
the terms of this Policy, hereby unconditionally and irrevocably
agrees to pay to Citibank, N.A., or its successor, as its agent
(the "Fiscal Agent"), for the benefit of the Mutual Fund
described above (the "Fund"), that portion of the principal of
and interest on the debt obligations described in Schedule A to
this Policy (the "Bonds") which shall become Due for Payment but
shall be unpaid by reason of Nonpayment by the Issuer.
Financial Guaranty will make such payments to the Fiscal Agent on
the date such principal or interest becomes Due for Payment or on
the Business Day next following the day on which Financial
Guaranty shall have received Notice of Nonpayment, whichever is
later. The Fiscal Agent will disburse to the Fund the face amount
of principal and interest which is then Due for Payment but is
unpaid by reason of Nonpayment by the Issuer but only upon
receipt by the Fiscal Agent, in form reasonably satisfactory to
it, of (i) evidence of the Fund's right to receive payment of the
principal or interest Due for Payment and (ii) evidence,
including any appropriate instruments of assignment, that all of
the Fund's rights to payment of such principal or interest Due
for Payment shall thereupon vest in Financial Guaranty. Upon such
disbursement, Financial Guaranty shall become the owner of the
Bond, appurtenant coupon or right to payment of principal or
interest on such Bond and shall be fully subrogated to all of the
Fund's rights thereunder, including the Fund's right to payment
thereof.
Page 1 of 3 Form
*Doing business in California as
FGIC Insurance Company.
Financial Guaranty Insurance
Company
175 Water Street
New York, New York 10038
Telephone (212)607-3000
Municipal Bond Mutual Fund Portfolio Insurance Policy
This Policy is non-cancellable for any reason, except failure to
pay any premium. This Policy shall be terminated as to any Bond
which has been paid prior to maturity, sold by the Fund or never
deposited in the Fund because the contract to purchase such Bond
has failed, and Financial Guaranty shall not thereafter have any
liability under this Policy on account of Nonpayment of any such
Bond. When Financial Guaranty is notified by the Fund that any
Bond has been paid prior to maturity, sold by the Fund or never
deposited in the Fund, Financial Guaranty shall refund any
prepaid premium thereon to the Fund. Any such notification must
specify the amount of Bonds affected, identify such Bonds by
their Item Number in Schedule A hereto, and designate the date of
the event giving rise to a refund of premium. This Policy does
not insure against loss of any prepayment premium which may at
any time be payable with respect to any Bond.
"Due for Payment" means, when referring to the principal of
a Bond, the stated maturity date thereof or the date on which the
same shall have been duly called for mandatory sinking fund
redemption and does not refer to any earlier date on which
payment is due by reason of call for redemption (other than by
mandatory sinking fund redemption), acceleration or other
advancement of maturity and means, when referring to interest on
a Bond, the stated date for payment of interest. "Nonpayment" in
respect of a Bond means the failure of the Issuer to have
provided sufficient funds to the paying agent for payment in full
of all principal and interest Due for Payment on such Bond.
"Notice" means telephonic or telegraphic notice, subsequently
confirmed in writing, or written notice by registered or
certified mail, from the Fund or a paying agent for the Bonds to
Financial Guaranty. "Business Day" means any day other than a
Saturday, Sunday or day on which the Fiscal Agent is authorized
by law to remain closed. "Issuer" means each issuer of the Bonds
described in Schedule A hereto.
Page 2 of 3 Form
Financial Guaranty Insurance
Company
175 Water Street
New York, New York 10038
Telephone (212)607-3000
Municipal Bond Mutual Fund Portfolio Insurance Policy
In Witness Whereof, Financial Guaranty has caused this Policy to
be affixed with its corporate seal and to be signed by its duly
authorized officers in facsimile to become effective and binding
upon Financial Guaranty by virtue of the countersignature of its
duly authorized representative.
President Executive Vice President
Effective Date: Authorized Representative
Citibank, N.A., acknowledges that it has agreed to perform the
duties of Fiscal Agent under this Policy.
Authorized Officer
Page 3 of 3 Form
Financial Guaranty Insurance
Company
175 Water Street
New York, New York 10038
Telephone (212)607-3000
Endorsement
To Financial Guaranty Insurance Company Insurance Policy
Policy Number: Control Number:
Notwithstanding the terms and conditions in this Policy, it is
further understood that the term "Due for Payment" shall also
include, when referring to the principal of a Bond, any date on
which the same shall have been duly called for mandatory
redemption as a result of the interest on such Bond having been
determined, as provided in the Bond documentation, to have become
subject to Federal income taxation, and shall also include when
referring to interest on a Bond, the accrued interest at the rate
provided in the Bond documentation, to the date on which such
Bond shall have been duly called for such mandatory redemption,
together with any applicable redemption premium.
In Witness Whereof, Financial Guaranty has caused this
Endorsement to be affixed with its corporate seal and to be
signed by its duly authorized officers in facsimile to become
effective and binding upon Financial Guaranty by virtue of the
countersignature of its duly authorized representative.
President Executive Vice President
Effective Date: Authorized Representative
Acknowledged as of the Effective Date written above:
Authorized Officer
Citibank, N.A., as Fiscal
Agent
Page 1 of 1 Form E-0001
Financial Guaranty Insurance
Company
175 Water Street
New York, New York 10038
Telephone: (212)607-3000
Endorsement
To Financial Guaranty Insurance Company Insurance Policy
Policy Number: Control Number:
It is further understood that the term "Nonpayment" in respect of
a Bond includes any payment of principal or interest made by or
on behalf of the issuer of such Bond to the Fund which has been
recovered from such Fund or its shareholders pursuant to the
United States Bankruptcy Code by a trustee in bankruptcy in
accordance with a final, nonappealable order of a court having
competent jurisdiction.
In Witness Whereof, Financial Guaranty has caused this
Endorsement to be affixed with its corporate seal and to be
signed by its duly authorized officers in facsimile to become
effective and binding upon Financial Guaranty by virtue of the
counter-signature of its duly authorized representative.
President Executive Vice President
Effective Date: Authorized Representative
Acknowledged as of the Effective Date written above:
Authorized Officer
Citibank, N.A., as Fiscal
Agent
Page 1 of 1 Form E-000
Schedule A (a part of the Municipal Bond Mutual Fund Portfolio
Insurance Policy)
Page of Form No.
Date of Policy:
Policy Number:
Control Number:
Name of Mutual Fund:
Item No.
Par Value ($)
Full Name of Issuer
Full Name of Bonds
Interest Rate (1)(%)
Date of Bonds
Stated Maturity Date of
Bonds
CUSIP Number
Rating (2)
Premiums
Annual Premium
Rate (3) (%)
Annual Premium ($)
Secondary Market
Premium Rate (3)(%)
Date First Insured
Date of Disposition
(1) If variable rate is applicable, briefly describe method of
determination.
(2) Without benefit of the portfolio insurance. First rating by
Standard & Poor's Corporation. Second rating by Moody's Investors
Service.
(3) Expressed as a percentage of the par value of the bonds.
FINANCIAL GUARANTY INSURANCE COMPANY
175 Water Street
New York, New York 10038
( 212 ) 607-3000
MUNICIPAL BOND
SECONDARY MARKET
INSURANCE POLICY
Issuer: Each of the Issuers Policy Number:
described in column (C) Control Number:
of Schedule I hereto
Bonds: Each of the Bonds described Premium: The sum total
in columns (D), (E) , (F) of the premiums listed
and (G) of Schedule in Column (J) of
I hereto Schedule I hereto
Financial Guaranty Insurance Company ("Financial
Guaranty" ), a New York stock insurance company, in consideration
of the payment of the premium and subject to the terms of this
Policy, hereby unconditionally and irrevocably agrees to pay to
Citibank, N.A., or its successor, as its agent (the "Fiscal
Agent"), for the benefit of Citibank, N.A., as custodian of Bonds
covered by Transferable Custodial Receipts for Insured Bonds and
of the records pertaining to insurance beneficiaries under the
Custody Agreement (the "Custodian"), that portion of the
principal and interest on the above-described debt obligations
(the "Bonds") which shall become Due for Payment but shall be
unpaid by reason of Nonpayment by the Issuer.
Financial Guaranty will make such payments to the Fiscal Agent on
the date such principal or interest becomes Due for Payment or on
the Business Day next following the day on which Financial
Guaranty shall have received Notice of Nonpayment, whichever is
later. The Fiscal Agent will disburse to the Custodian the face
amount of principal and interest which is then Due for Payment
but is unpaid by reason of Nonpayment by the Issuer but only upon
receipt by the Fiscal Agent in form reasonably satisfactory to
it, of (i) evidence of the Custodian's right to receive payment
of the principal or interest Due for Payment and (ii) evidence,
including any appropriate instruments of assignment that all of
the Custodian's rights and the rights of the registered owner of
the Transferable Custodial Receipt for Insured Bonds or the
Holder of Insured Bonds, as the case may be, to payment of such
principal or interest Due for Payment shall thereupon vest in
Financial Guaranty. Upon such disbursement, Financial Guaranty
shall become the owner of the Bond, appurtenant coupon or right
to payment of principal or interest on such Bond and shall be
fully subrogated to all of the Custodian's rights and rights of
the registered owner of the Transferable Custodial Receipt for
Insured Bonds or the Holder of Insured Bonds, as the case may be,
thereunder, including the right to payment thereof.
This Policy is non-cancellable for any reason. The premium
on this Policy is not refundable for any reason, including the
payment of the Bonds prior to their maturity. This Policy does
not insure against loss of any prepayment premium which may at
any time be payable with respect to any Bond or the failure of
the Custodian to remit amounts received hereunder to the
registered owner of a Transferable Custodial Receipt for Insured
Bonds or the Holder of Insured Bonds, as the case may be. No
payment shall be made under this Policy with respect to a Bond if
the registered owner of the Transferable Custodial Receipt for
Insured Bonds evidencing ownership of such Bond or if the holder
or registered owner of such Bond is the Issuer of such Bond.
As used herein, "Custody Agreement" means that certain
Custody Agreement dated as of December 1, 1984 by and between
Financial Guaranty and Citibank, N.A., as Custodian relating to
the Bonds. "Due for Payment" means, when referring to the
principal of a Bond, the stated maturity date thereof, or the
date on which the same shall have been duly called for mandatory
sinking fund redemption, and does not refer to any earlier date
on which payment is due by reason of call for redemption (other
than by mandatory sinking fund redemption), acceleration or other
advancement of maturity and means, when referring to interest on
a Bond, the stated date for payment of interest. "Holder of
Insured Bonds" means the holder or registered owner, as the case
may be, of Bonds insured under this Policy which are not being
held by the Custodian, but as to which the Custodian has the duty
under the Custody Agreement of recording the insurance
beneficiaries; provided however that the name of such holder or
registered owner is recorded on the books of the Custodian as the
insurance beneficiary of said Bonds. "Nonpayment" in respect of a
Bond means the failure of the Issuer to have provided sufficient
funds to the paying agent of such Bond for payment in full of all
principal and interest Due for Payment on such Bond. "Notice"
means telephonic or telegraphic notice, subsequently confirmed in
writing, or written notice by registered or certified mail, from
the Custodian to Financial Guaranty. "Business Day" means any day
other than a Saturday, Sunday or a day on which the Fiscal Agent
is authorized by law to remain closed. "Transferable Custodial
Receipt for Insured Bonds" means a Transferable Custodial Receipt
for Insured Bonds issued pursuant to the Custody Agreement.
In Witness Whereof, Financial Guaranty has caused this
Policy to be affixed with its corporate seal and to be signed by
its duly authorized officers in facsimile to become effective and
binding upon Financial Guaranty by virtue of the countersignature
of its duly authorized representative.
/s/ illegible /s/ Roger K. Taylor
president Executive Vice president
Effective Date: Authorized Representative
Citibank, N.A., acknowledges that it has agreed to
perform the duties of Fiscal Agent under this Policy.
Effective Date: Authorized Officer
Form 9004
Financial Guaranty Insurance
Company
175 Water Street
New York, New York 10038
Telephone: (212) 607-3000
ENDORSEMENT
To Financial Guaranty Insurance Company Insurance Policy
Policy Number. Control Number:
Notwithstanding the terms and conditions contained in this
Policy, it is further understood that the term "Due for Payment"
shall also include, when referring to the principal of a Bond,
any date on which the same shall have been duly called for
mandatory redemption as a result of the interest on such Bond
having been determined as provided in the Bond documentation to
have became subject to Federal income taxation and shall also
include when referring to interest on a Bond the accrued interest
at the rate provided in the Bond documentation to the date on
which such Bond shall have been duly called for such mandatory
redemption together with any applicable redemption premium.
In Witness Whereof, Financial Guaranty has caused this
Endorsement to be affixed with its corporate seal and to be
signed by its duly authorized officers in facsimile to become
effective and binding upon Financial Guaranty by virtue of the
countersignature of its duly authorized representative.
/s/ illegible /s/ Roger K. Taylor
President Executive Vice President
Effective Date: Authorized Representative
Acknowledged as of the Effective Date written above:
/s/ illegible
Authorized Officer
Citibank N.A. as Fiscal
Agent
ENDORSEMENT
To Financial Guaranty Insurance Policy
Policy Number
Control Number
It is further understood that the term "Nonpayment" in respect of
a Bond includes any payment of principal or interest made to the
Custodian by or on behalf of the Issuer which has been recovered
from the Custodian or a registered owner of a Custodial Receipt
for Insured Bonds or a Holder of Insured Bonds, as the case may
be, to which such payment was remitted by the Custodian, pursuant
to the United States Bankruptcy Code by a trustee in bankruptcy
in accordance with a final, nonappealable order of a court having
competent jurisdiction.
In Witness Whereof, Financial Guaranty has caused this
Endorsement to be affixed with its corporate seal and to be
signed by its duly authorized officers in facsimile to become
effective and binding upon Financial Guaranty by virtue of the
countersignature of its duly authorized representative.
/s/ illegible /s/ Roger K. Taylor
President Executive Vice President
Effective Date: Authorized Representative
Acknowledged as of the Effective Date written above:
/s/ illegible
Authorized Officer
N.A., as Fiscal Agent
Citibank
SCHEDULE 1 DATE OF POLICY:
to FORM 9004 NUMBER OF POLICY:
CONTROL NUMBER:
A B C D E F G
Item Par Full Name Full Name Interest Date of Stated
No. Value of Issuer of Bonds Rate Bonds Maturity
Date of
Bonds
H I J K L M
CUSIP Premium Premium Bond Bond Paying
Numbers Rate Trustee Registrant Agent(s)
STRADLEY RONON STEVENS & YOUNG
2600 ONE COMMERCE SQUARE
PHILADELPHIA, PENNSYLVANIA 19103-7098
Direct Dial:
(215) 564-8101
April 21, 1995
Franklin Tax-Free Trust
777 Mariners Island Boulevard
San Mateo, CA 94404
Gentlemen:
You have requested our opinion with respect to the
shares of beneficial interest sold by Franklin Tax-Free Trust
(the "Trust") during its fiscal year ended February 28, 1995, in
connection with the Notice being filed by the Trust pursuant to
Rule 24f-2 under the Investment Company Act of 1940. You have
represented that a total of 181,678,327 shares were sold by the
Trust during said fiscal year, all of which were sold in reliance
upon Rule 24f-2.
Based upon our review of such records, documents, and
representations as we have deemed relevant, it is our opinion
that the shares of beneficial interest of the Trust sold and
issued by the Trust during its fiscal year ended February 28,
1995, in reliance upon the registration under the Securities Act
of 1933 pursuant to Rule 24f-2 under the Investment Company Act
of 1940, as amended, were legally issued, fully paid and non-
assessable.
We hereby consent to the filing of this opinion as an
exhibit to the "Rule 24f-2 Notice" being filed by the Trust,
covering the registration of the said shares under the Securities
Act and the applications and registration statements, and
amendments thereto, filed in accordance with the securities laws
of the various states in which shares of the Trust are offered,
and we further consent to reference in the Prospectus of the
Trust to the fact that this opinion concerning the legality of
the issue has been rendered by us.
Very truly yours,
STRADLEY, RONON, STEVENS & YOUNG
By:/s/Audrey C. Talley
Audrey C. Talley
ACT/rlm
CONSENT OF INDEPENDENT AUDITORS
To the Board of Trustees of
Franklin Tax-Free Trust:
We consent to the incorporation by reference in Post-
Effective Amendment No. 21 to the Registration Statement of
Franklin Tax-Free Trust on Form N-1A (File No. 2-94222) of
our report dated April , 1995 on our audit of the
financial statements and financial highlights of the Trust,
which report is included in the Annual Report to
Shareholders for the year ended February 28, 1995, which is
incorporated by reference in the Registration Statement.
/s/ COOPERS & LYBRAND L.L.P.
San Francisco, California
April 14, 1995
FRANKLIN
RESOURCES, INC.
(Franklin logo)
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo, CA 94403-7777
415/312-3000
Franklin Tax-Free Trust
777 Mariners Island Blvd.
San Mateo, CA 94404
Gentlemen:
The undersigned hereby subscribes for the purchase of 200,000
shares of beneficial interest of the Franklin Federal
Intermediate-Term Tax-Free Income Fund (hereinafter referred to
as the "Fund"), at the price of $10.00 per share for a total
investment of $2,000,000 (hereinafter referred to as the
"Shares"). In connection with said subscription, the undersigned
hereby represents that:
1. There is no present reason to anticipate any change in
circumstances or any other occasion or event which would cause
the undersigned to sell or redeem the Shares shortly after the
purchase thereof.
2. There are no agreements or arrangements between the
undersigned and the Fund, or any of its officers, trustees,
employees or its investment manager or any affiliated persons
thereof with respect to the resale, future distribution or
redemption of the Shares.
3. The sale of the Shares will only be made by redemption to the
Fund and not by a transfer to any third party.
4. the undersigned is aware that in issuing and selling these
Shares, the Fund is relying upon the aforementioned
representations.
5. The undersigned is fully aware that the organization expenses
of the Fund, including the costs and expenses of registration of
the Fund, are being charged to the operation of the Fund over a
period of five years commencing from the effective date of the
Fund's Registration Statement under the Securities Act of 1933,
and that in the event the undersigned will reimburse the Fund for
the pro rata share of the unamortized organization expenses (by a
reduction of the redemption proceeds) in the same proportion as
the number of Shares being redeemed bears to the total number of
remaining initial Shares acquired by the undersigned hereunder.
FRANKLIN RESOURCES, INC.
By: /s/ Harmon E. Burns
Dated: 9/21/92 Title: Executive Vice President
To: All Franklin Templeton Funds Listed on Schedule A
777 Mariners Island Blvd.
San Mateo, CA 94404
Gentlemen:
We propose to invest $100.00 in the Class II shares (the "Shares") of
each of the Funds listed on the attached Schedule A (the "Funds"), on the
business day immediately preceding the effective date for each Fund's Class
II shares, at a purchase price per share equivalent to the net asset value
per share of each Fund's Class I shares on the date of purchase. We will
purchase the Shares in a private offering prior to the effectiveness of the
post-effective amendment to the Form N-1A registration statement under which
each Fund's Class II shares are initially offered, as filed by the Fund under
the Securities Act of 1933. The Shares are being purchased to serve as the
seed money for each Fund's Class II shares prior to the commencement of the
public offering of Class II shares.
In connection with such purchase, we understand that we, the purchaser,
intend to acquire the Shares for our own account as the sole beneficial owner
thereof and have no present intention of redeeming or reselling the Shares so
acquired.
We consent to the filing of this Investment Letter as an exhibit to the
form N-1A registration statement of each Fund.
Sincerely,
FRANKLIN RESOURCES, INC.
By: /s/ Harmon E. Burns
Harmon E. Burns
Executive Vice President
Date: April 12, 1995
<TABLE>
<CAPTION>
SCHEDULE A
<S> <C>
INVESTMENT COMPANY FUND & CLASS; TITAN NUMBER
Franklin Gold Fund Franklin Gold Fund - Class II; 232
Franklin Equity Fund Franklin Equity Fund - Class II; 234
AGE High Income Fund, Inc. AGE High Income Fund - Class II; 205
Franklin Custodian Funds, Inc. Growth Series - Class II; 206
Utilities Series - Class II; 207
Income Series - Class II; 209
U.S. Government Securities
Series - Class II; 210
Franklin California Tax-Free Franklin California Tax-Free Income
Income Fund, Inc. Fund - Class II; 212
Franklin New York Tax-Free Franklin New York Tax-Free Income
Income Fund, Inc. Fund - Class II; 215
Franklin Federal Tax-Free Franklin Federal Tax-Free Income
Income Fund Fund -Class II; 216
Franklin Managed Trust Franklin Rising Dividends
Fund - Class II; 258
Franklin California Tax-Free Franklin California Insured Tax-Free
Trust
Income Fund - Class II; 224
Franklin New York Tax-Free Trust Franklin New York Insured Tax-Free
Income Fund - Class II; 281
Franklin Investors Securities Franklin Global Government Income
Trust
Fund - Class II; 235
Franklin Equity Income
Fund - Class II; 239
Franklin Strategic Series Franklin Global Utilities
Fund - Class II; 297
Franklin Real Estate Securities Franklin Real Estate Securities
Trust
Fund - Class II; 292
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT COMPANY FUND AND CLASS; TITAN NUMBER
Franklin Tax-Free Franklin Alabama Tax-Free Income Fund - Class II; 264
Trust Franklin Arizona Tax-Free Income Fund - Class II; 226
Franklin Colorado Tax-Free Income Fund - Class II; 227
Franklin Connecticut Tax Free Income
Fund - Class II; 266
Franklin Florida Tax-Free Income Fund - Class II; 265
Franklin Georgia Tax-Free Income Fund - Class II; 228
Franklin High Yield Tax-Free Income Fund - Class II; 230
Franklin Insured Tax-Free Income Fund - Class II; 221
Franklin Louisiana Tax-Free Income Fund - Class II; 268
Franklin Maryland Tax-Free Income Fund - Class II; 269
Franklin Massachusetts Insured Tax-Free Income
Fund - Class II; 218
Franklin Michigan Insured Tax-Free Income
Fund - Class II; 219
Franklin Minnesota Insured Tax-Free Income
Fund - Class II; 220
Franklin Missouri Tax-Free Income Fund - Class II; 260
Franklin New Jersey Tax-Free Income
Fund - Class II; 271
Franklin North Carolina Tax-Free Income
Fund - Class II; 270
Franklin Ohio Insured Tax-Free Income
Fund - Class II; 222
Franklin Oregon Tax-Free Income Fund - Class II; 261
Franklin Pennsylvania Tax-Free Income
Fund - Class II; 229
Franklin Puerto Rico Tax-Free Income
Fund - Class II; 223
Franklin Texas Tax-Free Income Fund - Class II; 262
Franklin Virginia Tax-Free Income Fund - Class II; 263
</TABLE>
FRANKLIN TAX-FREE TRUST
Preamble to Distribution Plan
The following Distribution Plan (the "Plan") has been
adopted pursuant to Rule 12b-1 under the Investment Company Act
of 1940 (the "Act") by Franklin Tax-Free Trust (the "Trust") for
the use of Franklin Massachusetts Insured Tax-Free Income Fund
(the "Fund"), which Plan shall take effect on the 1st day of May,
1994 (the "Effective Date of the Plan"). The Plan has been
approved by a majority of the Board of Trustees of the Trust (the
"Board of Trustees"), including a majority of the trustees who
are not interested persons of the Trust and who have no direct or
indirect financial interest in the operation of the Plan (the
"non-interested trustees"), cast in person at a meeting called
for the purpose of voting on such Plan.
In reviewing the Plan, the Board of Trustees considered the
schedule and nature of payments and terms of the Management
Agreement between the Trust on behalf of the Fund and Franklin
Advisers, Inc. ("Advisers") and the terms of the Underwriting
Agreement between the Trust on behalf of the Fund and
Franklin/Templeton Distributors, Inc. ("Distributors"). The Board
of Trustees concluded that the compensation of Advisers, under
the Management Agreement, and of Distributors, under the
Underwriting Agreement, was fair and not excessive; however, the
Board of Trustees also recognized that uncertainty may exist from
time to time with respect to whether payments to be made by the
Fund to Advisers, Distributors, or others or by Advisers or
Distributors to others may be deemed to constitute distribution
expenses of the Fund. Accordingly, the Board of Trustees
determined that the Plan should provide for such payments and
that adoption of the Plan would be prudent and in the best
interest of the Fund and its shareholders. Such approval included
a determination that in the exercise of their reasonable business
judgment and in light of their fiduciary duties, there is a
reasonable likelihood that the Plan will benefit the Fund and its
shareholders.
DISTRIBUTION PLAN
1. The Fund shall reimburse Distributors or others for all
expenses incurred by Distributors or others in the promotion and
distribution of the shares of the Fund, including but 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 Trust on behalf of the Fund,
Distributors or its affiliates, which form of agreement has been
approved from time to time by the trustees, including the non-
interested trustees.
2. The maximum amount which may be reimbursed by the Fund to
Distributors or others pursuant to Paragraph 1 herein shall be
0.10% per annum of the average daily net assets of the Fund. Said
reimbursement shall be made quarterly by the Fund to Distributors
or others.
3. In addition to the payments which the Fund is authorized to
make pursuant to paragraphs 1 and 2 hereof, to the extent that
the Fund, Advisers, Distributors or other parties on behalf of
the Fund, Advisers or Distributors make payments that are deemed
to be payments by the Fund 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 under the Act, then such
payments shall be deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges
which include payments specified in paragraphs 1 and 2, plus any
other payments deemed to be made pursuant to the Plan under this
paragraph, exceed the amount permitted to be paid pursuant to the
Rules of Fair Practice of the National Association of Securities
Dealers, Inc., Article III, Section 26(d).
4. Distributors shall furnish to the Board of Trustees, for
their review, on a quarterly basis, a written report of the
monies reimbursed to it and to others under the Plan, and shall
furnish the Board of Trustees with such other information as the
Board of Trustees may reasonably request in connection with the
payments made under the Plan in order to enable the Board of
Trustees to make an informed determination of whether the Plan
should be continued.
5. The Plan shall continue in effect for a period of more than
one year only so long as such continuance is specifically
approved at least annually by a vote of the Board of Trustees,
including the non-interested trustees, cast in person at a
meeting called for the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to this
Plan, may be terminated at any time, without penalty, by vote of
a majority of the outstanding voting securities of the Fund or by
vote of a majority of the non-interested trustees, on not more
than sixty (60) days' written notice, or by Distributors on not
more than sixty (60) days' written notice, and shall terminate
automatically in the event of any act that constitutes an
assignment of the Management Agreement between the Trust on
behalf of the Fund and Advisers.
7. The Plan, and any agreements entered into pursuant to this
Plan, may not be amended to increase materially the amount to be
spent for distribution pursuant to Paragraph 2 hereof without
approval by a majority of the Fund's outstanding voting
securities.
8. All material amendments to the Plan, or any agreements
entered into pursuant to this Plan, shall be approved by a vote
of the non-interested trustees cast in person at a meeting called
for the purpose of voting on any such amendment.
9. So long as the Plan is in effect, the selection and
nomination of the Trust's non-interested trustees shall be
committed to the discretion of such non-interested trustees.
This Plan and the terms and provisions thereof are hereby
accepted and agreed to by the Trust and Distributors as evidenced
by their execution hereof.
FRANKLIN TAX-FREE TRUST
on behalf of Franklin Massachusetts Insured Tax-Free Income Fund
By:/s/ Deborah R. Gatzek
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By:/s/ Harmon E. Burns
FRANKLIN TAX-FREE TRUST
Preamble to Distribution Plan
The following Distribution Plan (the "Plan") has been
adopted pursuant to Rule 12b-1 under the Investment Company Act
of 1940 (the "Act") by Franklin Tax-Free Trust (the "Trust") for
the use of Franklin Michigan Insured Tax-Free Income Fund (the
"Fund"), which Plan shall take effect on the 1st day of May, 1994
(the "Effective Date of the Plan"). The Plan has been approved by
a majority of the Board of Trustees of the Trust (the "Board of
Trustees"), including a majority of the trustees who are not
interested persons of the Trust and who have no direct or
indirect financial interest in the operation of the Plan (the
"non-interested trustees"), cast in person at a meeting called
for the purpose of voting on such Plan.
In reviewing the Plan, the Board of Trustees considered the
schedule and nature of payments and terms of the Management
Agreement between the Trust on behalf of the Fund and Franklin
Advisers, Inc. ("Advisers") and the terms of the Underwriting
Agreement between the Trust on behalf of the Fund and
Franklin/Templeton Distributors, Inc. ("Distributors"). The Board
of Trustees concluded that the compensation of Advisers, under
the Management Agreement, and of Distributors, under the
Underwriting Agreement, was fair and not excessive; however, the
Board of Trustees also recognized that uncertainty may exist from
time to time with respect to whether payments to be made by the
Fund to Advisers, Distributors, or others or by Advisers or
Distributors to others may be deemed to constitute distribution
expenses of the Fund. Accordingly, the Board of Trustees
determined that the Plan should provide for such payments and
that adoption of the Plan would be prudent and in the best
interest of the Fund and its shareholders. Such approval included
a determination that in the exercise of their reasonable business
judgment and in light of their fiduciary duties, there is a
reasonable likelihood that the Plan will benefit the Fund and its
shareholders.
DISTRIBUTION PLAN
1. The Fund shall reimburse Distributors or others for all
expenses incurred by Distributors or others in the promotion and
distribution of the shares of the Fund, including but 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 Trust on behalf of the Fund,
Distributors or its affiliates, which form of agreement has been
approved from time to time by the trustees, including the non-
interested trustees.
2. The maximum amount which may be reimbursed by the Fund to
Distributors or others pursuant to Paragraph 1 herein shall be
0.10% per annum of the average daily net assets of the Fund. Said
reimbursement shall be made quarterly by the Fund to Distributors
or others.
3. In addition to the payments which the Fund is authorized to
make pursuant to paragraphs 1 and 2 hereof, to the extent that
the Fund, Advisers, Distributors or other parties on behalf of
the Fund, Advisers or Distributors make payments that are deemed
to be payments by the Fund 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 under the Act, then such
payments shall be deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges
which include payments specified in paragraphs 1 and 2, plus any
other payments deemed to be made pursuant to the Plan under this
paragraph, exceed the amount permitted to be paid pursuant to the
Rules of Fair Practice of the National Association of Securities
Dealers, Inc., Article III, Section 26(d).
4. Distributors shall furnish to the Board of Trustees, for
their review, on a quarterly basis, a written report of the
monies reimbursed to it and to others under the Plan, and shall
furnish the Board of Trustees with such other information as the
Board of Trustees may reasonably request in connection with the
payments made under the Plan in order to enable the Board of
Trustees to make an informed determination of whether the Plan
should be continued.
5. The Plan shall continue in effect for a period of more than
one year only so long as such continuance is specifically
approved at least annually by a vote of the Board of Trustees,
including the non-interested trustees, cast in person at a
meeting called for the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to this
Plan, may be terminated at any time, without penalty, by vote of
a majority of the outstanding voting securities of the Fund or by
vote of a majority of the non-interested trustees, on not more
than sixty (60) days' written notice, or by Distributors on not
more than sixty (60) days' written notice, and shall terminate
automatically in the event of any act that constitutes an
assignment of the Management Agreement between the Trust on
behalf of the Fund and Advisers.
7. The Plan, and any agreements entered into pursuant to this
Plan, may not be amended to increase materially the amount to be
spent for distribution pursuant to Paragraph 2 hereof without
approval by a majority of the Fund's outstanding voting
securities.
8. All material amendments to the Plan, or any agreements
entered into pursuant to this Plan, shall be approved by a vote
of the non-interested trustees cast in person at a meeting called
for the purpose of voting on any such amendment.
9. So long as the Plan is in effect, the selection and
nomination of the Trust's non-interested trustees shall be
committed to the discretion of such non-interested trustees.
This Plan and the terms and provisions thereof are hereby
accepted and agreed to by the Trust and Distributors as evidenced
by their execution hereof.
FRANKLIN TAX-FREE TRUST
on behalf of Franklin Michigan Insured Tax-Free Income Fund
By:/s/ Deborah R. Gatzek
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By:/s/ Harmon E. Burns
FRANKLIN TAX-FREE TRUST
Preamble to Distribution Plan
The following Distribution Plan (the "Plan") has been
adopted pursuant to Rule 12b-1 under the Investment Company Act
of 1940 (the "Act") by Franklin Tax-Free Trust (the "Trust") for
the use of Franklin Minnesota Insured Tax-Free Income Fund (the
"Fund"), which Plan shall take effect on the 1st day of May, 1994
(the "Effective Date of the Plan"). The Plan has been approved by
a majority of the Board of Trustees of the Trust (the "Board of
Trustees"), including a majority of the trustees who are not
interested persons of the Trust and who have no direct or
indirect financial interest in the operation of the Plan (the
"non-interested trustees"), cast in person at a meeting called
for the purpose of voting on such Plan.
In reviewing the Plan, the Board of Trustees considered the
schedule and nature of payments and terms of the Management
Agreement between the Trust on behalf of the Fund and Franklin
Advisers, Inc. ("Advisers") and the terms of the Underwriting
Agreement between the Trust on behalf of the Fund and
Franklin/Templeton Distributors, Inc. ("Distributors"). The Board
of Trustees concluded that the compensation of Advisers, under
the Management Agreement, and of Distributors, under the
Underwriting Agreement, was fair and not excessive; however, the
Board of Trustees also recognized that uncertainty may exist from
time to time with respect to whether payments to be made by the
Fund to Advisers, Distributors, or others or by Advisers or
Distributors to others may be deemed to constitute distribution
expenses of the Fund. Accordingly, the Board of Trustees
determined that the Plan should provide for such payments and
that adoption of the Plan would be prudent and in the best
interest of the Fund and its shareholders. Such approval included
a determination that in the exercise of their reasonable business
judgment and in light of their fiduciary duties, there is a
reasonable likelihood that the Plan will benefit the Fund and its
shareholders.
DISTRIBUTION PLAN
1. The Fund shall reimburse Distributors or others for all
expenses incurred by Distributors or others in the promotion and
distribution of the shares of the Fund, including but 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 Trust on behalf of the Fund,
Distributors or its affiliates, which form of agreement has been
approved from time to time by the trustees, including the non-
interested trustees.
2. The maximum amount which may be reimbursed by the Fund to
Distributors or others pursuant to Paragraph 1 herein shall be
0.10% per annum of the average daily net assets of the Fund. Said
reimbursement shall be made quarterly by the Fund to Distributors
or others.
3. In addition to the payments which the Fund is authorized to
make pursuant to paragraphs 1 and 2 hereof, to the extent that
the Fund, Advisers, Distributors or other parties on behalf of
the Fund, Advisers or Distributors make payments that are deemed
to be payments by the Fund 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 under the Act, then such
payments shall be deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges
which include payments specified in paragraphs 1 and 2, plus any
other payments deemed to be made pursuant to the Plan under this
paragraph, exceed the amount permitted to be paid pursuant to the
Rules of Fair Practice of the National Association of Securities
Dealers, Inc., Article III, Section 26(d).
4. Distributors shall furnish to the Board of Trustees, for
their review, on a quarterly basis, a written report of the
monies reimbursed to it and to others under the Plan, and shall
furnish the Board of Trustees with such other information as the
Board of Trustees may reasonably request in connection with the
payments made under the Plan in order to enable the Board of
Trustees to make an informed determination of whether the Plan
should be continued.
5. The Plan shall continue in effect for a period of more than
one year only so long as such continuance is specifically
approved at least annually by a vote of the Board of Trustees,
including the non-interested trustees, cast in person at a
meeting called for the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to this
Plan, may be terminated at any time, without penalty, by vote of
a majority of the outstanding voting securities of the Fund or by
vote of a majority of the non-interested trustees, on not more
than sixty (60) days' written notice, or by Distributors on not
more than sixty (60) days' written notice, and shall terminate
automatically in the event of any act that constitutes an
assignment of the Management Agreement between the Trust on
behalf of the Fund and Advisers.
7. The Plan, and any agreements entered into pursuant to this
Plan, may not be amended to increase materially the amount to be
spent for distribution pursuant to Paragraph 2 hereof without
approval by a majority of the Fund's outstanding voting
securities.
8. All material amendments to the Plan, or any agreements
entered into pursuant to this Plan, shall be approved by a vote
of the non-interested trustees cast in person at a meeting called
for the purpose of voting on any such amendment.
9. So long as the Plan is in effect, the selection and
nomination of the Trust's non-interested trustees shall be
committed to the discretion of such non-interested trustees.
This Plan and the terms and provisions thereof are hereby
accepted and agreed to by the Trust and Distributors as evidenced
by their execution hereof.
FRANKLIN TAX-FREE TRUST
on behalf of Franklin Minnesota Insured Tax-Free Income Fund
By:/s/ Deborah R. Gatzek
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By:/s/ Harmon E. Burns
FRANKLIN TAX-FREE TRUST
Preamble to Distribution Plan
The following Distribution Plan (the "Plan") has been
adopted pursuant to Rule 12b-1 under the Investment Company Act
of 1940 (the "Act") by Franklin Tax-Free Trust (the "Trust") for
the use of Franklin Insured Tax-Free Income Fund (the "Fund"),
which Plan shall take effect on the 1st day of May, 1994 (the
"Effective Date of the Plan"). The Plan has been approved by a
majority of the Board of Trustees of the Trust (the "Board of
Trustees"), including a majority of the trustees who are not
interested persons of the Trust and who have no direct or
indirect financial interest in the operation of the Plan (the
"non-interested trustees"), cast in person at a meeting called
for the purpose of voting on such Plan.
In reviewing the Plan, the Board of Trustees considered the
schedule and nature of payments and terms of the Management
Agreement between the Trust on behalf of the Fund and Franklin
Advisers, Inc. ("Advisers") and the terms of the Underwriting
Agreement between the Trust on behalf of the Fund and
Franklin/Templeton Distributors, Inc. ("Distributors"). The Board
of Trustees concluded that the compensation of Advisers, under
the Management Agreement, and of Distributors, under the
Underwriting Agreement, was fair and not excessive; however, the
Board of Trustees also recognized that uncertainty may exist from
time to time with respect to whether payments to be made by the
Fund to Advisers, Distributors, or others or by Advisers or
Distributors to others may be deemed to constitute distribution
expenses of the Fund. Accordingly, the Board of Trustees
determined that the Plan should provide for such payments and
that adoption of the Plan would be prudent and in the best
interest of the Fund and its shareholders. Such approval included
a determination that in the exercise of their reasonable business
judgment and in light of their fiduciary duties, there is a
reasonable likelihood that the Plan will benefit the Fund and its
shareholders.
DISTRIBUTION PLAN
1. The Fund shall reimburse Distributors or others for all
expenses incurred by Distributors or others in the promotion and
distribution of the shares of the Fund, including but 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 Trust on behalf of the Fund,
Distributors or its affiliates, which form of agreement has been
approved from time to time by the trustees, including the non-
interested trustees.
2. The maximum amount which may be reimbursed by the Fund to
Distributors or others pursuant to Paragraph 1 herein shall be
0.10% per annum of the average daily net assets of the Fund. Said
reimbursement shall be made quarterly by the Fund to Distributors
or others.
3. In addition to the payments which the Fund is authorized to
make pursuant to paragraphs 1 and 2 hereof, to the extent that
the Fund, Advisers, Distributors or other parties on behalf of
the Fund, Advisers or Distributors make payments that are deemed
to be payments by the Fund 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 under the Act, then such
payments shall be deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges
which include payments specified in paragraphs 1 and 2, plus any
other payments deemed to be made pursuant to the Plan under this
paragraph, exceed the amount permitted to be paid pursuant to the
Rules of Fair Practice of the National Association of Securities
Dealers, Inc., Article III, Section 26(d).
4. Distributors shall furnish to the Board of Trustees, for
their review, on a quarterly basis, a written report of the
monies reimbursed to it and to others under the Plan, and shall
furnish the Board of Trustees with such other information as the
Board of Trustees may reasonably request in connection with the
payments made under the Plan in order to enable the Board of
Trustees to make an informed determination of whether the Plan
should be continued.
5. The Plan shall continue in effect for a period of more than
one year only so long as such continuance is specifically
approved at least annually by a vote of the Board of Trustees,
including the non-interested trustees, cast in person at a
meeting called for the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to this
Plan, may be terminated at any time, without penalty, by vote of
a majority of the outstanding voting securities of the Fund or by
vote of a majority of the non-interested trustees, on not more
than sixty (60) days' written notice, or by Distributors on not
more than sixty (60) days' written notice, and shall terminate
automatically in the event of any act that constitutes an
assignment of the Management Agreement between the Trust on
behalf of the Fund and Advisers.
7. The Plan, and any agreements entered into pursuant to this
Plan, may not be amended to increase materially the amount to be
spent for distribution pursuant to Paragraph 2 hereof without
approval by a majority of the Fund's outstanding voting
securities.
8. All material amendments to the Plan, or any agreements
entered into pursuant to this Plan, shall be approved by a vote
of the non-interested trustees cast in person at a meeting called
for the purpose of voting on any such amendment.
9. So long as the Plan is in effect, the selection and
nomination of the Trust's non-interested trustees shall be
committed to the discretion of such non-interested trustees.
This Plan and the terms and provisions thereof are hereby
accepted and agreed to by the Trust and Distributors as evidenced
by their execution hereof.
FRANKLIN TAX-FREE TRUST
on behalf of Franklin Insured Tax-Free Income Fund
By:/s/ Deborah R. Gatzek
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By:/s/ Harmon E. Burns
FRANKLIN TAX-FREE TRUST
Preamble to Distribution Plan
The following Distribution Plan (the "Plan") has been
adopted pursuant to Rule 12b-1 under the Investment Company Act
of 1940 (the "Act") by Franklin Tax-Free Trust (the "Trust") for
the use of Franklin Ohio Insured Tax-Free Income Fund (the
"Fund"), which Plan shall take effect on the 1st day of May, 1994
(the "Effective Date of the Plan"). The Plan has been approved by
a majority of the Board of Trustees of the Trust (the "Board of
Trustees"), including a majority of the trustees who are not
interested persons of the Trust and who have no direct or
indirect financial interest in the operation of the Plan (the
"non-interested trustees"), cast in person at a meeting called
for the purpose of voting on such Plan.
In reviewing the Plan, the Board of Trustees considered the
schedule and nature of payments and terms of the Management
Agreement between the Trust on behalf of the Fund and Franklin
Advisers, Inc. ("Advisers") and the terms of the Underwriting
Agreement between the Trust on behalf of the Fund and
Franklin/Templeton Distributors, Inc. ("Distributors"). The Board
of Trustees concluded that the compensation of Advisers, under
the Management Agreement, and of Distributors, under the
Underwriting Agreement, was fair and not excessive; however, the
Board of Trustees also recognized that uncertainty may exist from
time to time with respect to whether payments to be made by the
Fund to Advisers, Distributors, or others or by Advisers or
Distributors to others may be deemed to constitute distribution
expenses of the Fund. Accordingly, the Board of Trustees
determined that the Plan should provide for such payments and
that adoption of the Plan would be prudent and in the best
interest of the Fund and its shareholders. Such approval included
a determination that in the exercise of their reasonable business
judgment and in light of their fiduciary duties, there is a
reasonable likelihood that the Plan will benefit the Fund and its
shareholders.
DISTRIBUTION PLAN
1. The Fund shall reimburse Distributors or others for all
expenses incurred by Distributors or others in the promotion and
distribution of the shares of the Fund, including but 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 Trust on behalf of the Fund,
Distributors or its affiliates, which form of agreement has been
approved from time to time by the trustees, including the non-
interested trustees.
2. The maximum amount which may be reimbursed by the Fund to
Distributors or others pursuant to Paragraph 1 herein shall be
0.10% per annum of the average daily net assets of the Fund. Said
reimbursement shall be made quarterly by the Fund to Distributors
or others.
3. In addition to the payments which the Fund is authorized to
make pursuant to paragraphs 1 and 2 hereof, to the extent that
the Fund, Advisers, Distributors or other parties on behalf of
the Fund, Advisers or Distributors make payments that are deemed
to be payments by the Fund 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 under the Act, then such
payments shall be deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges
which include payments specified in paragraphs 1 and 2, plus any
other payments deemed to be made pursuant to the Plan under this
paragraph, exceed the amount permitted to be paid pursuant to the
Rules of Fair Practice of the National Association of Securities
Dealers, Inc., Article III, Section 26(d).
4. Distributors shall furnish to the Board of Trustees, for
their review, on a quarterly basis, a written report of the
monies reimbursed to it and to others under the Plan, and shall
furnish the Board of Trustees with such other information as the
Board of Trustees may reasonably request in connection with the
payments made under the Plan in order to enable the Board of
Trustees to make an informed determination of whether the Plan
should be continued.
5. The Plan shall continue in effect for a period of more than
one year only so long as such continuance is specifically
approved at least annually by a vote of the Board of Trustees,
including the non-interested trustees, cast in person at a
meeting called for the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to this
Plan, may be terminated at any time, without penalty, by vote of
a majority of the outstanding voting securities of the Fund or by
vote of a majority of the non-interested trustees, on not more
than sixty (60) days' written notice, or by Distributors on not
more than sixty (60) days' written notice, and shall terminate
automatically in the event of any act that constitutes an
assignment of the Management Agreement between the Trust on
behalf of the Fund and Advisers.
7. The Plan, and any agreements entered into pursuant to this
Plan, may not be amended to increase materially the amount to be
spent for distribution pursuant to Paragraph 2 hereof without
approval by a majority of the Fund's outstanding voting
securities.
8. All material amendments to the Plan, or any agreements
entered into pursuant to this Plan, shall be approved by a vote
of the non-interested trustees cast in person at a meeting called
for the purpose of voting on any such amendment.
9. So long as the Plan is in effect, the selection and
nomination of the Trust's non-interested trustees shall be
committed to the discretion of such non-interested trustees.
This Plan and the terms and provisions thereof are hereby
accepted and agreed to by the Trust and Distributors as evidenced
by their execution hereof.
FRANKLIN TAX-FREE TRUST
on behalf of Franklin Ohio Insured Tax-Free Income Fund
By:/s/ Deborah R. Gatzek
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By:/s/ Harmon E. Burns
FRANKLIN TAX-FREE TRUST
Preamble to Distribution Plan
The following Distribution Plan (the "Plan") has been
adopted pursuant to Rule 12b-1 under the Investment Company Act
of 1940 (the "Act") by Franklin Tax-Free Trust (the "Trust") for
the use of Franklin Puerto Rico Tax-Free Income Fund (the
"Fund"), which Plan shall take effect on the 1st day of May, 1994
(the "Effective Date of the Plan"). The Plan has been approved by
a majority of the Board of Trustees of the Trust (the "Board of
Trustees"), including a majority of the trustees who are not
interested persons of the Trust and who have no direct or
indirect financial interest in the operation of the Plan (the
"non-interested trustees"), cast in person at a meeting called
for the purpose of voting on such Plan.
In reviewing the Plan, the Board of Trustees considered the
schedule and nature of payments and terms of the Management
Agreement between the Trust on behalf of the Fund and Franklin
Advisers, Inc. ("Advisers") and the terms of the Underwriting
Agreement between the Trust on behalf of the Fund and
Franklin/Templeton Distributors, Inc. ("Distributors"). The Board
of Trustees concluded that the compensation of Advisers, under
the Management Agreement, and of Distributors, under the
Underwriting Agreement, was fair and not excessive; however, the
Board of Trustees also recognized that uncertainty may exist from
time to time with respect to whether payments to be made by the
Fund to Advisers, Distributors, or others or by Advisers or
Distributors to others may be deemed to constitute distribution
expenses of the Fund. Accordingly, the Board of Trustees
determined that the Plan should provide for such payments and
that adoption of the Plan would be prudent and in the best
interest of the Fund and its shareholders. Such approval included
a determination that in the exercise of their reasonable business
judgment and in light of their fiduciary duties, there is a
reasonable likelihood that the Plan will benefit the Fund and its
shareholders.
DISTRIBUTION PLAN
1. The Fund shall reimburse Distributors or others for all
expenses incurred by Distributors or others in the promotion and
distribution of the shares of the Fund, including but 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 Trust on behalf of the Fund,
Distributors or its affiliates, which form of agreement has been
approved from time to time by the trustees, including the non-
interested trustees.
2. The maximum amount which may be reimbursed by the Fund to
Distributors or others pursuant to Paragraph 1 herein shall be
0.10% per annum of the average daily net assets of the Fund. Said
reimbursement shall be made quarterly by the Fund to Distributors
or others.
3. In addition to the payments which the Fund is authorized to
make pursuant to paragraphs 1 and 2 hereof, to the extent that
the Fund, Advisers, Distributors or other parties on behalf of
the Fund, Advisers or Distributors make payments that are deemed
to be payments by the Fund 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 under the Act, then such
payments shall be deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges
which include payments specified in paragraphs 1 and 2, plus any
other payments deemed to be made pursuant to the Plan under this
paragraph, exceed the amount permitted to be paid pursuant to the
Rules of Fair Practice of the National Association of Securities
Dealers, Inc., Article III, Section 26(d).
4. Distributors shall furnish to the Board of Trustees, for
their review, on a quarterly basis, a written report of the
monies reimbursed to it and to others under the Plan, and shall
furnish the Board of Trustees with such other information as the
Board of Trustees may reasonably request in connection with the
payments made under the Plan in order to enable the Board of
Trustees to make an informed determination of whether the Plan
should be continued.
5. The Plan shall continue in effect for a period of more than
one year only so long as such continuance is specifically
approved at least annually by a vote of the Board of Trustees,
including the non-interested trustees, cast in person at a
meeting called for the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to this
Plan, may be terminated at any time, without penalty, by vote of
a majority of the outstanding voting securities of the Fund or by
vote of a majority of the non-interested trustees, on not more
than sixty (60) days' written notice, or by Distributors on not
more than sixty (60) days' written notice, and shall terminate
automatically in the event of any act that constitutes an
assignment of the Management Agreement between the Trust on
behalf of the Fund and Advisers.
7. The Plan, and any agreements entered into pursuant to this
Plan, may not be amended to increase materially the amount to be
spent for distribution pursuant to Paragraph 2 hereof without
approval by a majority of the Fund's outstanding voting
securities.
8. All material amendments to the Plan, or any agreements
entered into pursuant to this Plan, shall be approved by a vote
of the non-interested trustees cast in person at a meeting called
for the purpose of voting on any such amendment.
9. So long as the Plan is in effect, the selection and
nomination of the Trust's non-interested trustees shall be
committed to the discretion of such non-interested trustees.
This Plan and the terms and provisions thereof are hereby
accepted and agreed to by the Trust and Distributors as evidenced
by their execution hereof.
FRANKLIN TAX-FREE TRUST
on behalf of Franklin Puerto Rico Tax-Free Income Fund
By:/s/ Deborah R. Gatzek
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By:/s/ Harmon E. Burns
FRANKLIN TAX-FREE TRUST
Preamble to Distribution Plan
The following Distribution Plan (the "Plan") has been
adopted pursuant to Rule 12b-1 under the Investment Company Act
of 1940 (the "Act") by Franklin Tax-Free Trust (the "Trust") for
the use of Franklin Arizona Tax-Free Income Fund (the "Fund"),
which Plan shall take effect on the 1st day of May, 1994 (the
"Effective Date of the Plan"). The Plan has been approved by a
majority of the Board of Trustees of the Trust (the "Board of
Trustees"), including a majority of the trustees who are not
interested persons of the Trust and who have no direct or
indirect financial interest in the operation of the Plan (the
"non-interested trustees"), cast in person at a meeting called
for the purpose of voting on such Plan.
In reviewing the Plan, the Board of Trustees considered the
schedule and nature of payments and terms of the Management
Agreement between the Trust on behalf of the Fund and Franklin
Advisers, Inc. ("Advisers") and the terms of the Underwriting
Agreement between the Trust on behalf of the Fund and
Franklin/Templeton Distributors, Inc. ("Distributors"). The Board
of Trustees concluded that the compensation of Advisers, under
the Management Agreement, and of Distributors, under the
Underwriting Agreement, was fair and not excessive; however, the
Board of Trustees also recognized that uncertainty may exist from
time to time with respect to whether payments to be made by the
Fund to Advisers, Distributors, or others or by Advisers or
Distributors to others may be deemed to constitute distribution
expenses of the Fund. Accordingly, the Board of Trustees
determined that the Plan should provide for such payments and
that adoption of the Plan would be prudent and in the best
interest of the Fund and its shareholders. Such approval included
a determination that in the exercise of their reasonable business
judgment and in light of their fiduciary duties, there is a
reasonable likelihood that the Plan will benefit the Fund and its
shareholders.
DISTRIBUTION PLAN
1. The Fund shall reimburse Distributors or others for all
expenses incurred by Distributors or others in the promotion and
distribution of the shares of the Fund, including but 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 Trust on behalf of the Fund,
Distributors or its affiliates, which form of agreement has been
approved from time to time by the trustees, including the non-
interested trustees.
2. The maximum amount which may be reimbursed by the Fund to
Distributors or others pursuant to Paragraph 1 herein shall be
0.10% per annum of the average daily net assets of the Fund. Said
reimbursement shall be made quarterly by the Fund to Distributors
or others.
3. In addition to the payments which the Fund is authorized to
make pursuant to paragraphs 1 and 2 hereof, to the extent that
the Fund, Advisers, Distributors or other parties on behalf of
the Fund, Advisers or Distributors make payments that are deemed
to be payments by the Fund 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 under the Act, then such
payments shall be deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges
which include payments specified in paragraphs 1 and 2, plus any
other payments deemed to be made pursuant to the Plan under this
paragraph, exceed the amount permitted to be paid pursuant to the
Rules of Fair Practice of the National Association of Securities
Dealers, Inc., Article III, Section 26(d).
4. Distributors shall furnish to the Board of Trustees, for
their review, on a quarterly basis, a written report of the
monies reimbursed to it and to others under the Plan, and shall
furnish the Board of Trustees with such other information as the
Board of Trustees may reasonably request in connection with the
payments made under the Plan in order to enable the Board of
Trustees to make an informed determination of whether the Plan
should be continued.
5. The Plan shall continue in effect for a period of more than
one year only so long as such continuance is specifically
approved at least annually by a vote of the Board of Trustees,
including the non-interested trustees, cast in person at a
meeting called for the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to this
Plan, may be terminated at any time, without penalty, by vote of
a majority of the outstanding voting securities of the Fund or by
vote of a majority of the non-interested trustees, on not more
than sixty (60) days' written notice, or by Distributors on not
more than sixty (60) days' written notice, and shall terminate
automatically in the event of any act that constitutes an
assignment of the Management Agreement between the Trust on
behalf of the Fund and Advisers.
7. The Plan, and any agreements entered into pursuant to this
Plan, may not be amended to increase materially the amount to be
spent for distribution pursuant to Paragraph 2 hereof without
approval by a majority of the Fund's outstanding voting
securities.
8. All material amendments to the Plan, or any agreements
entered into pursuant to this Plan, shall be approved by a vote
of the non-interested trustees cast in person at a meeting called
for the purpose of voting on any such amendment.
9. So long as the Plan is in effect, the selection and
nomination of the Trust's non-interested trustees shall be
committed to the discretion of such non-interested trustees.
This Plan and the terms and provisions thereof are hereby
accepted and agreed to by the Trust and Distributors as evidenced
by their execution hereof.
FRANKLIN TAX-FREE TRUST
on behalf of Franklin Arizona Tax-Free Income Fund
By:/s/ Deborah R. Gatzek
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By:/s/ Harmon E. Burns
FRANKLIN TAX-FREE TRUST
Preamble to Distribution Plan
The following Distribution Plan (the "Plan") has been
adopted pursuant to Rule 12b-1 under the Investment Company Act
of 1940 (the "Act") by Franklin Tax-Free Trust (the "Trust") for
the use of Franklin Colorado Tax-Free Income Fund (the "Fund"),
which Plan shall take effect on the 1st day of May, 1994 (the
"Effective Date of the Plan"). The Plan has been approved by a
majority of the Board of Trustees of the Trust (the "Board of
Trustees"), including a majority of the trustees who are not
interested persons of the Trust and who have no direct or
indirect financial interest in the operation of the Plan (the
"non-interested trustees"), cast in person at a meeting called
for the purpose of voting on such Plan.
In reviewing the Plan, the Board of Trustees considered the
schedule and nature of payments and terms of the Management
Agreement between the Trust on behalf of the Fund and Franklin
Advisers, Inc. ("Advisers") and the terms of the Underwriting
Agreement between the Trust on behalf of the Fund and
Franklin/Templeton Distributors, Inc. ("Distributors"). The Board
of Trustees concluded that the compensation of Advisers, under
the Management Agreement, and of Distributors, under the
Underwriting Agreement, was fair and not excessive; however, the
Board of Trustees also recognized that uncertainty may exist from
time to time with respect to whether payments to be made by the
Fund to Advisers, Distributors, or others or by Advisers or
Distributors to others may be deemed to constitute distribution
expenses of the Fund. Accordingly, the Board of Trustees
determined that the Plan should provide for such payments and
that adoption of the Plan would be prudent and in the best
interest of the Fund and its shareholders. Such approval included
a determination that in the exercise of their reasonable business
judgment and in light of their fiduciary duties, there is a
reasonable likelihood that the Plan will benefit the Fund and its
shareholders.
DISTRIBUTION PLAN
1. The Fund shall reimburse Distributors or others for all
expenses incurred by Distributors or others in the promotion and
distribution of the shares of the Fund, including but 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 Trust on behalf of the Fund,
Distributors or its affiliates, which form of agreement has been
approved from time to time by the trustees, including the non-
interested trustees.
2. The maximum amount which may be reimbursed by the Fund to
Distributors or others pursuant to Paragraph 1 herein shall be
0.10% per annum of the average daily net assets of the Fund. Said
reimbursement shall be made quarterly by the Fund to Distributors
or others.
3. In addition to the payments which the Fund is authorized to
make pursuant to paragraphs 1 and 2 hereof, to the extent that
the Fund, Advisers, Distributors or other parties on behalf of
the Fund, Advisers or Distributors make payments that are deemed
to be payments by the Fund 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 under the Act, then such
payments shall be deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges
which include payments specified in paragraphs 1 and 2, plus any
other payments deemed to be made pursuant to the Plan under this
paragraph, exceed the amount permitted to be paid pursuant to the
Rules of Fair Practice of the National Association of Securities
Dealers, Inc., Article III, Section 26(d).
4. Distributors shall furnish to the Board of Trustees, for
their review, on a quarterly basis, a written report of the
monies reimbursed to it and to others under the Plan, and shall
furnish the Board of Trustees with such other information as the
Board of Trustees may reasonably request in connection with the
payments made under the Plan in order to enable the Board of
Trustees to make an informed determination of whether the Plan
should be continued.
5. The Plan shall continue in effect for a period of more than
one year only so long as such continuance is specifically
approved at least annually by a vote of the Board of Trustees,
including the non-interested trustees, cast in person at a
meeting called for the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to this
Plan, may be terminated at any time, without penalty, by vote of
a majority of the outstanding voting securities of the Fund or by
vote of a majority of the non-interested trustees, on not more
than sixty (60) days' written notice, or by Distributors on not
more than sixty (60) days' written notice, and shall terminate
automatically in the event of any act that constitutes an
assignment of the Management Agreement between the Trust on
behalf of the Fund and Advisers.
7. The Plan, and any agreements entered into pursuant to this
Plan, may not be amended to increase materially the amount to be
spent for distribution pursuant to Paragraph 2 hereof without
approval by a majority of the Fund's outstanding voting
securities.
8. All material amendments to the Plan, or any agreements
entered into pursuant to this Plan, shall be approved by a vote
of the non-interested trustees cast in person at a meeting called
for the purpose of voting on any such amendment.
9. So long as the Plan is in effect, the selection and
nomination of the Trust's non-interested trustees shall be
committed to the discretion of such non-interested trustees.
This Plan and the terms and provisions thereof are hereby
accepted and agreed to by the Trust and Distributors as evidenced
by their execution hereof.
FRANKLIN TAX-FREE TRUST
on behalf of Franklin Colorado Tax-Free Income Fund
By:/s/ Deborah R. Gatzek
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By:/s/ Harmon E. Burns
FRANKLIN TAX-FREE TRUST
Preamble to Distribution Plan
The following Distribution Plan (the "Plan") has been
adopted pursuant to Rule 12b-1 under the Investment Company Act
of 1940 (the "Act") by Franklin Tax-Free Trust (the "Trust") for
the use of Franklin Georgia Tax-Free Income Fund (the "Fund"),
which Plan shall take effect on the 1st day of May, 1994 (the
"Effective Date of the Plan"). The Plan has been approved by a
majority of the Board of Trustees of the Trust (the "Board of
Trustees"), including a majority of the trustees who are not
interested persons of the Trust and who have no direct or
indirect financial interest in the operation of the Plan (the
"non-interested trustees"), cast in person at a meeting called
for the purpose of voting on such Plan.
In reviewing the Plan, the Board of Trustees considered the
schedule and nature of payments and terms of the Management
Agreement between the Trust on behalf of the Fund and Franklin
Advisers, Inc. ("Advisers") and the terms of the Underwriting
Agreement between the Trust on behalf of the Fund and
Franklin/Templeton Distributors, Inc. ("Distributors"). The Board
of Trustees concluded that the compensation of Advisers, under
the Management Agreement, and of Distributors, under the
Underwriting Agreement, was fair and not excessive; however, the
Board of Trustees also recognized that uncertainty may exist from
time to time with respect to whether payments to be made by the
Fund to Advisers, Distributors, or others or by Advisers or
Distributors to others may be deemed to constitute distribution
expenses of the Fund. Accordingly, the Board of Trustees
determined that the Plan should provide for such payments and
that adoption of the Plan would be prudent and in the best
interest of the Fund and its shareholders. Such approval included
a determination that in the exercise of their reasonable business
judgment and in light of their fiduciary duties, there is a
reasonable likelihood that the Plan will benefit the Fund and its
shareholders.
DISTRIBUTION PLAN
1. The Fund shall reimburse Distributors or others for all
expenses incurred by Distributors or others in the promotion and
distribution of the shares of the Fund, including but 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 Trust on behalf of the Fund,
Distributors or its affiliates, which form of agreement has been
approved from time to time by the trustees, including the non-
interested trustees.
2. The maximum amount which may be reimbursed by the Fund to
Distributors or others pursuant to Paragraph 1 herein shall be
0.10% per annum of the average daily net assets of the Fund. Said
reimbursement shall be made quarterly by the Fund to Distributors
or others.
3. In addition to the payments which the Fund is authorized to
make pursuant to paragraphs 1 and 2 hereof, to the extent that
the Fund, Advisers, Distributors or other parties on behalf of
the Fund, Advisers or Distributors make payments that are deemed
to be payments by the Fund 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 under the Act, then such
payments shall be deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges
which include payments specified in paragraphs 1 and 2, plus any
other payments deemed to be made pursuant to the Plan under this
paragraph, exceed the amount permitted to be paid pursuant to the
Rules of Fair Practice of the National Association of Securities
Dealers, Inc., Article III, Section 26(d).
4. Distributors shall furnish to the Board of Trustees, for
their review, on a quarterly basis, a written report of the
monies reimbursed to it and to others under the Plan, and shall
furnish the Board of Trustees with such other information as the
Board of Trustees may reasonably request in connection with the
payments made under the Plan in order to enable the Board of
Trustees to make an informed determination of whether the Plan
should be continued.
5. The Plan shall continue in effect for a period of more than
one year only so long as such continuance is specifically
approved at least annually by a vote of the Board of Trustees,
including the non-interested trustees, cast in person at a
meeting called for the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to this
Plan, may be terminated at any time, without penalty, by vote of
a majority of the outstanding voting securities of the Fund or by
vote of a majority of the non-interested trustees, on not more
than sixty (60) days' written notice, or by Distributors on not
more than sixty (60) days' written notice, and shall terminate
automatically in the event of any act that constitutes an
assignment of the Management Agreement between the Trust on
behalf of the Fund and Advisers.
7. The Plan, and any agreements entered into pursuant to this
Plan, may not be amended to increase materially the amount to be
spent for distribution pursuant to Paragraph 2 hereof without
approval by a majority of the Fund's outstanding voting
securities.
8. All material amendments to the Plan, or any agreements
entered into pursuant to this Plan, shall be approved by a vote
of the non-interested trustees cast in person at a meeting called
for the purpose of voting on any such amendment.
9. So long as the Plan is in effect, the selection and
nomination of the Trust's non-interested trustees shall be
committed to the discretion of such non-interested trustees.
This Plan and the terms and provisions thereof are hereby
accepted and agreed to by the Trust and Distributors as evidenced
by their execution hereof.
FRANKLIN TAX-FREE TRUST
on behalf of Franklin Georgia Tax-Free Income Fund
By:/s/ Deborah R. Gatzek
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By:/s/ Harmon E. Burns
FRANKLIN TAX-FREE TRUST
Preamble to Distribution Plan
The following Distribution Plan (the "Plan") has been
adopted pursuant to Rule 12b-1 under the Investment Company Act
of 1940 (the "Act") by Franklin Tax-Free Trust (the "Trust") for
the use of Franklin Pennsylvania Tax-Free Income Fund (the
"Fund"), which Plan shall take effect on the 1st day of May, 1994
(the "Effective Date of the Plan"). The Plan has been approved by
a majority of the Board of Trustees of the Trust (the "Board of
Trustees"), including a majority of the trustees who are not
interested persons of the Trust and who have no direct or
indirect financial interest in the operation of the Plan (the
"non-interested trustees"), cast in person at a meeting called
for the purpose of voting on such Plan.
In reviewing the Plan, the Board of Trustees considered the
schedule and nature of payments and terms of the Management
Agreement between the Trust on behalf of the Fund and Franklin
Advisers, Inc. ("Advisers") and the terms of the Underwriting
Agreement between the Trust on behalf of the Fund and
Franklin/Templeton Distributors, Inc. ("Distributors"). The Board
of Trustees concluded that the compensation of Advisers, under
the Management Agreement, and of Distributors, under the
Underwriting Agreement, was fair and not excessive; however, the
Board of Trustees also recognized that uncertainty may exist from
time to time with respect to whether payments to be made by the
Fund to Advisers, Distributors, or others or by Advisers or
Distributors to others may be deemed to constitute distribution
expenses of the Fund. Accordingly, the Board of Trustees
determined that the Plan should provide for such payments and
that adoption of the Plan would be prudent and in the best
interest of the Fund and its shareholders. Such approval included
a determination that in the exercise of their reasonable business
judgment and in light of their fiduciary duties, there is a
reasonable likelihood that the Plan will benefit the Fund and its
shareholders.
DISTRIBUTION PLAN
1. The Fund shall reimburse Distributors or others for all
expenses incurred by Distributors or others in the promotion and
distribution of the shares of the Fund, including but 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 Trust on behalf of the Fund,
Distributors or its affiliates, which form of agreement has been
approved from time to time by the trustees, including the non-
interested trustees.
2. The maximum amount which may be reimbursed by the Fund to
Distributors or others pursuant to Paragraph 1 herein shall be
0.10% per annum of the average daily net assets of the Fund. Said
reimbursement shall be made quarterly by the Fund to Distributors
or others.
3. In addition to the payments which the Fund is authorized to
make pursuant to paragraphs 1 and 2 hereof, to the extent that
the Fund, Advisers, Distributors or other parties on behalf of
the Fund, Advisers or Distributors make payments that are deemed
to be payments by the Fund 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 under the Act, then such
payments shall be deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges
which include payments specified in paragraphs 1 and 2, plus any
other payments deemed to be made pursuant to the Plan under this
paragraph, exceed the amount permitted to be paid pursuant to the
Rules of Fair Practice of the National Association of Securities
Dealers, Inc., Article III, Section 26(d).
4. Distributors shall furnish to the Board of Trustees, for
their review, on a quarterly basis, a written report of the
monies reimbursed to it and to others under the Plan, and shall
furnish the Board of Trustees with such other information as the
Board of Trustees may reasonably request in connection with the
payments made under the Plan in order to enable the Board of
Trustees to make an informed determination of whether the Plan
should be continued.
5. The Plan shall continue in effect for a period of more than
one year only so long as such continuance is specifically
approved at least annually by a vote of the Board of Trustees,
including the non-interested trustees, cast in person at a
meeting called for the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to this
Plan, may be terminated at any time, without penalty, by vote of
a majority of the outstanding voting securities of the Fund or by
vote of a majority of the non-interested trustees, on not more
than sixty (60) days' written notice, or by Distributors on not
more than sixty (60) days' written notice, and shall terminate
automatically in the event of any act that constitutes an
assignment of the Management Agreement between the Trust on
behalf of the Fund and Advisers.
7. The Plan, and any agreements entered into pursuant to this
Plan, may not be amended to increase materially the amount to be
spent for distribution pursuant to Paragraph 2 hereof without
approval by a majority of the Fund's outstanding voting
securities.
8. All material amendments to the Plan, or any agreements
entered into pursuant to this Plan, shall be approved by a vote
of the non-interested trustees cast in person at a meeting called
for the purpose of voting on any such amendment.
9. So long as the Plan is in effect, the selection and
nomination of the Trust's non-interested trustees shall be
committed to the discretion of such non-interested trustees.
This Plan and the terms and provisions thereof are hereby
accepted and agreed to by the Trust and Distributors as evidenced
by their execution hereof.
FRANKLIN TAX-FREE TRUST
on behalf of Franklin Pennsylvania Tax-Free Income Fund
By:/s/ Deborah R. Gatzek
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By:/s/ Harmon E. Burns
FRANKLIN TAX-FREE TRUST
Preamble to Distribution Plan
The following Distribution Plan (the "Plan") has been
adopted pursuant to Rule 12b-1 under the Investment Company Act
of 1940 (the "Act") by Franklin Tax-Free Trust (the "Trust") for
the use of Franklin High Yield Tax-Free Income Fund (the "Fund"),
which Plan shall take effect on the 1st day of May, 1994 (the
"Effective Date of the Plan"). The Plan has been approved by a
majority of the Board of Trustees of the Trust (the "Board of
Trustees"), including a majority of the trustees who are not
interested persons of the Trust and who have no direct or
indirect financial interest in the operation of the Plan (the
"non-interested trustees"), cast in person at a meeting called
for the purpose of voting on such Plan.
In reviewing the Plan, the Board of Trustees considered the
schedule and nature of payments and terms of the Management
Agreement between the Trust on behalf of the Fund and Franklin
Advisers, Inc. ("Advisers") and the terms of the Underwriting
Agreement between the Trust on behalf of the Fund and
Franklin/Templeton Distributors, Inc. ("Distributors"). The Board
of Trustees concluded that the compensation of Advisers, under
the Management Agreement, and of Distributors, under the
Underwriting Agreement, was fair and not excessive; however, the
Board of Trustees also recognized that uncertainty may exist from
time to time with respect to whether payments to be made by the
Fund to Advisers, Distributors, or others or by Advisers or
Distributors to others may be deemed to constitute distribution
expenses of the Fund. Accordingly, the Board of Trustees
determined that the Plan should provide for such payments and
that adoption of the Plan would be prudent and in the best
interest of the Fund and its shareholders. Such approval included
a determination that in the exercise of their reasonable business
judgment and in light of their fiduciary duties, there is a
reasonable likelihood that the Plan will benefit the Fund and its
shareholders.
DISTRIBUTION PLAN
1. The Fund shall reimburse Distributors or others for all
expenses incurred by Distributors or others in the promotion and
distribution of the shares of the Fund, including but 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 Trust on behalf of the Fund,
Distributors or its affiliates, which form of agreement has been
approved from time to time by the trustees, including the non-
interested trustees.
2. The maximum amount which may be reimbursed by the Fund to
Distributors or others pursuant to Paragraph 1 herein shall be
0.10% per annum of the average daily net assets of the Fund. Said
reimbursement shall be made quarterly by the Fund to Distributors
or others.
3. In addition to the payments which the Fund is authorized to
make pursuant to paragraphs 1 and 2 hereof, to the extent that
the Fund, Advisers, Distributors or other parties on behalf of
the Fund, Advisers or Distributors make payments that are deemed
to be payments by the Fund 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 under the Act, then such
payments shall be deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges
which include payments specified in paragraphs 1 and 2, plus any
other payments deemed to be made pursuant to the Plan under this
paragraph, exceed the amount permitted to be paid pursuant to the
Rules of Fair Practice of the National Association of Securities
Dealers, Inc., Article III, Section 26(d).
4. Distributors shall furnish to the Board of Trustees, for
their review, on a quarterly basis, a written report of the
monies reimbursed to it and to others under the Plan, and shall
furnish the Board of Trustees with such other information as the
Board of Trustees may reasonably request in connection with the
payments made under the Plan in order to enable the Board of
Trustees to make an informed determination of whether the Plan
should be continued.
5. The Plan shall continue in effect for a period of more than
one year only so long as such continuance is specifically
approved at least annually by a vote of the Board of Trustees,
including the non-interested trustees, cast in person at a
meeting called for the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to this
Plan, may be terminated at any time, without penalty, by vote of
a majority of the outstanding voting securities of the Fund or by
vote of a majority of the non-interested trustees, on not more
than sixty (60) days' written notice, or by Distributors on not
more than sixty (60) days' written notice, and shall terminate
automatically in the event of any act that constitutes an
assignment of the Management Agreement between the Trust on
behalf of the Fund and Advisers.
7. The Plan, and any agreements entered into pursuant to this
Plan, may not be amended to increase materially the amount to be
spent for distribution pursuant to Paragraph 2 hereof without
approval by a majority of the Fund's outstanding voting
securities.
8. All material amendments to the Plan, or any agreements
entered into pursuant to this Plan, shall be approved by a vote
of the non-interested trustees cast in person at a meeting called
for the purpose of voting on any such amendment.
9. So long as the Plan is in effect, the selection and
nomination of the Trust's non-interested trustees shall be
committed to the discretion of such non-interested trustees.
This Plan and the terms and provisions thereof are hereby
accepted and agreed to by the Trust and Distributors as evidenced
by their execution hereof.
FRANKLIN TAX-FREE TRUST
on behalf of Franklin High Yield Tax-Free Income Fund
By:/s/ Deborah R. Gatzek
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By:/s/ Harmon E. Burns
FRANKLIN TAX-FREE TRUST
Preamble to Distribution Plan
The following Distribution Plan (the "Plan") has been
adopted pursuant to Rule 12b-1 under the Investment Company Act
of 1940 (the "Act") by Franklin Tax-Free Trust (the "Trust") for
the use of Franklin Missouri Tax-Free Income Fund (the "Fund"),
which Plan shall take effect on the 1st day of May, 1994 (the
"Effective Date of the Plan"). The Plan has been approved by a
majority of the Board of Trustees of the Trust (the "Board of
Trustees"), including a majority of the trustees who are not
interested persons of the Trust and who have no direct or
indirect financial interest in the operation of the Plan (the
"non-interested trustees"), cast in person at a meeting called
for the purpose of voting on such Plan.
In reviewing the Plan, the Board of Trustees considered the
schedule and nature of payments and terms of the Management
Agreement between the Trust on behalf of the Fund and Franklin
Advisers, Inc. ("Advisers") and the terms of the Underwriting
Agreement between the Trust on behalf of the Fund and
Franklin/Templeton Distributors, Inc. ("Distributors"). The Board
of Trustees concluded that the compensation of Advisers, under
the Management Agreement, and of Distributors, under the
Underwriting Agreement, was fair and not excessive; however, the
Board of Trustees also recognized that uncertainty may exist from
time to time with respect to whether payments to be made by the
Fund to Advisers, Distributors, or others or by Advisers or
Distributors to others may be deemed to constitute distribution
expenses of the Fund. Accordingly, the Board of Trustees
determined that the Plan should provide for such payments and
that adoption of the Plan would be prudent and in the best
interest of the Fund and its shareholders. Such approval included
a determination that in the exercise of their reasonable business
judgment and in light of their fiduciary duties, there is a
reasonable likelihood that the Plan will benefit the Fund and its
shareholders.
DISTRIBUTION PLAN
1. The Fund shall reimburse Distributors or others for all
expenses incurred by Distributors or others in the promotion and
distribution of the shares of the Fund, including but 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 Trust on behalf of the Fund,
Distributors or its affiliates, which form of agreement has been
approved from time to time by the trustees, including the non-
interested trustees.
2. The maximum amount which may be reimbursed by the Fund to
Distributors or others pursuant to Paragraph 1 herein shall be
0.10% per annum of the average daily net assets of the Fund. Said
reimbursement shall be made quarterly by the Fund to Distributors
or others.
3. In addition to the payments which the Fund is authorized to
make pursuant to paragraphs 1 and 2 hereof, to the extent that
the Fund, Advisers, Distributors or other parties on behalf of
the Fund, Advisers or Distributors make payments that are deemed
to be payments by the Fund 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 under the Act, then such
payments shall be deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges
which include payments specified in paragraphs 1 and 2, plus any
other payments deemed to be made pursuant to the Plan under this
paragraph, exceed the amount permitted to be paid pursuant to the
Rules of Fair Practice of the National Association of Securities
Dealers, Inc., Article III, Section 26(d).
4. Distributors shall furnish to the Board of Trustees, for
their review, on a quarterly basis, a written report of the
monies reimbursed to it and to others under the Plan, and shall
furnish the Board of Trustees with such other information as the
Board of Trustees may reasonably request in connection with the
payments made under the Plan in order to enable the Board of
Trustees to make an informed determination of whether the Plan
should be continued.
5. The Plan shall continue in effect for a period of more than
one year only so long as such continuance is specifically
approved at least annually by a vote of the Board of Trustees,
including the non-interested trustees, cast in person at a
meeting called for the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to this
Plan, may be terminated at any time, without penalty, by vote of
a majority of the outstanding voting securities of the Fund or by
vote of a majority of the non-interested trustees, on not more
than sixty (60) days' written notice, or by Distributors on not
more than sixty (60) days' written notice, and shall terminate
automatically in the event of any act that constitutes an
assignment of the Management Agreement between the Trust on
behalf of the Fund and Advisers.
7. The Plan, and any agreements entered into pursuant to this
Plan, may not be amended to increase materially the amount to be
spent for distribution pursuant to Paragraph 2 hereof without
approval by a majority of the Fund's outstanding voting
securities.
8. All material amendments to the Plan, or any agreements
entered into pursuant to this Plan, shall be approved by a vote
of the non-interested trustees cast in person at a meeting called
for the purpose of voting on any such amendment.
9. So long as the Plan is in effect, the selection and
nomination of the Trust's non-interested trustees shall be
committed to the discretion of such non-interested trustees.
This Plan and the terms and provisions thereof are hereby
accepted and agreed to by the Trust and Distributors as evidenced
by their execution hereof.
FRANKLIN TAX-FREE TRUST
on behalf of Franklin Missouri Tax-Free Income Fund
By:/s/ Deborah R. Gatzek
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By:/s/ Harmon E. Burns
FRANKLIN TAX-FREE TRUST
Preamble to Distribution Plan
The following Distribution Plan (the "Plan") has been
adopted pursuant to Rule 12b-1 under the Investment Company Act
of 1940 (the "Act") by Franklin Tax-Free Trust (the "Trust") for
the use of Franklin Oregon Tax-Free Income Fund (the "Fund"),
which Plan shall take effect on the 1st day of May, 1994 (the
"Effective Date of the Plan"). The Plan has been approved by a
majority of the Board of Trustees of the Trust (the "Board of
Trustees"), including a majority of the trustees who are not
interested persons of the Trust and who have no direct or
indirect financial interest in the operation of the Plan (the
"non-interested trustees"), cast in person at a meeting called
for the purpose of voting on such Plan.
In reviewing the Plan, the Board of Trustees considered the
schedule and nature of payments and terms of the Management
Agreement between the Trust on behalf of the Fund and Franklin
Advisers, Inc. ("Advisers") and the terms of the Underwriting
Agreement between the Trust on behalf of the Fund and
Franklin/Templeton Distributors, Inc. ("Distributors"). The Board
of Trustees concluded that the compensation of Advisers, under
the Management Agreement, and of Distributors, under the
Underwriting Agreement, was fair and not excessive; however, the
Board of Trustees also recognized that uncertainty may exist from
time to time with respect to whether payments to be made by the
Fund to Advisers, Distributors, or others or by Advisers or
Distributors to others may be deemed to constitute distribution
expenses of the Fund. Accordingly, the Board of Trustees
determined that the Plan should provide for such payments and
that adoption of the Plan would be prudent and in the best
interest of the Fund and its shareholders. Such approval included
a determination that in the exercise of their reasonable business
judgment and in light of their fiduciary duties, there is a
reasonable likelihood that the Plan will benefit the Fund and its
shareholders.
DISTRIBUTION PLAN
1. The Fund shall reimburse Distributors or others for all
expenses incurred by Distributors or others in the promotion and
distribution of the shares of the Fund, including but 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 Trust on behalf of the Fund,
Distributors or its affiliates, which form of agreement has been
approved from time to time by the trustees, including the non-
interested trustees.
2. The maximum amount which may be reimbursed by the Fund to
Distributors or others pursuant to Paragraph 1 herein shall be
0.10% per annum of the average daily net assets of the Fund. Said
reimbursement shall be made quarterly by the Fund to Distributors
or others.
3. In addition to the payments which the Fund is authorized to
make pursuant to paragraphs 1 and 2 hereof, to the extent that
the Fund, Advisers, Distributors or other parties on behalf of
the Fund, Advisers or Distributors make payments that are deemed
to be payments by the Fund 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 under the Act, then such
payments shall be deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges
which include payments specified in paragraphs 1 and 2, plus any
other payments deemed to be made pursuant to the Plan under this
paragraph, exceed the amount permitted to be paid pursuant to the
Rules of Fair Practice of the National Association of Securities
Dealers, Inc., Article III, Section 26(d).
4. Distributors shall furnish to the Board of Trustees, for
their review, on a quarterly basis, a written report of the
monies reimbursed to it and to others under the Plan, and shall
furnish the Board of Trustees with such other information as the
Board of Trustees may reasonably request in connection with the
payments made under the Plan in order to enable the Board of
Trustees to make an informed determination of whether the Plan
should be continued.
5. The Plan shall continue in effect for a period of more than
one year only so long as such continuance is specifically
approved at least annually by a vote of the Board of Trustees,
including the non-interested trustees, cast in person at a
meeting called for the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to this
Plan, may be terminated at any time, without penalty, by vote of
a majority of the outstanding voting securities of the Fund or by
vote of a majority of the non-interested trustees, on not more
than sixty (60) days' written notice, or by Distributors on not
more than sixty (60) days' written notice, and shall terminate
automatically in the event of any act that constitutes an
assignment of the Management Agreement between the Trust on
behalf of the Fund and Advisers.
7. The Plan, and any agreements entered into pursuant to this
Plan, may not be amended to increase materially the amount to be
spent for distribution pursuant to Paragraph 2 hereof without
approval by a majority of the Fund's outstanding voting
securities.
8. All material amendments to the Plan, or any agreements
entered into pursuant to this Plan, shall be approved by a vote
of the non-interested trustees cast in person at a meeting called
for the purpose of voting on any such amendment.
9. So long as the Plan is in effect, the selection and
nomination of the Trust's non-interested trustees shall be
committed to the discretion of such non-interested trustees.
This Plan and the terms and provisions thereof are hereby
accepted and agreed to by the Trust and Distributors as evidenced
by their execution hereof.
FRANKLIN TAX-FREE TRUST
on behalf of Franklin Oregon Tax-Free Income Fund
By:/s/ Deborah R. Gatzek
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By:/s/ Harmon E. Burns
FRANKLIN TAX-FREE TRUST
Preamble to Distribution Plan
The following Distribution Plan (the "Plan") has been
adopted pursuant to Rule 12b-1 under the Investment Company Act
of 1940 (the "Act") by Franklin Tax-Free Trust (the "Trust") for
the use of Franklin Texas Tax-Free Income Fund (the "Fund"),
which Plan shall take effect on the 1st day of May, 1994 (the
"Effective Date of the Plan"). The Plan has been approved by a
majority of the Board of Trustees of the Trust (the "Board of
Trustees"), including a majority of the trustees who are not
interested persons of the Trust and who have no direct or
indirect financial interest in the operation of the Plan (the
"non-interested trustees"), cast in person at a meeting called
for the purpose of voting on such Plan.
In reviewing the Plan, the Board of Trustees considered the
schedule and nature of payments and terms of the Management
Agreement between the Trust on behalf of the Fund and Franklin
Advisers, Inc. ("Advisers") and the terms of the Underwriting
Agreement between the Trust on behalf of the Fund and
Franklin/Templeton Distributors, Inc. ("Distributors"). The Board
of Trustees concluded that the compensation of Advisers, under
the Management Agreement, and of Distributors, under the
Underwriting Agreement, was fair and not excessive; however, the
Board of Trustees also recognized that uncertainty may exist from
time to time with respect to whether payments to be made by the
Fund to Advisers, Distributors, or others or by Advisers or
Distributors to others may be deemed to constitute distribution
expenses of the Fund. Accordingly, the Board of Trustees
determined that the Plan should provide for such payments and
that adoption of the Plan would be prudent and in the best
interest of the Fund and its shareholders. Such approval included
a determination that in the exercise of their reasonable business
judgment and in light of their fiduciary duties, there is a
reasonable likelihood that the Plan will benefit the Fund and its
shareholders.
DISTRIBUTION PLAN
1. The Fund shall reimburse Distributors or others for all
expenses incurred by Distributors or others in the promotion and
distribution of the shares of the Fund, including but 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 Trust on behalf of the Fund,
Distributors or its affiliates, which form of agreement has been
approved from time to time by the trustees, including the non-
interested trustees.
2. The maximum amount which may be reimbursed by the Fund to
Distributors or others pursuant to Paragraph 1 herein shall be
0.10% per annum of the average daily net assets of the Fund. Said
reimbursement shall be made quarterly by the Fund to Distributors
or others.
3. In addition to the payments which the Fund is authorized to
make pursuant to paragraphs 1 and 2 hereof, to the extent that
the Fund, Advisers, Distributors or other parties on behalf of
the Fund, Advisers or Distributors make payments that are deemed
to be payments by the Fund 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 under the Act, then such
payments shall be deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges
which include payments specified in paragraphs 1 and 2, plus any
other payments deemed to be made pursuant to the Plan under this
paragraph, exceed the amount permitted to be paid pursuant to the
Rules of Fair Practice of the National Association of Securities
Dealers, Inc., Article III, Section 26(d).
4. Distributors shall furnish to the Board of Trustees, for
their review, on a quarterly basis, a written report of the
monies reimbursed to it and to others under the Plan, and shall
furnish the Board of Trustees with such other information as the
Board of Trustees may reasonably request in connection with the
payments made under the Plan in order to enable the Board of
Trustees to make an informed determination of whether the Plan
should be continued.
5. The Plan shall continue in effect for a period of more than
one year only so long as such continuance is specifically
approved at least annually by a vote of the Board of Trustees,
including the non-interested trustees, cast in person at a
meeting called for the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to this
Plan, may be terminated at any time, without penalty, by vote of
a majority of the outstanding voting securities of the Fund or by
vote of a majority of the non-interested trustees, on not more
than sixty (60) days' written notice, or by Distributors on not
more than sixty (60) days' written notice, and shall terminate
automatically in the event of any act that constitutes an
assignment of the Management Agreement between the Trust on
behalf of the Fund and Advisers.
7. The Plan, and any agreements entered into pursuant to this
Plan, may not be amended to increase materially the amount to be
spent for distribution pursuant to Paragraph 2 hereof without
approval by a majority of the Fund's outstanding voting
securities.
8. All material amendments to the Plan, or any agreements
entered into pursuant to this Plan, shall be approved by a vote
of the non-interested trustees cast in person at a meeting called
for the purpose of voting on any such amendment.
9. So long as the Plan is in effect, the selection and
nomination of the Trust's non-interested trustees shall be
committed to the discretion of such non-interested trustees.
This Plan and the terms and provisions thereof are hereby
accepted and agreed to by the Trust and Distributors as evidenced
by their execution hereof.
FRANKLIN TAX-FREE TRUST
on behalf of Franklin Texas Tax-Free Income Fund
By:/s/ Deborah R. Gatzek
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By:/s/ Harmon E. Burns
FRANKLIN TAX-FREE TRUST
Preamble to Distribution Plan
The following Distribution Plan (the "Plan") has been
adopted pursuant to Rule 12b-1 under the Investment Company Act
of 1940 (the "Act") by Franklin Tax-Free Trust (the "Trust") for
the use of Franklin Virginia Tax-Free Income Fund (the "Fund"),
which Plan shall take effect on the 1st day of May, 1994 (the
"Effective Date of the Plan"). The Plan has been approved by a
majority of the Board of Trustees of the Trust (the "Board of
Trustees"), including a majority of the trustees who are not
interested persons of the Trust and who have no direct or
indirect financial interest in the operation of the Plan (the
"non-interested trustees"), cast in person at a meeting called
for the purpose of voting on such Plan.
In reviewing the Plan, the Board of Trustees considered the
schedule and nature of payments and terms of the Management
Agreement between the Trust on behalf of the Fund and Franklin
Advisers, Inc. ("Advisers") and the terms of the Underwriting
Agreement between the Trust on behalf of the Fund and
Franklin/Templeton Distributors, Inc. ("Distributors"). The Board
of Trustees concluded that the compensation of Advisers, under
the Management Agreement, and of Distributors, under the
Underwriting Agreement, was fair and not excessive; however, the
Board of Trustees also recognized that uncertainty may exist from
time to time with respect to whether payments to be made by the
Fund to Advisers, Distributors, or others or by Advisers or
Distributors to others may be deemed to constitute distribution
expenses of the Fund. Accordingly, the Board of Trustees
determined that the Plan should provide for such payments and
that adoption of the Plan would be prudent and in the best
interest of the Fund and its shareholders. Such approval included
a determination that in the exercise of their reasonable business
judgment and in light of their fiduciary duties, there is a
reasonable likelihood that the Plan will benefit the Fund and its
shareholders.
DISTRIBUTION PLAN
1. The Fund shall reimburse Distributors or others for all
expenses incurred by Distributors or others in the promotion and
distribution of the shares of the Fund, including but 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 Trust on behalf of the Fund,
Distributors or its affiliates, which form of agreement has been
approved from time to time by the trustees, including the non-
interested trustees.
2. The maximum amount which may be reimbursed by the Fund to
Distributors or others pursuant to Paragraph 1 herein shall be
0.10% per annum of the average daily net assets of the Fund. Said
reimbursement shall be made quarterly by the Fund to Distributors
or others.
3. In addition to the payments which the Fund is authorized to
make pursuant to paragraphs 1 and 2 hereof, to the extent that
the Fund, Advisers, Distributors or other parties on behalf of
the Fund, Advisers or Distributors make payments that are deemed
to be payments by the Fund 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 under the Act, then such
payments shall be deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges
which include payments specified in paragraphs 1 and 2, plus any
other payments deemed to be made pursuant to the Plan under this
paragraph, exceed the amount permitted to be paid pursuant to the
Rules of Fair Practice of the National Association of Securities
Dealers, Inc., Article III, Section 26(d).
4. Distributors shall furnish to the Board of Trustees, for
their review, on a quarterly basis, a written report of the
monies reimbursed to it and to others under the Plan, and shall
furnish the Board of Trustees with such other information as the
Board of Trustees may reasonably request in connection with the
payments made under the Plan in order to enable the Board of
Trustees to make an informed determination of whether the Plan
should be continued.
5. The Plan shall continue in effect for a period of more than
one year only so long as such continuance is specifically
approved at least annually by a vote of the Board of Trustees,
including the non-interested trustees, cast in person at a
meeting called for the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to this
Plan, may be terminated at any time, without penalty, by vote of
a majority of the outstanding voting securities of the Fund or by
vote of a majority of the non-interested trustees, on not more
than sixty (60) days' written notice, or by Distributors on not
more than sixty (60) days' written notice, and shall terminate
automatically in the event of any act that constitutes an
assignment of the Management Agreement between the Trust on
behalf of the Fund and Advisers.
7. The Plan, and any agreements entered into pursuant to this
Plan, may not be amended to increase materially the amount to be
spent for distribution pursuant to Paragraph 2 hereof without
approval by a majority of the Fund's outstanding voting
securities.
8. All material amendments to the Plan, or any agreements
entered into pursuant to this Plan, shall be approved by a vote
of the non-interested trustees cast in person at a meeting called
for the purpose of voting on any such amendment.
9. So long as the Plan is in effect, the selection and
nomination of the Trust's non-interested trustees shall be
committed to the discretion of such non-interested trustees.
This Plan and the terms and provisions thereof are hereby
accepted and agreed to by the Trust and Distributors as evidenced
by their execution hereof.
FRANKLIN TAX-FREE TRUST
on behalf of Franklin Virginia Tax-Free Income Fund
By:/s/ Deborah R. Gatzek
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By:/s/ Harmon E. Burns
FRANKLIN TAX-FREE TRUST
Preamble to Distribution Plan
The following Distribution Plan (the "Plan") has been
adopted pursuant to Rule 12b-1 under the Investment Company Act
of 1940 (the "Act") by Franklin Tax-Free Trust (the "Trust") for
the use of Franklin Alabama Tax-Free Income Fund (the "Fund"),
which Plan shall take effect on the 1st day of May, 1994 (the
"Effective Date of the Plan"). The Plan has been approved by a
majority of the Board of Trustees of the Trust (the "Board of
Trustees"), including a majority of the trustees who are not
interested persons of the Trust and who have no direct or
indirect financial interest in the operation of the Plan (the
"non-interested trustees"), cast in person at a meeting called
for the purpose of voting on such Plan.
In reviewing the Plan, the Board of Trustees considered the
schedule and nature of payments and terms of the Management
Agreement between the Trust on behalf of the Fund and Franklin
Advisers, Inc. ("Advisers") and the terms of the Underwriting
Agreement between the Trust on behalf of the Fund and
Franklin/Templeton Distributors, Inc. ("Distributors"). The Board
of Trustees concluded that the compensation of Advisers, under
the Management Agreement, and of Distributors, under the
Underwriting Agreement, was fair and not excessive; however, the
Board of Trustees also recognized that uncertainty may exist from
time to time with respect to whether payments to be made by the
Fund to Advisers, Distributors, or others or by Advisers or
Distributors to others may be deemed to constitute distribution
expenses of the Fund. Accordingly, the Board of Trustees
determined that the Plan should provide for such payments and
that adoption of the Plan would be prudent and in the best
interest of the Fund and its shareholders. Such approval included
a determination that in the exercise of their reasonable business
judgment and in light of their fiduciary duties, there is a
reasonable likelihood that the Plan will benefit the Fund and its
shareholders.
DISTRIBUTION PLAN
1. The Fund shall reimburse Distributors or others for all
expenses incurred by Distributors or others in the promotion and
distribution of the shares of the Fund, including but 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 Trust on behalf of the Fund,
Distributors or its affiliates, which form of agreement has been
approved from time to time by the trustees, including the non-
interested trustees.
2. The maximum amount which may be reimbursed by the Fund to
Distributors or others pursuant to Paragraph 1 herein shall be
0.10% per annum of the average daily net assets of the Fund. Said
reimbursement shall be made quarterly by the Fund to Distributors
or others.
3. In addition to the payments which the Fund is authorized to
make pursuant to paragraphs 1 and 2 hereof, to the extent that
the Fund, Advisers, Distributors or other parties on behalf of
the Fund, Advisers or Distributors make payments that are deemed
to be payments by the Fund 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 under the Act, then such
payments shall be deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges
which include payments specified in paragraphs 1 and 2, plus any
other payments deemed to be made pursuant to the Plan under this
paragraph, exceed the amount permitted to be paid pursuant to the
Rules of Fair Practice of the National Association of Securities
Dealers, Inc., Article III, Section 26(d).
4. Distributors shall furnish to the Board of Trustees, for
their review, on a quarterly basis, a written report of the
monies reimbursed to it and to others under the Plan, and shall
furnish the Board of Trustees with such other information as the
Board of Trustees may reasonably request in connection with the
payments made under the Plan in order to enable the Board of
Trustees to make an informed determination of whether the Plan
should be continued.
5. The Plan shall continue in effect for a period of more than
one year only so long as such continuance is specifically
approved at least annually by a vote of the Board of Trustees,
including the non-interested trustees, cast in person at a
meeting called for the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to this
Plan, may be terminated at any time, without penalty, by vote of
a majority of the outstanding voting securities of the Fund or by
vote of a majority of the non-interested trustees, on not more
than sixty (60) days' written notice, or by Distributors on not
more than sixty (60) days' written notice, and shall terminate
automatically in the event of any act that constitutes an
assignment of the Management Agreement between the Trust on
behalf of the Fund and Advisers.
7. The Plan, and any agreements entered into pursuant to this
Plan, may not be amended to increase materially the amount to be
spent for distribution pursuant to Paragraph 2 hereof without
approval by a majority of the Fund's outstanding voting
securities.
8. All material amendments to the Plan, or any agreements
entered into pursuant to this Plan, shall be approved by a vote
of the non-interested trustees cast in person at a meeting called
for the purpose of voting on any such amendment.
9. So long as the Plan is in effect, the selection and
nomination of the Trust's non-interested trustees shall be
committed to the discretion of such non-interested trustees.
This Plan and the terms and provisions thereof are hereby
accepted and agreed to by the Trust and Distributors as evidenced
by their execution hereof.
FRANKLIN TAX-FREE TRUST
on behalf of Franklin Alabama Tax-Free Income Fund
By:/s/ Deborah R. Gatzek
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By:/s/ Harmon E. Burns
FRANKLIN TAX-FREE TRUST
Preamble to Distribution Plan
The following Distribution Plan (the "Plan") has been
adopted pursuant to Rule 12b-1 under the Investment Company Act
of 1940 (the "Act") by Franklin Tax-Free Trust (the "Trust") for
the use of Franklin Florida Tax-Free Income Fund (the "Fund"),
which Plan shall take effect on the 1st day of May, 1994 (the
"Effective Date of the Plan"). The Plan has been approved by a
majority of the Board of Trustees of the Trust (the "Board of
Trustees"), including a majority of the trustees who are not
interested persons of the Trust and who have no direct or
indirect financial interest in the operation of the Plan (the
"non-interested trustees"), cast in person at a meeting called
for the purpose of voting on such Plan.
In reviewing the Plan, the Board of Trustees considered the
schedule and nature of payments and terms of the Management
Agreement between the Trust on behalf of the Fund and Franklin
Advisers, Inc. ("Advisers") and the terms of the Underwriting
Agreement between the Trust on behalf of the Fund and
Franklin/Templeton Distributors, Inc. ("Distributors"). The Board
of Trustees concluded that the compensation of Advisers, under
the Management Agreement, and of Distributors, under the
Underwriting Agreement, was fair and not excessive; however, the
Board of Trustees also recognized that uncertainty may exist from
time to time with respect to whether payments to be made by the
Fund to Advisers, Distributors, or others or by Advisers or
Distributors to others may be deemed to constitute distribution
expenses of the Fund. Accordingly, the Board of Trustees
determined that the Plan should provide for such payments and
that adoption of the Plan would be prudent and in the best
interest of the Fund and its shareholders. Such approval included
a determination that in the exercise of their reasonable business
judgment and in light of their fiduciary duties, there is a
reasonable likelihood that the Plan will benefit the Fund and its
shareholders.
DISTRIBUTION PLAN
1. The Fund shall reimburse Distributors or others for all
expenses incurred by Distributors or others in the promotion and
distribution of the shares of the Fund, including but 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 Trust on behalf of the Fund,
Distributors or its affiliates, which form of agreement has been
approved from time to time by the trustees, including the non-
interested trustees.
2. The maximum amount which may be reimbursed by the Fund to
Distributors or others pursuant to Paragraph 1 herein shall be
0.10% per annum of the average daily net assets of the Fund. Said
reimbursement shall be made quarterly by the Fund to Distributors
or others.
3. In addition to the payments which the Fund is authorized to
make pursuant to paragraphs 1 and 2 hereof, to the extent that
the Fund, Advisers, Distributors or other parties on behalf of
the Fund, Advisers or Distributors make payments that are deemed
to be payments by the Fund 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 under the Act, then such
payments shall be deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges
which include payments specified in paragraphs 1 and 2, plus any
other payments deemed to be made pursuant to the Plan under this
paragraph, exceed the amount permitted to be paid pursuant to the
Rules of Fair Practice of the National Association of Securities
Dealers, Inc., Article III, Section 26(d).
4. Distributors shall furnish to the Board of Trustees, for
their review, on a quarterly basis, a written report of the
monies reimbursed to it and to others under the Plan, and shall
furnish the Board of Trustees with such other information as the
Board of Trustees may reasonably request in connection with the
payments made under the Plan in order to enable the Board of
Trustees to make an informed determination of whether the Plan
should be continued.
5. The Plan shall continue in effect for a period of more than
one year only so long as such continuance is specifically
approved at least annually by a vote of the Board of Trustees,
including the non-interested trustees, cast in person at a
meeting called for the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to this
Plan, may be terminated at any time, without penalty, by vote of
a majority of the outstanding voting securities of the Fund or by
vote of a majority of the non-interested trustees, on not more
than sixty (60) days' written notice, or by Distributors on not
more than sixty (60) days' written notice, and shall terminate
automatically in the event of any act that constitutes an
assignment of the Management Agreement between the Trust on
behalf of the Fund and Advisers.
7. The Plan, and any agreements entered into pursuant to this
Plan, may not be amended to increase materially the amount to be
spent for distribution pursuant to Paragraph 2 hereof without
approval by a majority of the Fund's outstanding voting
securities.
8. All material amendments to the Plan, or any agreements
entered into pursuant to this Plan, shall be approved by a vote
of the non-interested trustees cast in person at a meeting called
for the purpose of voting on any such amendment.
9. So long as the Plan is in effect, the selection and
nomination of the Trust's non-interested trustees shall be
committed to the discretion of such non-interested trustees.
This Plan and the terms and provisions thereof are hereby
accepted and agreed to by the Trust and Distributors as evidenced
by their execution hereof.
FRANKLIN TAX-FREE TRUST
on behalf of Franklin Florida Tax-Free Income Fund
By:/s/ Deborah R. Gatzek
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By:/s/ Harmon E. Burns
FRANKLIN TAX-FREE TRUST
Preamble to Distribution Plan
The following Distribution Plan (the "Plan") has been
adopted pursuant to Rule 12b-1 under the Investment Company Act
of 1940 (the "Act") by Franklin Tax-Free Trust (the "Trust") for
the use of Franklin Connecticut Tax-Free Income Fund (the
"Fund"), which Plan shall take effect on the 1st day of May, 1994
(the "Effective Date of the Plan"). The Plan has been approved by
a majority of the Board of Trustees of the Trust (the "Board of
Trustees"), including a majority of the trustees who are not
interested persons of the Trust and who have no direct or
indirect financial interest in the operation of the Plan (the
"non-interested trustees"), cast in person at a meeting called
for the purpose of voting on such Plan.
In reviewing the Plan, the Board of Trustees considered the
schedule and nature of payments and terms of the Management
Agreement between the Trust on behalf of the Fund and Franklin
Advisers, Inc. ("Advisers") and the terms of the Underwriting
Agreement between the Trust on behalf of the Fund and
Franklin/Templeton Distributors, Inc. ("Distributors"). The Board
of Trustees concluded that the compensation of Advisers, under
the Management Agreement, and of Distributors, under the
Underwriting Agreement, was fair and not excessive; however, the
Board of Trustees also recognized that uncertainty may exist from
time to time with respect to whether payments to be made by the
Fund to Advisers, Distributors, or others or by Advisers or
Distributors to others may be deemed to constitute distribution
expenses of the Fund. Accordingly, the Board of Trustees
determined that the Plan should provide for such payments and
that adoption of the Plan would be prudent and in the best
interest of the Fund and its shareholders. Such approval included
a determination that in the exercise of their reasonable business
judgment and in light of their fiduciary duties, there is a
reasonable likelihood that the Plan will benefit the Fund and its
shareholders.
DISTRIBUTION PLAN
1. The Fund shall reimburse Distributors or others for all
expenses incurred by Distributors or others in the promotion and
distribution of the shares of the Fund, including but 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 Trust on behalf of the Fund,
Distributors or its affiliates, which form of agreement has been
approved from time to time by the trustees, including the non-
interested trustees.
2. The maximum amount which may be reimbursed by the Fund to
Distributors or others pursuant to Paragraph 1 herein shall be
0.10% per annum of the average daily net assets of the Fund. Said
reimbursement shall be made quarterly by the Fund to Distributors
or others.
3. In addition to the payments which the Fund is authorized to
make pursuant to paragraphs 1 and 2 hereof, to the extent that
the Fund, Advisers, Distributors or other parties on behalf of
the Fund, Advisers or Distributors make payments that are deemed
to be payments by the Fund 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 under the Act, then such
payments shall be deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges
which include payments specified in paragraphs 1 and 2, plus any
other payments deemed to be made pursuant to the Plan under this
paragraph, exceed the amount permitted to be paid pursuant to the
Rules of Fair Practice of the National Association of Securities
Dealers, Inc., Article III, Section 26(d).
4. Distributors shall furnish to the Board of Trustees, for
their review, on a quarterly basis, a written report of the
monies reimbursed to it and to others under the Plan, and shall
furnish the Board of Trustees with such other information as the
Board of Trustees may reasonably request in connection with the
payments made under the Plan in order to enable the Board of
Trustees to make an informed determination of whether the Plan
should be continued.
5. The Plan shall continue in effect for a period of more than
one year only so long as such continuance is specifically
approved at least annually by a vote of the Board of Trustees,
including the non-interested trustees, cast in person at a
meeting called for the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to this
Plan, may be terminated at any time, without penalty, by vote of
a majority of the outstanding voting securities of the Fund or by
vote of a majority of the non-interested trustees, on not more
than sixty (60) days' written notice, or by Distributors on not
more than sixty (60) days' written notice, and shall terminate
automatically in the event of any act that constitutes an
assignment of the Management Agreement between the Trust on
behalf of the Fund and Advisers.
7. The Plan, and any agreements entered into pursuant to this
Plan, may not be amended to increase materially the amount to be
spent for distribution pursuant to Paragraph 2 hereof without
approval by a majority of the Fund's outstanding voting
securities.
8. All material amendments to the Plan, or any agreements
entered into pursuant to this Plan, shall be approved by a vote
of the non-interested trustees cast in person at a meeting called
for the purpose of voting on any such amendment.
9. So long as the Plan is in effect, the selection and
nomination of the Trust's non-interested trustees shall be
committed to the discretion of such non-interested trustees.
This Plan and the terms and provisions thereof are hereby
accepted and agreed to by the Trust and Distributors as evidenced
by their execution hereof.
FRANKLIN TAX-FREE TRUST
on behalf of Franklin Connecticut Tax-Free Income Fund
By:/s/ Deborah R. Gatzek
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By:/s/ Harmon E. Burns
FRANKLIN TAX-FREE TRUST
Preamble to Distribution Plan
The following Distribution Plan (the "Plan") has been
adopted pursuant to Rule 12b-1 under the Investment Company Act
of 1940 (the "Act") by Franklin Tax-Free Trust (the "Trust") for
the use of Franklin Indiana Tax-Free Income Fund (the "Fund"),
which Plan shall take effect on the 1st day of May, 1994 (the
"Effective Date of the Plan"). The Plan has been approved by a
majority of the Board of Trustees of the Trust (the "Board of
Trustees"), including a majority of the trustees who are not
interested persons of the Trust and who have no direct or
indirect financial interest in the operation of the Plan (the
"non-interested trustees"), cast in person at a meeting called
for the purpose of voting on such Plan.
In reviewing the Plan, the Board of Trustees considered the
schedule and nature of payments and terms of the Management
Agreement between the Trust on behalf of the Fund and Franklin
Advisers, Inc. ("Advisers") and the terms of the Underwriting
Agreement between the Trust on behalf of the Fund and
Franklin/Templeton Distributors, Inc. ("Distributors"). The Board
of Trustees concluded that the compensation of Advisers, under
the Management Agreement, and of Distributors, under the
Underwriting Agreement, was fair and not excessive; however, the
Board of Trustees also recognized that uncertainty may exist from
time to time with respect to whether payments to be made by the
Fund to Advisers, Distributors, or others or by Advisers or
Distributors to others may be deemed to constitute distribution
expenses of the Fund. Accordingly, the Board of Trustees
determined that the Plan should provide for such payments and
that adoption of the Plan would be prudent and in the best
interest of the Fund and its shareholders. Such approval included
a determination that in the exercise of their reasonable business
judgment and in light of their fiduciary duties, there is a
reasonable likelihood that the Plan will benefit the Fund and its
shareholders.
DISTRIBUTION PLAN
1. The Fund shall reimburse Distributors or others for all
expenses incurred by Distributors or others in the promotion and
distribution of the shares of the Fund, including but 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 Trust on behalf of the Fund,
Distributors or its affiliates, which form of agreement has been
approved from time to time by the trustees, including the non-
interested trustees.
2. The maximum amount which may be reimbursed by the Fund to
Distributors or others pursuant to Paragraph 1 herein shall be
0.10% per annum of the average daily net assets of the Fund. Said
reimbursement shall be made quarterly by the Fund to Distributors
or others.
3. In addition to the payments which the Fund is authorized to
make pursuant to paragraphs 1 and 2 hereof, to the extent that
the Fund, Advisers, Distributors or other parties on behalf of
the Fund, Advisers or Distributors make payments that are deemed
to be payments by the Fund 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 under the Act, then such
payments shall be deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges
which include payments specified in paragraphs 1 and 2, plus any
other payments deemed to be made pursuant to the Plan under this
paragraph, exceed the amount permitted to be paid pursuant to the
Rules of Fair Practice of the National Association of Securities
Dealers, Inc., Article III, Section 26(d).
4. Distributors shall furnish to the Board of Trustees, for
their review, on a quarterly basis, a written report of the
monies reimbursed to it and to others under the Plan, and shall
furnish the Board of Trustees with such other information as the
Board of Trustees may reasonably request in connection with the
payments made under the Plan in order to enable the Board of
Trustees to make an informed determination of whether the Plan
should be continued.
5. The Plan shall continue in effect for a period of more than
one year only so long as such continuance is specifically
approved at least annually by a vote of the Board of Trustees,
including the non-interested trustees, cast in person at a
meeting called for the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to this
Plan, may be terminated at any time, without penalty, by vote of
a majority of the outstanding voting securities of the Fund or by
vote of a majority of the non-interested trustees, on not more
than sixty (60) days' written notice, or by Distributors on not
more than sixty (60) days' written notice, and shall terminate
automatically in the event of any act that constitutes an
assignment of the Management Agreement between the Trust on
behalf of the Fund and Advisers.
7. The Plan, and any agreements entered into pursuant to this
Plan, may not be amended to increase materially the amount to be
spent for distribution pursuant to Paragraph 2 hereof without
approval by a majority of the Fund's outstanding voting
securities.
8. All material amendments to the Plan, or any agreements
entered into pursuant to this Plan, shall be approved by a vote
of the non-interested trustees cast in person at a meeting called
for the purpose of voting on any such amendment.
9. So long as the Plan is in effect, the selection and
nomination of the Trust's non-interested trustees shall be
committed to the discretion of such non-interested trustees.
This Plan and the terms and provisions thereof are hereby
accepted and agreed to by the Trust and Distributors as evidenced
by their execution hereof.
FRANKLIN TAX-FREE TRUST
on behalf of Franklin Indiana Tax-Free Income Fund
By:/s/ Deborah R. Gatzek
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By:/s/ Harmon E. Burns
FRANKLIN TAX-FREE TRUST
Preamble to Distribution Plan
The following Distribution Plan (the "Plan") has been
adopted pursuant to Rule 12b-1 under the Investment Company Act
of 1940 (the "Act") by Franklin Tax-Free Trust (the "Trust") for
the use of Franklin Louisiana Tax-Free Income Fund (the "Fund"),
which Plan shall take effect on the 1st day of May, 1994 (the
"Effective Date of the Plan"). The Plan has been approved by a
majority of the Board of Trustees of the Trust (the "Board of
Trustees"), including a majority of the trustees who are not
interested persons of the Trust and who have no direct or
indirect financial interest in the operation of the Plan (the
"non-interested trustees"), cast in person at a meeting called
for the purpose of voting on such Plan.
In reviewing the Plan, the Board of Trustees considered the
schedule and nature of payments and terms of the Management
Agreement between the Trust on behalf of the Fund and Franklin
Advisers, Inc. ("Advisers") and the terms of the Underwriting
Agreement between the Trust on behalf of the Fund and
Franklin/Templeton Distributors, Inc. ("Distributors"). The Board
of Trustees concluded that the compensation of Advisers, under
the Management Agreement, and of Distributors, under the
Underwriting Agreement, was fair and not excessive; however, the
Board of Trustees also recognized that uncertainty may exist from
time to time with respect to whether payments to be made by the
Fund to Advisers, Distributors, or others or by Advisers or
Distributors to others may be deemed to constitute distribution
expenses of the Fund. Accordingly, the Board of Trustees
determined that the Plan should provide for such payments and
that adoption of the Plan would be prudent and in the best
interest of the Fund and its shareholders. Such approval included
a determination that in the exercise of their reasonable business
judgment and in light of their fiduciary duties, there is a
reasonable likelihood that the Plan will benefit the Fund and its
shareholders.
DISTRIBUTION PLAN
1. The Fund shall reimburse Distributors or others for all
expenses incurred by Distributors or others in the promotion and
distribution of the shares of the Fund, including but 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 Trust on behalf of the Fund,
Distributors or its affiliates, which form of agreement has been
approved from time to time by the trustees, including the non-
interested trustees.
2. The maximum amount which may be reimbursed by the Fund to
Distributors or others pursuant to Paragraph 1 herein shall be
0.10% per annum of the average daily net assets of the Fund. Said
reimbursement shall be made quarterly by the Fund to Distributors
or others.
3. In addition to the payments which the Fund is authorized to
make pursuant to paragraphs 1 and 2 hereof, to the extent that
the Fund, Advisers, Distributors or other parties on behalf of
the Fund, Advisers or Distributors make payments that are deemed
to be payments by the Fund 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 under the Act, then such
payments shall be deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges
which include payments specified in paragraphs 1 and 2, plus any
other payments deemed to be made pursuant to the Plan under this
paragraph, exceed the amount permitted to be paid pursuant to the
Rules of Fair Practice of the National Association of Securities
Dealers, Inc., Article III, Section 26(d).
4. Distributors shall furnish to the Board of Trustees, for
their review, on a quarterly basis, a written report of the
monies reimbursed to it and to others under the Plan, and shall
furnish the Board of Trustees with such other information as the
Board of Trustees may reasonably request in connection with the
payments made under the Plan in order to enable the Board of
Trustees to make an informed determination of whether the Plan
should be continued.
5. The Plan shall continue in effect for a period of more than
one year only so long as such continuance is specifically
approved at least annually by a vote of the Board of Trustees,
including the non-interested trustees, cast in person at a
meeting called for the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to this
Plan, may be terminated at any time, without penalty, by vote of
a majority of the outstanding voting securities of the Fund or by
vote of a majority of the non-interested trustees, on not more
than sixty (60) days' written notice, or by Distributors on not
more than sixty (60) days' written notice, and shall terminate
automatically in the event of any act that constitutes an
assignment of the Management Agreement between the Trust on
behalf of the Fund and Advisers.
7. The Plan, and any agreements entered into pursuant to this
Plan, may not be amended to increase materially the amount to be
spent for distribution pursuant to Paragraph 2 hereof without
approval by a majority of the Fund's outstanding voting
securities.
8. All material amendments to the Plan, or any agreements
entered into pursuant to this Plan, shall be approved by a vote
of the non-interested trustees cast in person at a meeting called
for the purpose of voting on any such amendment.
9. So long as the Plan is in effect, the selection and
nomination of the Trust's non-interested trustees shall be
committed to the discretion of such non-interested trustees.
This Plan and the terms and provisions thereof are hereby
accepted and agreed to by the Trust and Distributors as evidenced
by their execution hereof.
FRANKLIN TAX-FREE TRUST
on behalf of Franklin Louisiana Tax-Free Income Fund
By:/s/ Deborah R. Gatzek
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By:/s/ Harmon E. Burns
FRANKLIN TAX-FREE TRUST
Preamble to Distribution Plan
The following Distribution Plan (the "Plan") has been
adopted pursuant to Rule 12b-1 under the Investment Company Act
of 1940 (the "Act") by Franklin Tax-Free Trust (the "Trust") for
the use of Franklin Maryland Tax-Free Income Fund (the "Fund"),
which Plan shall take effect on the 1st day of May, 1994 (the
"Effective Date of the Plan"). The Plan has been approved by a
majority of the Board of Trustees of the Trust (the "Board of
Trustees"), including a majority of the trustees who are not
interested persons of the Trust and who have no direct or
indirect financial interest in the operation of the Plan (the
"non-interested trustees"), cast in person at a meeting called
for the purpose of voting on such Plan.
In reviewing the Plan, the Board of Trustees considered the
schedule and nature of payments and terms of the Management
Agreement between the Trust on behalf of the Fund and Franklin
Advisers, Inc. ("Advisers") and the terms of the Underwriting
Agreement between the Trust on behalf of the Fund and
Franklin/Templeton Distributors, Inc. ("Distributors"). The Board
of Trustees concluded that the compensation of Advisers, under
the Management Agreement, and of Distributors, under the
Underwriting Agreement, was fair and not excessive; however, the
Board of Trustees also recognized that uncertainty may exist from
time to time with respect to whether payments to be made by the
Fund to Advisers, Distributors, or others or by Advisers or
Distributors to others may be deemed to constitute distribution
expenses of the Fund. Accordingly, the Board of Trustees
determined that the Plan should provide for such payments and
that adoption of the Plan would be prudent and in the best
interest of the Fund and its shareholders. Such approval included
a determination that in the exercise of their reasonable business
judgment and in light of their fiduciary duties, there is a
reasonable likelihood that the Plan will benefit the Fund and its
shareholders.
DISTRIBUTION PLAN
1. The Fund shall reimburse Distributors or others for all
expenses incurred by Distributors or others in the promotion and
distribution of the shares of the Fund, including but 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 Trust on behalf of the Fund,
Distributors or its affiliates, which form of agreement has been
approved from time to time by the trustees, including the non-
interested trustees.
2. The maximum amount which may be reimbursed by the Fund to
Distributors or others pursuant to Paragraph 1 herein shall be
0.10% per annum of the average daily net assets of the Fund. Said
reimbursement shall be made quarterly by the Fund to Distributors
or others.
3. In addition to the payments which the Fund is authorized to
make pursuant to paragraphs 1 and 2 hereof, to the extent that
the Fund, Advisers, Distributors or other parties on behalf of
the Fund, Advisers or Distributors make payments that are deemed
to be payments by the Fund 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 under the Act, then such
payments shall be deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges
which include payments specified in paragraphs 1 and 2, plus any
other payments deemed to be made pursuant to the Plan under this
paragraph, exceed the amount permitted to be paid pursuant to the
Rules of Fair Practice of the National Association of Securities
Dealers, Inc., Article III, Section 26(d).
4. Distributors shall furnish to the Board of Trustees, for
their review, on a quarterly basis, a written report of the
monies reimbursed to it and to others under the Plan, and shall
furnish the Board of Trustees with such other information as the
Board of Trustees may reasonably request in connection with the
payments made under the Plan in order to enable the Board of
Trustees to make an informed determination of whether the Plan
should be continued.
5. The Plan shall continue in effect for a period of more than
one year only so long as such continuance is specifically
approved at least annually by a vote of the Board of Trustees,
including the non-interested trustees, cast in person at a
meeting called for the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to this
Plan, may be terminated at any time, without penalty, by vote of
a majority of the outstanding voting securities of the Fund or by
vote of a majority of the non-interested trustees, on not more
than sixty (60) days' written notice, or by Distributors on not
more than sixty (60) days' written notice, and shall terminate
automatically in the event of any act that constitutes an
assignment of the Management Agreement between the Trust on
behalf of the Fund and Advisers.
7. The Plan, and any agreements entered into pursuant to this
Plan, may not be amended to increase materially the amount to be
spent for distribution pursuant to Paragraph 2 hereof without
approval by a majority of the Fund's outstanding voting
securities.
8. All material amendments to the Plan, or any agreements
entered into pursuant to this Plan, shall be approved by a vote
of the non-interested trustees cast in person at a meeting called
for the purpose of voting on any such amendment.
9. So long as the Plan is in effect, the selection and
nomination of the Trust's non-interested trustees shall be
committed to the discretion of such non-interested trustees.
This Plan and the terms and provisions thereof are hereby
accepted and agreed to by the Trust and Distributors as evidenced
by their execution hereof.
FRANKLIN TAX-FREE TRUST
on behalf of Franklin Maryland Tax-Free Income Fund
By:/s/ Deborah R. Gatzek
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By:/s/ Harmon E. Burns
FRANKLIN TAX-FREE TRUST
Preamble to Distribution Plan
The following Distribution Plan (the "Plan") has been
adopted pursuant to Rule 12b-1 under the Investment Company Act
of 1940 (the "Act") by Franklin Tax-Free Trust (the "Trust") for
the use of Franklin North Carolina Tax-Free Income Fund (the
"Fund"), which Plan shall take effect on the 1st day of May, 1994
(the "Effective Date of the Plan"). The Plan has been approved by
a majority of the Board of Trustees of the Trust (the "Board of
Trustees"), including a majority of the trustees who are not
interested persons of the Trust and who have no direct or
indirect financial interest in the operation of the Plan (the
"non-interested trustees"), cast in person at a meeting called
for the purpose of voting on such Plan.
In reviewing the Plan, the Board of Trustees considered the
schedule and nature of payments and terms of the Management
Agreement between the Trust on behalf of the Fund and Franklin
Advisers, Inc. ("Advisers") and the terms of the Underwriting
Agreement between the Trust on behalf of the Fund and
Franklin/Templeton Distributors, Inc. ("Distributors"). The Board
of Trustees concluded that the compensation of Advisers, under
the Management Agreement, and of Distributors, under the
Underwriting Agreement, was fair and not excessive; however, the
Board of Trustees also recognized that uncertainty may exist from
time to time with respect to whether payments to be made by the
Fund to Advisers, Distributors, or others or by Advisers or
Distributors to others may be deemed to constitute distribution
expenses of the Fund. Accordingly, the Board of Trustees
determined that the Plan should provide for such payments and
that adoption of the Plan would be prudent and in the best
interest of the Fund and its shareholders. Such approval included
a determination that in the exercise of their reasonable business
judgment and in light of their fiduciary duties, there is a
reasonable likelihood that the Plan will benefit the Fund and its
shareholders.
DISTRIBUTION PLAN
1. The Fund shall reimburse Distributors or others for all
expenses incurred by Distributors or others in the promotion and
distribution of the shares of the Fund, including but 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 Trust on behalf of the Fund,
Distributors or its affiliates, which form of agreement has been
approved from time to time by the trustees, including the non-
interested trustees.
2. The maximum amount which may be reimbursed by the Fund to
Distributors or others pursuant to Paragraph 1 herein shall be
0.10% per annum of the average daily net assets of the Fund. Said
reimbursement shall be made quarterly by the Fund to Distributors
or others.
3. In addition to the payments which the Fund is authorized to
make pursuant to paragraphs 1 and 2 hereof, to the extent that
the Fund, Advisers, Distributors or other parties on behalf of
the Fund, Advisers or Distributors make payments that are deemed
to be payments by the Fund 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 under the Act, then such
payments shall be deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges
which include payments specified in paragraphs 1 and 2, plus any
other payments deemed to be made pursuant to the Plan under this
paragraph, exceed the amount permitted to be paid pursuant to the
Rules of Fair Practice of the National Association of Securities
Dealers, Inc., Article III, Section 26(d).
4. Distributors shall furnish to the Board of Trustees, for
their review, on a quarterly basis, a written report of the
monies reimbursed to it and to others under the Plan, and shall
furnish the Board of Trustees with such other information as the
Board of Trustees may reasonably request in connection with the
payments made under the Plan in order to enable the Board of
Trustees to make an informed determination of whether the Plan
should be continued.
5. The Plan shall continue in effect for a period of more than
one year only so long as such continuance is specifically
approved at least annually by a vote of the Board of Trustees,
including the non-interested trustees, cast in person at a
meeting called for the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to this
Plan, may be terminated at any time, without penalty, by vote of
a majority of the outstanding voting securities of the Fund or by
vote of a majority of the non-interested trustees, on not more
than sixty (60) days' written notice, or by Distributors on not
more than sixty (60) days' written notice, and shall terminate
automatically in the event of any act that constitutes an
assignment of the Management Agreement between the Trust on
behalf of the Fund and Advisers.
7. The Plan, and any agreements entered into pursuant to this
Plan, may not be amended to increase materially the amount to be
spent for distribution pursuant to Paragraph 2 hereof without
approval by a majority of the Fund's outstanding voting
securities.
8. All material amendments to the Plan, or any agreements
entered into pursuant to this Plan, shall be approved by a vote
of the non-interested trustees cast in person at a meeting called
for the purpose of voting on any such amendment.
9. So long as the Plan is in effect, the selection and
nomination of the Trust's non-interested trustees shall be
committed to the discretion of such non-interested trustees.
This Plan and the terms and provisions thereof are hereby
accepted and agreed to by the Trust and Distributors as evidenced
by their execution hereof.
FRANKLIN TAX-FREE TRUST
on behalf of Franklin North Carolina Tax-Free Income Fund
By:/s/ Deborah R. Gatzek
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By:/s/ Harmon E. Burns
FRANKLIN TAX-FREE TRUST
Preamble to Distribution Plan
The following Distribution Plan (the "Plan") has been
adopted pursuant to Rule 12b-1 under the Investment Company Act
of 1940 (the "Act") by Franklin Tax-Free Trust (the "Trust") for
the use of Franklin New Jersey Tax-Free Income Fund (the "Fund"),
which Plan shall take effect on the 1st day of May, 1994 (the
"Effective Date of the Plan"). The Plan has been approved by a
majority of the Board of Trustees of the Trust (the "Board of
Trustees"), including a majority of the trustees who are not
interested persons of the Trust and who have no direct or
indirect financial interest in the operation of the Plan (the
"non-interested trustees"), cast in person at a meeting called
for the purpose of voting on such Plan.
In reviewing the Plan, the Board of Trustees considered the
schedule and nature of payments and terms of the Management
Agreement between the Trust on behalf of the Fund and Franklin
Advisers, Inc. ("Advisers") and the terms of the Underwriting
Agreement between the Trust on behalf of the Fund and
Franklin/Templeton Distributors, Inc. ("Distributors"). The Board
of Trustees concluded that the compensation of Advisers, under
the Management Agreement, and of Distributors, under the
Underwriting Agreement, was fair and not excessive; however, the
Board of Trustees also recognized that uncertainty may exist from
time to time with respect to whether payments to be made by the
Fund to Advisers, Distributors, or others or by Advisers or
Distributors to others may be deemed to constitute distribution
expenses of the Fund. Accordingly, the Board of Trustees
determined that the Plan should provide for such payments and
that adoption of the Plan would be prudent and in the best
interest of the Fund and its shareholders. Such approval included
a determination that in the exercise of their reasonable business
judgment and in light of their fiduciary duties, there is a
reasonable likelihood that the Plan will benefit the Fund and its
shareholders.
DISTRIBUTION PLAN
1. The Fund shall reimburse Distributors or others for all
expenses incurred by Distributors or others in the promotion and
distribution of the shares of the Fund, including but 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 Trust on behalf of the Fund,
Distributors or its affiliates, which form of agreement has been
approved from time to time by the trustees, including the non-
interested trustees.
2. The maximum amount which may be reimbursed by the Fund to
Distributors or others pursuant to Paragraph 1 herein shall be
0.10% per annum of the average daily net assets of the Fund. Said
reimbursement shall be made quarterly by the Fund to Distributors
or others.
3. In addition to the payments which the Fund is authorized to
make pursuant to paragraphs 1 and 2 hereof, to the extent that
the Fund, Advisers, Distributors or other parties on behalf of
the Fund, Advisers or Distributors make payments that are deemed
to be payments by the Fund 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 under the Act, then such
payments shall be deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges
which include payments specified in paragraphs 1 and 2, plus any
other payments deemed to be made pursuant to the Plan under this
paragraph, exceed the amount permitted to be paid pursuant to the
Rules of Fair Practice of the National Association of Securities
Dealers, Inc., Article III, Section 26(d).
4. Distributors shall furnish to the Board of Trustees, for
their review, on a quarterly basis, a written report of the
monies reimbursed to it and to others under the Plan, and shall
furnish the Board of Trustees with such other information as the
Board of Trustees may reasonably request in connection with the
payments made under the Plan in order to enable the Board of
Trustees to make an informed determination of whether the Plan
should be continued.
5. The Plan shall continue in effect for a period of more than
one year only so long as such continuance is specifically
approved at least annually by a vote of the Board of Trustees,
including the non-interested trustees, cast in person at a
meeting called for the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to this
Plan, may be terminated at any time, without penalty, by vote of
a majority of the outstanding voting securities of the Fund or by
vote of a majority of the non-interested trustees, on not more
than sixty (60) days' written notice, or by Distributors on not
more than sixty (60) days' written notice, and shall terminate
automatically in the event of any act that constitutes an
assignment of the Management Agreement between the Trust on
behalf of the Fund and Advisers.
7. The Plan, and any agreements entered into pursuant to this
Plan, may not be amended to increase materially the amount to be
spent for distribution pursuant to Paragraph 2 hereof without
approval by a majority of the Fund's outstanding voting
securities.
8. All material amendments to the Plan, or any agreements
entered into pursuant to this Plan, shall be approved by a vote
of the non-interested trustees cast in person at a meeting called
for the purpose of voting on any such amendment.
9. So long as the Plan is in effect, the selection and
nomination of the Trust's non-interested trustees shall be
committed to the discretion of such non-interested trustees.
This Plan and the terms and provisions thereof are hereby
accepted and agreed to by the Trust and Distributors as evidenced
by their execution hereof.
FRANKLIN TAX-FREE TRUST
on behalf of Franklin New Jersey Tax-Free Income Fund
By:/s/ Deborah R. Gatzek
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By:/s/ Harmon E. Burns
FRANKLIN TAX-FREE TRUST
Preamble to Distribution Plan
The following Distribution Plan (the "Plan") has been
adopted pursuant to Rule 12b-1 under the Investment Company Act
of 1940 (the "Act") by Franklin Tax-Free Trust (the "Trust") for
the use of Franklin Kentucky Tax-Free Income Fund (the "Fund"),
which Plan shall take effect on the 1st day of May, 1994 (the
"Effective Date of the Plan"). The Plan has been approved by a
majority of the Board of Trustees of the Trust (the "Board of
Trustees"), including a majority of the trustees who are not
interested persons of the Trust and who have no direct or
indirect financial interest in the operation of the Plan (the
"non-interested trustees"), cast in person at a meeting called
for the purpose of voting on such Plan.
In reviewing the Plan, the Board of Trustees considered the
schedule and nature of payments and terms of the Management
Agreement between the Trust on behalf of the Fund and Franklin
Advisers, Inc. ("Advisers") and the terms of the Underwriting
Agreement between the Trust on behalf of the Fund and
Franklin/Templeton Distributors, Inc. ("Distributors"). The Board
of Trustees concluded that the compensation of Advisers, under
the Management Agreement, and of Distributors, under the
Underwriting Agreement, was fair and not excessive; however, the
Board of Trustees also recognized that uncertainty may exist from
time to time with respect to whether payments to be made by the
Fund to Advisers, Distributors, or others or by Advisers or
Distributors to others may be deemed to constitute distribution
expenses of the Fund. Accordingly, the Board of Trustees
determined that the Plan should provide for such payments and
that adoption of the Plan would be prudent and in the best
interest of the Fund and its shareholders. Such approval included
a determination that in the exercise of their reasonable business
judgment and in light of their fiduciary duties, there is a
reasonable likelihood that the Plan will benefit the Fund and its
shareholders.
DISTRIBUTION PLAN
1. The Fund shall reimburse Distributors or others for all
expenses incurred by Distributors or others in the promotion and
distribution of the shares of the Fund, including but 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 Trust on behalf of the Fund,
Distributors or its affiliates, which form of agreement has been
approved from time to time by the trustees, including the non-
interested trustees.
2. The maximum amount which may be reimbursed by the Fund to
Distributors or others pursuant to Paragraph 1 herein shall be
0.10% per annum of the average daily net assets of the Fund. Said
reimbursement shall be made quarterly by the Fund to Distributors
or others.
3. In addition to the payments which the Fund is authorized to
make pursuant to paragraphs 1 and 2 hereof, to the extent that
the Fund, Advisers, Distributors or other parties on behalf of
the Fund, Advisers or Distributors make payments that are deemed
to be payments by the Fund 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 under the Act, then such
payments shall be deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges
which include payments specified in paragraphs 1 and 2, plus any
other payments deemed to be made pursuant to the Plan under this
paragraph, exceed the amount permitted to be paid pursuant to the
Rules of Fair Practice of the National Association of Securities
Dealers, Inc., Article III, Section 26(d).
4. Distributors shall furnish to the Board of Trustees, for
their review, on a quarterly basis, a written report of the
monies reimbursed to it and to others under the Plan, and shall
furnish the Board of Trustees with such other information as the
Board of Trustees may reasonably request in connection with the
payments made under the Plan in order to enable the Board of
Trustees to make an informed determination of whether the Plan
should be continued.
5. The Plan shall continue in effect for a period of more than
one year only so long as such continuance is specifically
approved at least annually by a vote of the Board of Trustees,
including the non-interested trustees, cast in person at a
meeting called for the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to this
Plan, may be terminated at any time, without penalty, by vote of
a majority of the outstanding voting securities of the Fund or by
vote of a majority of the non-interested trustees, on not more
than sixty (60) days' written notice, or by Distributors on not
more than sixty (60) days' written notice, and shall terminate
automatically in the event of any act that constitutes an
assignment of the Management Agreement between the Trust on
behalf of the Fund and Advisers.
7. The Plan, and any agreements entered into pursuant to this
Plan, may not be amended to increase materially the amount to be
spent for distribution pursuant to Paragraph 2 hereof without
approval by a majority of the Fund's outstanding voting
securities.
8. All material amendments to the Plan, or any agreements
entered into pursuant to this Plan, shall be approved by a vote
of the non-interested trustees cast in person at a meeting called
for the purpose of voting on any such amendment.
9. So long as the Plan is in effect, the selection and
nomination of the Trust's non-interested trustees shall be
committed to the discretion of such non-interested trustees.
This Plan and the terms and provisions thereof are hereby
accepted and agreed to by the Trust and Distributors as evidenced
by their execution hereof.
FRANKLIN TAX-FREE TRUST
on behalf of Franklin Kentucky Tax-Free Income Fund
By:/s/ Deborah R. Gatzek
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By:/s/ Harmon E. Burns
FRANKLIN TAX-FREE TRUST
Preamble to Amended and Restated Distribution Plan
The following Amended and Restated Distribution Plan (the
"Plan") has been adopted pursuant to Rule 12b-1 under the
Investment Company Act of 1940 (the "Act") by Franklin Tax-Free
Trust (the "Trust") for the use of a series entitled Franklin
Federal Intermediate-Term Tax-Free Income Fund (the "Fund"). The
Plan has been approved by a majority vote of the Board of
Trustees of the Trust (the "Board of Trustees"), including a
majority of the trustees who are not interested persons of the
Trust and who have no direct or indirect financial interest in
the operation of the Plan (the "non-interested trustees"), cast
in person at a meeting called for the purpose of voting on such
Plan.
In reviewing the Plan, the Board of Trustees considered the
schedule and nature of payments and terms of the Management
Agreement between the Trust, on behalf of the Fund, and Franklin
Advisers, Inc. (the "Manager") and the terms of the Underwriting
Agreement between the Trust and Franklin/Templeton Distributors,
Inc. ("Distributors"). The Board of Trustees concluded that the
compensation of the Manager, under the Management Agreement was
fair and not excessive; however, the Board of Trustees also
recognized that uncertainty may exist from time to time with
respect to whether payments to be made by the Fund to the Manager
or to Distributors or others or by the Manager or Distributors to
others may be deemed to constitute distribution expenses.
Accordingly, the Board of Trustees determined that the Plan
should provide for such payments and that adoption of the Plan
would be prudent and in the best interests of the Fund and its
shareholders. Such approval included a determination that, in
the exercise of their reasonable business judgment and in light
of their fiduciary duties, there is a reasonable likelihood that
the Plan will benefit the Fund and its shareholders.
AMENDED AND RESTATED DISTRIBUTION PLAN
1. The Fund shall reimburse Distributors or others for all
expenses incurred by Distributors or others in the promotion and
distribution of the shares of the Fund, including, but not
limited to, the printing of prospectuses and reports used for
sales purposes, expenses of preparation and distribution of 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, which form of agreement has been approved from time
to time by the trustees, including the non-interested trustees.
2. The maximum amount which may be reimbursed by the Fund
to Distributors or others pursuant to Paragraph 1 herein shall be
1/10 of 1% per annum of the average daily net assets of the Fund.
Said reimbursement shall be made quarterly by the Fund to
Distributors or others.
3. In addition to the payments which the Fund is
authorized to make pursuant to paragraphs 1 and 2 hereof, to the
extent that the Fund, the Manager, Distributors or other parties
on behalf of the Fund, the Manager or Distributors make payments
that are deemed to be payments 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 under the Act, then such
payments shall be deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges,
which include payments specified in paragraphs 1 and 2, plus any
other payments deemed to be made pursuant to the Plan under this
paragraph, exceed the amount permitted to be paid pursuant to the
Rules of Fair Practice of the National Association of Securities
Dealers, Inc., Article III, Section 26(d).
4. Distributors shall furnish to the Board of Trustees,
for their review, on a quarterly basis, a written report of the
monies reimbursed to it and to others under the Plan, and shall
furnish the Board of Trustees with such other information as the
Board of Trustees may reasonably request in connection with the
payments made under the Plan in order to enable the Board of
Trustees to make an informed determination of whether the Plan
should be continued.
5. The Plan shall continue in effect for a period of more
than one year only so long as such continuance is specifically
approved at least annually by a vote of the Board of Trustees,
including the non-interested trustees, cast in person at a
meeting called for the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to
this Plan, may be terminated at any time, without penalty, by
vote of a majority of the outstanding voting securities of the
Fund, or by vote of a majority of the non-interested trustees, on
not more than sixty (60) days' written notice, or by Distributors
on not more than sixty (60) days' written notice and shall
terminate automatically in the event of any act that constitutes
an assignment of the Management Agreement between the Trust, on
behalf of the Fund, and the Manager or the Underwriting Agreement
between the Trust and Distributors.
7. The Plan, and any agreements entered into pursuant to
this Plan, may not be amended to increase materially the amount
to be spent for distribution pursuant to Paragraph 2 hereof
without approval by a majority of the Fund's outstanding voting
securities.
8. All material amendments to the Plan, or any agreements
entered into pursuant to this Plan, shall be approved by a vote
of the non-interested trustees, cast in person at a meeting
called for the purpose of voting on any such amendment.
9. So long as the Plan is in effect, the selection and
nomination of the Trust's non-interested trustees shall be
committed to the discretion of such non-interested trustees.
10. This Plan shall take effect on the 1st day of July, 1993.
This Plan and the terms and provisions thereof are hereby
accepted and agreed to by the Trust, on behalf of the Fund, and
Distributors as evidenced by their execution hereof.
FRANKLIN TAX-FREE TRUST on behalf of
Franklin Federal Intermediate-Term Tax-Free Income Fund
By:/s/ Charles B. Johnson
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By:/s/ Rupert H. Johnson, Jr.
FRANKLIN TAX-FREE TRUST
Preamble to Amended and Restated Distribution Plan
The following Amended and Restated Distribution Plan (the
"Plan") has been adopted pursuant to Rule 12b-1 under the
Investment Company Act of 1940 (the "Act") by Franklin Tax-Free
Trust (the "Trust") for the use of a series entitled Franklin
Arizona Insured Tax-Free Income Fund (the "Fund"). The Plan has
been approved by a majority vote of the Board of Trustees of the
Trust (the "Board of Trustees"), including a majority of the
trustees who are not interested persons of the Trust and who have
no direct or indirect financial interest in the operation of the
Plan (the "non-interested trustees"), cast in person at a meeting
called for the purpose of voting on such Plan.
In reviewing the Plan, the Board of Trustees considered the
schedule and nature of payments and terms of the Management
Agreement between the Trust, on behalf of the Fund, and Franklin
Advisers, Inc. (the "Manager") and the terms of the Underwriting
Agreement between the Trust and Franklin/Templeton Distributors,
Inc. ("Distributors"). The Board of Trustees concluded that the
compensation of the Manager, under the Management Agreement was
fair and not excessive; however, the Board of Trustees also
recognized that uncertainty may exist from time to time with
respect to whether payments to be made by the Fund to the Manager
or to Distributors or others or by the Manager or Distributors to
others may be deemed to constitute distribution expenses.
Accordingly, the Board of Trustees determined that the Plan
should provide for such payments and that adoption of the Plan
would be prudent and in the best interests of the Fund and its
shareholders. Such approval included a determination that, in
the exercise of their reasonable business judgment and in light
of their fiduciary duties, there is a reasonable likelihood that
the Plan will benefit the Fund and its shareholders.
AMENDED AND RESTATED DISTRIBUTION PLAN
1. The Fund shall reimburse Distributors or others for all
expenses incurred by Distributors or others in the promotion and
distribution of the shares of the Fund, including, but not
limited to, the printing of prospectuses and reports used for
sales purposes, expenses of preparation and distribution of 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, which form of agreement has been approved from time
to time by the trustees, including the non-interested trustees.
2. The maximum amount which may be reimbursed by the Fund
to Distributors or others pursuant to Paragraph 1 herein shall be
1/15 of 1% per annum of the average daily net assets of the Fund.
Said reimbursement shall be made quarterly by the Fund to
Distributors or others.
3. In addition to the payments which the Fund is
authorized to make pursuant to paragraphs 1 and 2 hereof, to the
extent that the Fund, the Manager, Distributors or other parties
on behalf of the Fund, the Manager or Distributors make payments
that are deemed to be payments 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 under the Act, then such
payments shall be deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges,
which include payments specified in paragraphs 1 and 2, plus any
other payments deemed to be made pursuant to the Plan under this
paragraph, exceed the amount permitted to be paid pursuant to the
Rules of Fair Practice of the National Association of Securities
Dealers, Inc., Article III, Section 26(d).
4. Distributors shall furnish to the Board of Trustees,
for their review, on a quarterly basis, a written report of the
monies reimbursed to it and to others under the Plan, and shall
furnish the Board of Trustees with such other information as the
Board of Trustees may reasonably request in connection with the
payments made under the Plan in order to enable the Board of
Trustees to make an informed determination of whether the Plan
should be continued.
5. The Plan shall continue in effect for a period of more
than one year only so long as such continuance is specifically
approved at least annually by a vote of the Board of Trustees,
including the non-interested trustees, cast in person at a
meeting called for the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to
this Plan, may be terminated at any time, without penalty, by
vote of a majority of the outstanding voting securities of the
Fund or by vote of the majority of the non-interested trustees,
on not more than sixty (60) days' written notice, or by
Distributors on not more than sixty (60) days' written notice and
shall terminate automatically in the event of any act that
constitutes an assignment of the Management Agreement between the
Trust and the Manager or the Underwriting Agreement between the
Trust and Distributors.
7. The Plan, and any agreements entered into pursuant to
this Plan, may not be amended to increase materially the amount
to be spent for distribution pursuant to Paragraph 2 hereof
without approval by a majority of the Fund's outstanding voting
securities.
8. All material amendments to the Plan, or any agreements
entered into pursuant to this Plan, shall be approved by a vote
of the non-interested trustees, cast in person at a meeting
called for the purpose of voting on any such amendment.
9. So long as the Plan is in effect, the selection and
nomination of the Trust's non-interested trustees shall be
committed to the discretion of such non-interested trustees.
10. This Plan shall take effect on the 1st day of July,
1993.
This Plan and the terms and provisions thereof are hereby
accepted and agreed to by the Trust, on behalf of the Fund, and
Distributors as evidenced by their execution hereof.
FRANKLIN TAX-FREE TRUST
on behalf of Franklin Arizona
Insured Tax-Free Income Fund
By:/s/ Charles B. Johnson
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By:/s/ Rupert H. Johnson, Jr.
FRANKLIN TAX-FREE TRUST
Preamble to Amended and Restated Distribution Plan
The following Amended and Restated Distribution Plan (the
"Plan") has been adopted pursuant to Rule 12b-1 under the
Investment Company Act of 1940 (the "Act") by Franklin Tax-Free
Trust (the "Trust") for the use of a series entitled Franklin
Florida Insured Tax-Free Income Fund (the "Fund"). The Plan has
been approved by a majority vote of the Board of Trustees of the
Trust (the "Board of Trustees"), including a majority of the
trustees who are not interested persons of the Trust and who have
no direct or indirect financial interest in the operation of the
Plan (the "non-interested trustees"), cast in person at a meeting
called for the purpose of voting on such Plan.
In reviewing the Plan, the Board of Trustees considered the
schedule and nature of payments and terms of the Management
Agreement between the Trust, on behalf of the Fund, and Franklin
Advisers, Inc. (the "Manager") and the terms of the Underwriting
Agreement between the Trust and Franklin/Templeton Distributors,
Inc. ("Distributors"). The Board of Trustees concluded that the
compensation of the Manager, under the Management Agreement was
fair and not excessive; however, the Board of Trustees also
recognized that uncertainty may exist from time to time with
respect to whether payments to be made by the Fund to the Manager
or to Distributors or others or by the Manager or Distributors to
others may be deemed to constitute distribution expenses.
Accordingly, the Board of Trustees determined that the Plan
should provide for such payments and that adoption of the Plan
would be prudent and in the best interests of the Fund and its
shareholders. Such approval included a determination that, in
the exercise of their reasonable business judgment and in light
of their fiduciary duties, there is a reasonable likelihood that
the Plan will benefit the Fund and its shareholders.
AMENDED AND RESTATED DISTRIBUTION PLAN
l. The Fund shall reimburse Distributors or others for all
expenses incurred by Distributors or others in the promotion and
distribution of the shares of the Fund, including, but not
limited to, the printing of prospectuses and reports used for
sales purposes, expenses of preparation and distribution of 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, which form of agreement has been approved from time
to time by the trustees, including the non-interested trustees.
2. The maximum amount which may be reimbursed by the Fund to
Distributors or others pursuant to Paragraph 1 herein shall be
1/15 of 1% per annum of the average daily net assets of the Fund.
Said reimbursement shall be made quarterly by the Fund to
Distributors or others.
3. In addition to the payments which the Fund is authorized to
make pursuant to paragraphs 1 and 2 hereof, to the extent that
the Fund, the Manager, Distributors or other parties on behalf of
the Fund, the Manager or Distributors make payments that are
deemed to be payments 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 under the Act, then such
payments shall be deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges,
which include payments specified in paragraphs 1 and 2, plus any
other payments deemed to be made pursuant to the Plan under this
paragraph, exceed the amount permitted to be paid pursuant to the
Rules of Fair Practice of the National Association of Securities
Dealers, Inc., Article III, Section 26(d).
4. Distributors shall furnish to the Board of Trustees, for
their review, on a quarterly basis, a written report of the
monies reimbursed to it and to others under the Plan, and shall
furnish the Board of Trustees with such other information as the
Board of Trustees may reasonably request in connection with the
payments made under the Plan in order to enable the Board of
Trustees to make an informed determination of whether the Plan
should be continued.
5. The Plan shall continue in effect for a period of more than
one year only so long as such continuance is specifically
approved at least annually by a vote of the Board of Trustees,
including the non-interested trustees, cast in person at a
meeting called for the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to this
Plan, may be terminated at any time, without penalty, by vote of
a majority of the outstanding voting securities of the Fund, or
by vote of the majority of the non-interested trustees, on not
more than sixty (60) days' written notice, or by Distributors on
not more than sixty (60) days' written notice and shall terminate
automatically in the event of any act that constitutes an
assignment of the Management Agreement between the Trust and the
Manager or the Underwriting Agreement between the Trust and
Distributors.
7. The Plan, and any agreements entered into pursuant to this
Plan, may not be amended to increase materially the amount to be
spent for distribution pursuant to Paragraph 2 hereof without
approval by a majority of the Fund's outstanding voting
securities.
8. All material amendments to the Plan, or any agreements
entered into pursuant to this Plan, shall be approved by a vote
of the non-interested trustees, cast in person at a meeting
called for the purpose of voting on any such amendment.
9. So long as the Plan is in effect, the selection and
nomination of the Trust's non-interested trustees shall be
committed to the discretion of such non-interested trustees.
10. This Plan shall take effect on the 1st day of July, 1993.
This Plan and the terms and provisions thereof are
hereby accepted and agreed to by the Trust, on behalf of the
Fund, and Distributors as evidenced by their execution hereof.
FRANKLIN TAX-FREE TRUST
on behalf of Franklin Florida
Insured Tax-Free Income Fund
By:/s/ Charles B. Johnson
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By:/s/ Rupert H. Johnson, Jr.
CLASS II DISTRIBUTION PLAN
I. Investment Company: FRANKLIN TAX-FREE TRUST
II. Fund: FRANKLIN ALABAMA TAX-FREE INCOME FUND
FRANKLIN ARIZONA TAX-FREE INCOME FUND
FRANKLIN COLORADO TAX-FREE INCOME FUND
FRANKLIN CONNECTICUT TAX-FREE INCOME FUND
FRANKLIN FLORIDA TAX-FREE INCOME FUND
FRANKLIN GEORGIA TAX-FREE INCOME FUND
FRANKLIN HIGH YIELD TAX-FREE INCOME FUND
FRANKLIN INSURED 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
III. Maximum Per Annum Rule 12b-1 Fees for Class II Shares
(as a percentage of average daily net assets of the class)
A. Distribution Fee: 0.50%
B. Service Fee: 0.15%
PREAMBLE TO CLASS II DISTRIBUTION PLAN
The following Distribution Plan (the "Plan") has been
adopted pursuant to Rule 12b-1 under the Investment Company Act
of 1940 (the "Act") by the Investment Company named above
("Investment Company") for the class II shares (the "Class") of
each Fund named above ("Fund"), which Plan shall take effect as
of the date class II shares are first offered (the "Effective
Date of the Plan"). The Plan has been approved by a majority of
the Board of Directors or Trustees of the Investment Company (the
"Board"), including a majority of the Board members who are not
interested persons of the Investment Company and who have no
direct, or indirect financial interest in the operation of the
Plan (the "non-interested Board members"), cast in person at a
meeting called for the purpose of voting on such Plan.
In reviewing the Plan, the Board considered the schedule and
nature of payments and terms of the Management Agreement between
the Investment Company and Franklin Advisers, Inc. and the terms
of the Underwriting Agreement between the Investment Company and
Franklin/Templeton Distributors, Inc. ("Distributors"). The
Board concluded that the compensation of Advisers, under the
Management Agreement, and of Distributors, under the Underwriting
Agreement, was fair and not excessive. The approval of the Plan
included a determination that in the exercise of their reasonable
business judgment and in light of their fiduciary duties, there
is a reasonable likelihood that the Plan will benefit the Fund
and its shareholders.
DISTRIBUTION PLAN
1. (a) The Fund shall pay to Distributors a quarterly fee
not to exceed the above-stated maximum distribution fee per annum
of the Class' average daily net assets represented by shares of
the Class, as may be determined by the Board from time to time.
(b) In addition to the amounts described in (a) above,
the Fund shall pay (i) to Distributors for payment to dealers or
others, or (ii) directly to others, an amount not to exceed the
above-stated maximum service fee per annum of the Class' average
daily net assets represented by shares of the Class, as may be
determined by the Fund's Board from time to time, as a service
fee pursuant to servicing agreements which have been approved
from time to time by the Board, including the non-interested
Board members.
2. (a) Distributors shall use the monies paid to it
pursuant to Paragraph 1(a) above to assist in the distribution
and promotion of shares of the Class. Payments made to
Distributors under the Plan may be used for, among other things,
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 pro-rated portion of Distributors' overhead
expenses attributable to the distribution of Class shares, as
well as for additional distribution fees paid to securities
dealers or their firms or others who have executed agreements
with the Investment Company, Distributors or its affiliates,
which form of agreement has been approved from time to time by
the Trustees, including the non-interested trustees. In
addition, such fees may be used to pay for advancing the
commission costs to dealers or others with respect to the sale of
Class shares.
(b) The monies to be paid pursuant to paragraph 1(b)
above shall be used to pay dealers or others for, among other
things, furnishing personal services and maintaining shareholder
accounts, which services include, among other things, assisting
in establishing and maintaining customer accounts and records;
assisting with purchase and redemption requests; arranging for
bank wires; monitoring dividend payments from the Fund on behalf
of customers; forwarding certain shareholder communications from
the Fund to customers; receiving and answering correspondence;
and aiding in maintaining the investment of their respective
customers in the Class. Any amounts paid under this paragraph
2(b) shall be paid pursuant to a servicing or other agreement,
which form of agreement has been approved from time to time by
the Board.
3. In addition to the payments which the Fund is authorized
to make pursuant to paragraphs 1 and 2 hereof, to the extent that
the Fund, Advisers, Distributors or other parties on behalf of
the Fund, Advisers or Distributors make payments that are deemed
to be payments by the Fund for the financing of any activity
primarily intended to result in the sale of Class shares issued
by the Fund within the context of Rule 12b-1 under the Act, then
such payments shall be deemed to have been made pursuant to the
Plan.
In no event shall the aggregate asset-based sales charges
which include payments specified in paragraphs 1 and 2, plus any
other payments deemed to be made pursuant to the Plan under this
paragraph, exceed the amount permitted to be paid pursuant to the
Rules of Fair Practice of the National Association of Securities
Dealers, Inc., Article III, Section 26(d).
4. Distributors shall furnish to the Board, for its review,
on a quarterly basis, a written report of the monies reimbursed
to it and to others under the Plan, and shall furnish the Board
with such other information as the Board may reasonably request
in connection with the payments made under the Plan in order to
enable the Board to make an informed determination of whether the
Plan should be continued.
5. The Plan shall continue in effect for a period of more
than one year only so long as such continuance is specifically
approved at least annually by the Board, including the non-
interested Board members, cast in person at a meeting called for
the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to
this Plan, may be terminated at any time, without penalty, by
vote of a majority of the outstanding voting securities of the
Fund or by vote of a majority of the non-interested Board
members, on not more than sixty (60) days' written notice, or by
Distributors on not more than sixty (60) days' written notice,
and shall terminate automatically in the event of any act that
constitutes an assignment of the Management Agreement between the
Fund and Advisers.
7. The Plan, and any agreements entered into pursuant to
this Plan, may not be amended to increase materially the amount
to be spent for distribution pursuant to Paragraph 1 hereof
without approval by a majority of the Fund's outstanding voting
securities.
8. All material amendments to the Plan, or any agreements
entered into pursuant to this Plan, shall be approved by the non-
interested Board members cast in person at a meeting called for
the purpose of voting on any such amendment.
9. So long as the Plan is in effect, the selection and
nomination of the Fund's non-interested Board members shall be
committed to the discretion of such non-interested Board members.
This Plan and the terms and provisions thereof are hereby
accepted and agreed to by the Investment Company and Distributors
as evidenced by their execution hereof.
Date: __________________, 1995
Investment Company
By:________________________________
Franklin/Templeton Distributors, Inc.
By:_____________________________________
Fund Name:
Period Ending: 12/31/94 12/31/94
MAX OFF NAV
1 Yr T.Return: -6.58% -2.41%
5 Yr T.Return: 61.27% 68.47%
10 Yr T.Return: NA NA
From Inception: 85.09% 93.24%
Inception Date: 05/04/87 05/04/87
SEC STANDARD TOTAL RETURN
Franklin Tax-Advantaged High Yield AS OF: 12/31/94
Securities
MAX OFFER NAV
ONE YEAR -6.58% -2.41%
P= 1000.00 1000.00
T= -0.0658 -0.0241
n= 1 1
ERV= 934.20 975.90
FIVE YEAR 10.03% 11.00%
P= 1000.00 1000.00
T= 0.1003 0.1100
n= 5 5
ERV= 1612.71 1685.06
TEN YEAR 0.00% 0.00%
P= 1000.00 1000.00
T= 0.0000 0.0000
n= 10 10
ERV= 1000.00 1000.00
FROM INCEPTION 05/04/87 8.36% 8.97%
P= 1000.00 1000.00
T= 0.0836 0.0897
n= 7.6685 7.6685
ERV= 1850.94 1932.36
AGGREGATE TOTAL RETURN
1 YEAR -6.58% -2.41%
5 YEAR 61.27% 68.47%
10 YEAR NA NA
FROM INCEPTION 85.09% 93.24%
30-DAY SEC YIELD 10.15%
30-DAY SEC YIELD W/O NA
WAIVER
FISCAL YEAR-END 9.52%
DISTRIBUTION RATE (ON MAX
OFFERING)
FISCAL YEAR-END 9.93%
DISTRIBUTION RATE (ON
NAV)
FUND #156
FTA - High Yield Securities Fund
For the year ended 12/31/94
SEC - YIELD CALCULATION
a = interest/dividends earned 751,960
b = expenses accrued 58,736
c = avg # of shares o/s 10,026,685
d = maximum offering price 8.344
CALIFORNIA TAX FREE INCOME FUND
15-Feb-95
a - b 6
SEC Yield= 2[(---------------------------------- + 1) -1]
cd
751,960 - 58,736 6
= 2[(----------------------------------- + 1) -1]
10,026,685 * 8.344
693,224 6
= 2[(------------------------- + 1) -1]
83,662,660
6
= 2[( 1.00828594265330 ) -1]
= 2( 1.05075695727946 - 1)
= 0.1015139146
= 10.15%
POWER OF ATTORNEY
The undersigned officers and trustees of FRANKLIN TAX-FREE
TRUST (the "Registrant") hereby appoint MARK H. PLAFKER, HARMON
E. BURNS, DEBORAH R. GATZEK, KAREN L. SKIDMORE AND LARRY L.
GREENE (with full power to each of them to act alone) his
attorney-in-fact and agent, in all capacities, to execute, and to
file any of the documents referred to below relating to Post-
Effective Amendments to the Registrant's registration statement
on Form N-1A under the Investment Company Act of 1940, as
amended, and under the Securities Act of 1933 covering the sale
of shares by the Registrant under prospectuses becoming effective
after this date, including any amendment or amendments increasing
or decreasing the amount of securities for which registration is
being sought, with all exhibits and any and all documents
required to be filed with respect thereto with any regulatory
authority. Each of the undersigned grants to each of said
attorneys, full authority to do every act necessary to be done in
order to effectuate the same as fully, to all intents and
purposes as he could do if personally present, thereby ratifying
all that said attorneys-in-fact and agents, may lawfully do or
cause to be done by virtue hereof.
The undersigned officers and trustees hereby execute this
Power of Attorney as of this 16th day of February 1995.
/s/ Rupert H. Johnson, Jr. /s/ Charles B. Johnson
Rupert H. Johnson, Jr., Charles B. Johnson,
Principal Executive Officer Trustee
and Trustee
/s/ Frank H. Abbott, III /s/ Harris J. Ashton
Frank H. Abbott, III, Harris J. Ashton,
Trustee Trustee
/s/ S. Joseph Fortunato /s/ David W. Garbellano
S. Joseph Fortunato, David W. Garbellano,
Trustee Trustee
/s/ Frank W. T. LaHaye /s/ Gordon S. Macklin
Frank W. T. LaHaye, Gordon S. Macklin,
Trustee Trustee
/s/ Martin L. Flanagan /s/ Diomedes Loo-Tam
Martin L. Flanagan, Diomedes Loo-Tam,
Principal Financial Officer Principal Accounting Officer
CERTIFICATE OF SECRETARY
I, Deborah R. Gatzek, certify that I am Secretary of
Franklin Tax-Free Trust (the "Trust").
As Secretary of the Trust, I further certify that the following
resolution was adopted by a majority of the Trustees of the Trust
present at a meeting held at 777 Mariners Island Boulevard, San
Mateo, California, on February 16, 1995.
RESOLVED, that a Power of Attorney, substantially in
the form of the Power of Attorney presented to this
Board, appointing Harmon E. Burns, Deborah R. Gatzek,
Karen L. Skidmore, Larry L. Greene and Mark H. Plafker
as attorneys-in-fact for the purpose of filing
documents with the Securities and Exchange Commission,
be executed by each Trustee and designated officer.
I declare under penalty of perjury that the matters set forth in
this certificate are true and correct of my own knowledge.
/s/ Deborah R. Gatzek
Dated: February 16, 1995 Deborah R. Gatzek
Secretary
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 28, 1995 ANNUAL REPORT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 1
<NAME> FRANKLIN INSURED TAX-FREE INCOME FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1995
<PERIOD-END> FEB-28-1995
<INVESTMENTS-AT-COST> 1,575,639,048
<INVESTMENTS-AT-VALUE> 1,658,531,416
<RECEIVABLES> 29,214,163
<ASSETS-OTHER> 209,829
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,687,955,408
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4,721,244
<TOTAL-LIABILITIES> 4,721,244
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,611,535,930
<SHARES-COMMON-STOCK> 140,649,184
<SHARES-COMMON-PRIOR> 144,787,839
<ACCUMULATED-NII-CURRENT> 1,735,732
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (12,929,866)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 82,892,368
<NET-ASSETS> 1,683,234,164
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 112,477,597
<OTHER-INCOME> 0
<EXPENSES-NET> (10,027,591)
<NET-INVESTMENT-INCOME> 102,450,006
<REALIZED-GAINS-CURRENT> (8,535,568)
<APPREC-INCREASE-CURRENT> (63,668,654)
<NET-CHANGE-FROM-OPS> 30,245,784
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (102,152,086)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 24,836,459
<NUMBER-OF-SHARES-REDEEMED> (32,435,287)
<SHARES-REINVESTED> 3,460,173
<NET-CHANGE-IN-ASSETS> (119,313,447)
<ACCUMULATED-NII-PRIOR> 1,437,812
<ACCUMULATED-GAINS-PRIOR> (4,394,298)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (7,903,871)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (10,027,591)
<AVERAGE-NET-ASSETS> 1,708,668,060
<PER-SHARE-NAV-BEGIN> 12.45
<PER-SHARE-NII> 0.710
<PER-SHARE-GAIN-APPREC> (0.481)
<PER-SHARE-DIVIDEND> (0.709)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.97
<EXPENSE-RATIO> .590
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE FRANKLIN TAX-FREE TRUST FEBRUARY 28, 1995
ANNUAL REPORT AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 2
<NAME> FRANKLIN MASSACHUSETTS INSURED TAX-FREE INCOME FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1995
<PERIOD-END> FEB-28-1995
<INVESTMENTS-AT-COST> 269,169,996
<INVESTMENTS-AT-VALUE> 283,970,085
<RECEIVABLES> 4,683,621
<ASSETS-OTHER> 343,422
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 288,997,128
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 666,212
<TOTAL-LIABILITIES> 666,212
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 276,838,877
<SHARES-COMMON-STOCK> 25,429,785
<SHARES-COMMON-PRIOR> 25,995,155
<ACCUMULATED-NII-CURRENT> 375,946
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (3,683,996)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 14,800,089
<NET-ASSETS> 288,330,916
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 18,922,694
<OTHER-INCOME> 0
<EXPENSES-NET> (1,941,616)
<NET-INVESTMENT-INCOME> 16,981,078
<REALIZED-GAINS-CURRENT> (1,669,981)
<APPREC-INCREASE-CURRENT> (10,866,463)
<NET-CHANGE-FROM-OPS> 4,444,634
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (16,987,060)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,759,026
<NUMBER-OF-SHARES-REDEEMED> (4,936,346)
<SHARES-REINVESTED> 611,950
<NET-CHANGE-IN-ASSETS> (18,682,142)
<ACCUMULATED-NII-PRIOR> 381,928
<ACCUMULATED-GAINS-PRIOR> (2,014,015)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (1,540,886)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (1,941,616)
<AVERAGE-NET-ASSETS> 288,420,481
<PER-SHARE-NAV-BEGIN> 11.810
<PER-SHARE-NII> .660
<PER-SHARE-GAIN-APPREC> (.468)
<PER-SHARE-DIVIDEND> (.662)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 11.340
<EXPENSE-RATIO> .670
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 28, 1995 ANNUAL REPORT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 3
<NAME> FRANKLIN MICHIGAN INSURED TAX-FREE INCOME FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1995
<PERIOD-END> FEB-28-1995
<INVESTMENTS-AT-COST> 979,971,773
<INVESTMENTS-AT-VALUE> 1,022,294,038
<RECEIVABLES> 19,787,742
<ASSETS-OTHER> 116,678
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,042,198,458
<PAYABLE-FOR-SECURITIES> 2,271,792
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,209,735
<TOTAL-LIABILITIES> 4,481,527
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 997,017,003
<SHARES-COMMON-STOCK> 88,222,756
<SHARES-COMMON-PRIOR> 86,212,902
<ACCUMULATED-NII-CURRENT> 781,185
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (2,403,522)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 42,322,265
<NET-ASSETS> 1,037,716,931
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 66,362,803
<OTHER-INCOME> 0
<EXPENSES-NET> (6,219,229)
<NET-INVESTMENT-INCOME> 60,143,574
<REALIZED-GAINS-CURRENT> (146,409)
<APPREC-INCREASE-CURRENT> (41,854,681)
<NET-CHANGE-FROM-OPS> 18,142,484
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (60,164,972)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 9,643,950
<NUMBER-OF-SHARES-REDEEMED> (10,002,725)
<SHARES-REINVESTED> 2,368,629
<NET-CHANGE-IN-ASSETS> (17,734,798)
<ACCUMULATED-NII-PRIOR> 802,583
<ACCUMULATED-GAINS-PRIOR> (2,257,113)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (4,846,714)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (6,219,229)
<AVERAGE-NET-ASSETS> 1,024,048,992
<PER-SHARE-NAV-BEGIN> 12.240
<PER-SHARE-NII> .690
<PER-SHARE-GAIN-APPREC> (.484)
<PER-SHARE-DIVIDEND> (.686)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 11.760
<EXPENSE-RATIO> .610
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 28, 1995 ANNUAL REPORT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 4
<NAME> FRANKLIN MINNESOTA INSURED TAX-FREE INCOME FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1995
<PERIOD-END> FEB-28-1995
<INVESTMENTS-AT-COST> 460,412,208
<INVESTMENTS-AT-VALUE> 476,781,633
<RECEIVABLES> 6,033,711
<ASSETS-OTHER> 304,745
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 483,120,089
<PAYABLE-FOR-SECURITIES> 2,185,260
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,000,599
<TOTAL-LIABILITIES> 3,185,859
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 463,617,856
<SHARES-COMMON-STOCK> 40,383,702
<SHARES-COMMON-PRIOR> 40,506,368
<ACCUMULATED-NII-CURRENT> 547,076
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (600,127)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 16,369,425
<NET-ASSETS> 479,934,230
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 31,037,504
<OTHER-INCOME> 0
<EXPENSES-NET> (3,161,140)
<NET-INVESTMENT-INCOME> 27,876,364
<REALIZED-GAINS-CURRENT> (599,133)
<APPREC-INCREASE-CURRENT> (18,084,434)
<NET-CHANGE-FROM-OPS> 9,192,797
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (27,874,417)
<DISTRIBUTIONS-OF-GAINS> (146,496)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,164,515
<NUMBER-OF-SHARES-REDEEMED> (5,470,410)
<SHARES-REINVESTED> 1,183,229
<NET-CHANGE-IN-ASSETS> (19,684,398)
<ACCUMULATED-NII-PRIOR> 545,129
<ACCUMULATED-GAINS-PRIOR> 145,502
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (2,401,351)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (3,161,140)
<AVERAGE-NET-ASSETS> 479,735,673
<PER-SHARE-NAV-BEGIN> 12.33
<PER-SHARE-NII> .690
<PER-SHARE-GAIN-APPREC> (.451)
<PER-SHARE-DIVIDEND> (.685)
<PER-SHARE-DISTRIBUTIONS> (.004)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.88
<EXPENSE-RATIO> .660
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 28, 1995 ANNUAL REPORT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 5
<NAME> FRANKLIN OHIO INSURED TAX-FREE INCOME FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1995
<PERIOD-END> FEB-28-1995
<INVESTMENTS-AT-COST> 616,892,411
<INVESTMENTS-AT-VALUE> 643,945,276
<RECEIVABLES> 14,324,141
<ASSETS-OTHER> 133,433
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 658,402,850
<PAYABLE-FOR-SECURITIES> 4,203,714
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,654,532
<TOTAL-LIABILITIES> 5,858,246
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 633,511,976
<SHARES-COMMON-STOCK> 54,836,159
<SHARES-COMMON-PRIOR> 55,334,796
<ACCUMULATED-NII-CURRENT> 481,682
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (8,501,919)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 27,052,865
<NET-ASSETS> 652,544,604
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 42,230,040
<OTHER-INCOME> 0
<EXPENSES-NET> (4,108,045)
<NET-INVESTMENT-INCOME> 38,121,995
<REALIZED-GAINS-CURRENT> (2,762,910)
<APPREC-INCREASE-CURRENT> (25,721,132)
<NET-CHANGE-FROM-OPS> 9,637,953
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (38,353,594)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5,732,381
<NUMBER-OF-SHARES-REDEEMED> (7,725,678)
<SHARES-REINVESTED> 1,494,660
<NET-CHANGE-IN-ASSETS> (33,853,862)
<ACCUMULATED-NII-PRIOR> 713,281
<ACCUMULATED-GAINS-PRIOR> (5,739,009)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (3,181,729)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (4,108,045)
<AVERAGE-NET-ASSETS> 654,197,951
<PER-SHARE-NAV-BEGIN> 12.400
<PER-SHARE-NII> .690
<PER-SHARE-GAIN-APPREC> (.499)
<PER-SHARE-DIVIDEND> (.691)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 11.900
<EXPENSE-RATIO> .630
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
TAX-FREE TRUST FEBRUARY 28, 1995 ANNUAL REPORT AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 6
<NAME> FRANKLIN PUERTO RICO TAX-FREE INCOME FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1995
<PERIOD-END> FEB-28-1995
<INVESTMENTS-AT-COST> 167,745,111
<INVESTMENTS-AT-VALUE> 174,165,122
<RECEIVABLES> 2,984,471
<ASSETS-OTHER> 138,753
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 177,288,346
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 400,845
<TOTAL-LIABILITIES> 400,845
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 171,110,471
<SHARES-COMMON-STOCK> 15,641,338
<SHARES-COMMON-PRIOR> 14,801,566
<ACCUMULATED-NII-CURRENT> 151,704
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (794,685)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 6,420,011
<NET-ASSETS> 176,887,501
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 11,532,268
<OTHER-INCOME> 0
<EXPENSES-NET> (1,263,182)
<NET-INVESTMENT-INCOME> 10,269,086
<REALIZED-GAINS-CURRENT> (429,424)
<APPREC-INCREASE-CURRENT> (7,065,161)
<NET-CHANGE-FROM-OPS> 2,774,501
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (10,528,194)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,468,917
<NUMBER-OF-SHARES-REDEEMED> (2,059,470)
<SHARES-REINVESTED> 430,325
<NET-CHANGE-IN-ASSETS> 1,851,528
<ACCUMULATED-NII-PRIOR> 410,812
<ACCUMULATED-GAINS-PRIOR> (365,261)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (986,561)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (1,263,182)
<AVERAGE-NET-ASSETS> 172,517,780
<PER-SHARE-NAV-BEGIN> 11.830
<PER-SHARE-NII> 0.670
<PER-SHARE-GAIN-APPREC> (0.504)
<PER-SHARE-DIVIDEND> (0.686)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.310
<EXPENSE-RATIO> 0.730
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 28, 1995 ANNUAL REPORT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 7
<NAME> FRANKLIN HIGH YIELD TAX-FREE INCOME FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1995
<PERIOD-END> FEB-28-1995
<INVESTMENTS-AT-COST> 3,134,453,308
<INVESTMENTS-AT-VALUE> 3,246,571,180
<RECEIVABLES> 74,894,674
<ASSETS-OTHER> 1,545,258
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 3,323,011,112
<PAYABLE-FOR-SECURITIES> 26,902,441
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 8,839,035
<TOTAL-LIABILITIES> 35,741,476
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 3,229,026,729
<SHARES-COMMON-STOCK> 305,971,497
<SHARES-COMMON-PRIOR> 299,864,353
<ACCUMULATED-NII-CURRENT> 2,525,462
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (56,400,427)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 112,117,872
<NET-ASSETS> 3,287,269,636
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 244,709,593
<OTHER-INCOME> 0
<EXPENSES-NET> (19,387,969)
<NET-INVESTMENT-INCOME> 225,321,624
<REALIZED-GAINS-CURRENT> (23,498,580)
<APPREC-INCREASE-CURRENT> (130,650,901)
<NET-CHANGE-FROM-OPS> 71,172,143
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (225,313,301)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 53,177,827
<NUMBER-OF-SHARES-REDEEMED> (54,477,334)
<SHARES-REINVESTED> 7,406,651
<NET-CHANGE-IN-ASSETS> (85,263,558)
<ACCUMULATED-NII-PRIOR> 2,517,139
<ACCUMULATED-GAINS-PRIOR> (32,901,847)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (14,863,761)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (19,387,969)
<AVERAGE-NET-ASSETS> 3,257,172,777
<PER-SHARE-NAV-BEGIN> 11.250
<PER-SHARE-NII> .740
<PER-SHARE-GAIN-APPREC> (.509)
<PER-SHARE-DIVIDEND> (.741)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.740
<EXPENSE-RATIO> .600
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE FRANKLIN TAX-FREE TRUST FEBRUARY 28, 1995
ANNUAL REPORT AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 8
<NAME> FRANKLIN PENNSYLVANIA TAX-FREE INCOME FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1995
<PERIOD-END> FEB-28-1995
<INVESTMENTS-AT-COST> 549,992,198
<INVESTMENTS-AT-VALUE> 577,218,192
<RECEIVABLES> 11,652,324
<ASSETS-OTHER> 197,474
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 589,067,990
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,701,996
<TOTAL-LIABILITIES> 1,701,996
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 563,845,157
<SHARES-COMMON-STOCK> 57,830,693
<SHARES-COMMON-PRIOR> 58,271,465
<ACCUMULATED-NII-CURRENT> 1,121,082
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (4,826,239)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 27,225,994
<NET-ASSETS> 587,365,994
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 39,766,712
<OTHER-INCOME> 0
<EXPENSES-NET> (3,701,748)
<NET-INVESTMENT-INCOME> 36,064,964
<REALIZED-GAINS-CURRENT> (4,262,862)
<APPREC-INCREASE-CURRENT> (20,108,962)
<NET-CHANGE-FROM-OPS> 11,693,140
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (35,690,544)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 7,041,899
<NUMBER-OF-SHARES-REDEEMED> (8,872,713)
<SHARES-REINVESTED> 1,390,042
<NET-CHANGE-IN-ASSETS> (28,179,540)
<ACCUMULATED-NII-PRIOR> 746,662
<ACCUMULATED-GAINS-PRIOR> (563,377)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (2,880,051)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (3,701,748)
<AVERAGE-NET-ASSETS> 586,860,173
<PER-SHARE-NAV-BEGIN> 10.560
<PER-SHARE-NII> 0.620
<PER-SHARE-GAIN-APPREC> (0.406)
<PER-SHARE-DIVIDEND> (0.614)
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 10.160
<EXPENSE-RATIO> 0.630
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 28, 1995 ANNUAL REPORT AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 9
<NAME> FRANKLIN COLORADO TAX-FREE INCOME FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1995
<PERIOD-END> FEB-28-1995
<INVESTMENTS-AT-COST> 182,661,151
<INVESTMENTS-AT-VALUE> 191,954,771
<RECEIVABLES> 3,891,631
<ASSETS-OTHER> 350,482
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 196,196,884
<PAYABLE-FOR-SECURITIES> 1,091,090
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 541,843
<TOTAL-LIABILITIES> 1,632,933
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 188,701,447
<SHARES-COMMON-STOCK> 17,095,446
<SHARES-COMMON-PRIOR> 16,934,511
<ACCUMULATED-NII-CURRENT> 331,254
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (3,762,370)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 9,293,620
<NET-ASSETS> 194,563,951
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 12,748,674
<OTHER-INCOME> 0
<EXPENSES-NET> (1,346,919)
<NET-INVESTMENT-INCOME> 11,401,755
<REALIZED-GAINS-CURRENT> (3,447,577)
<APPREC-INCREASE-CURRENT> (6,337,878)
<NET-CHANGE-FROM-OPS> 1,616,300
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (11,268,015)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,612,880
<NUMBER-OF-SHARES-REDEEMED> (2,907,368)
<SHARES-REINVESTED> 455,423
<NET-CHANGE-IN-ASSETS> (7,593,741)
<ACCUMULATED-NII-PRIOR> 197,514
<ACCUMULATED-GAINS-PRIOR> (314,793)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (1,081,347)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (1,346,919)
<AVERAGE-NET-ASSETS> 192,097,890
<PER-SHARE-NAV-BEGIN> 11.940
<PER-SHARE-NII> 0.670
<PER-SHARE-GAIN-APPREC> (0.568)
<PER-SHARE-DIVIDEND> (0.662)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.380
<EXPENSE-RATIO> 0.700
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 28, 1995 ANNUAL REPORT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 10
<NAME> FRANKLIN GEORGIA TAX-FREE INCOME FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1995
<PERIOD-END> FEB-28-1995
<INVESTMENTS-AT-COST> 112,825,108
<INVESTMENTS-AT-VALUE> 117,807,147
<RECEIVABLES> 1,838,713
<ASSETS-OTHER> 263,671
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 119,909,531
<PAYABLE-FOR-SECURITIES> 2,844,237
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 293,958
<TOTAL-LIABILITIES> 3,138,195
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 113,317,104
<SHARES-COMMON-STOCK> 10,115,092
<SHARES-COMMON-PRIOR> 10,070,397
<ACCUMULATED-NII-CURRENT> 98,646
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,626,453)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4,982,039
<NET-ASSETS> 116,771,336
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 7,571,983
<OTHER-INCOME> 0
<EXPENSES-NET> (878,791)
<NET-INVESTMENT-INCOME> 6,693,192
<REALIZED-GAINS-CURRENT> (1,426,675)
<APPREC-INCREASE-CURRENT> (3,279,116)
<NET-CHANGE-FROM-OPS> 1,987,401
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (6,715,463)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,841,595
<NUMBER-OF-SHARES-REDEEMED> (2,068,884)
<SHARES-REINVESTED> 271,984
<NET-CHANGE-IN-ASSETS> (4,111,053)
<ACCUMULATED-NII-PRIOR> 120,917
<ACCUMULATED-GAINS-PRIOR> (199,778)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (703,628)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (878,791)
<AVERAGE-NET-ASSETS> 116,117,246
<PER-SHARE-NAV-BEGIN> 12.000
<PER-SHARE-NII> .660
<PER-SHARE-GAIN-APPREC> (.458)
<PER-SHARE-DIVIDEND> (.662)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.540
<EXPENSE-RATIO> .760
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 28, 1995 ANNUAL REPORT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 11
<NAME> FRANKLIN MISSOURI TAX-FREE INCOME FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1995
<PERIOD-END> FEB-28-1995
<INVESTMENTS-AT-COST> 215,852,078
<INVESTMENTS-AT-VALUE> 223,920,169
<RECEIVABLES> 3,687,100
<ASSETS-OTHER> 284,391
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 227,891,660
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 450,154
<TOTAL-LIABILITIES> 450,154
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 221,631,559
<SHARES-COMMON-STOCK> 19,874,717
<SHARES-COMMON-PRIOR> 19,108,922
<ACCUMULATED-NII-CURRENT> 179,382
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (2,437,526)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 8,068,091
<NET-ASSETS> 227,441,506
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 14,477,053
<OTHER-INCOME> 0
<EXPENSES-NET> (1,573,936)
<NET-INVESTMENT-INCOME> 12,903,117
<REALIZED-GAINS-CURRENT> (1,832,356)
<APPREC-INCREASE-CURRENT> (8,063,083)
<NET-CHANGE-FROM-OPS> 3,007,678
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (12,863,835)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,211,056
<NUMBER-OF-SHARES-REDEEMED> (2,929,041)
<SHARES-REINVESTED> 483,780
<NET-CHANGE-IN-ASSETS> (707,002)
<ACCUMULATED-NII-PRIOR> 140,100
<ACCUMULATED-GAINS-PRIOR> (605,071)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (1,246,460)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (1,573,936)
<AVERAGE-NET-ASSETS> 224,572,429
<PER-SHARE-NAV-BEGIN> 11.940
<PER-SHARE-NII> .650
<PER-SHARE-GAIN-APPREC> (.501)
<PER-SHARE-DIVIDEND> (.649)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.440
<EXPENSE-RATIO> .700
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE FRANKLIN TAX-FREE TRUST FEBRUARY 28, 1995 ANNUAL
REPORT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 12
<NAME> FRANKLIN OREGON TAX-FREE INCOME FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1995
<PERIOD-END> FEB-28-1995
<INVESTMENTS-AT-COST> 331,689,683
<INVESTMENTS-AT-VALUE> 343,839,264
<RECEIVABLES> 6,166,206
<ASSETS-OTHER> 103,254
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 350,108,724
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 650,842
<TOTAL-LIABILITIES> 650,842
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 341,726,882
<SHARES-COMMON-STOCK> 31,142,756
<SHARES-COMMON-PRIOR> 32,112,174
<ACCUMULATED-NII-CURRENT> 998,757
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (5,417,338)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 12,149,581
<NET-ASSETS> 349,457,882
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 22,449,338
<OTHER-INCOME> 0
<EXPENSES-NET> (2,228,516)
<NET-INVESTMENT-INCOME> 20,160,822
<REALIZED-GAINS-CURRENT> (5,072,515)
<APPREC-INCREASE-CURRENT> (11,526,013)
<NET-CHANGE-FROM-OPS> 3,562,294
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (19,631,598)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,776,579
<NUMBER-OF-SHARES-REDEEMED> (5,704,135)
<SHARES-REINVESTED> 958,138
<NET-CHANGE-IN-ASSETS> (26,225,942)
<ACCUMULATED-NII-PRIOR> 469,533
<ACCUMULATED-GAINS-PRIOR> (344,823)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (1,831,692)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (2,288,516)
<AVERAGE-NET-ASSETS> 353,339,047
<PER-SHARE-NAV-BEGIN> 11.700
<PER-SHARE-NII> .630
<PER-SHARE-GAIN-APPREC> (.493)
<PER-SHARE-DIVIDEND> (.617)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 11.220
<EXPENSE-RATIO> .650
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 28, 1995 ANNUAL REPORT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 13
<NAME> FRANKLIN TEXAS TAX-FREE INCOME FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1995
<PERIOD-END> FEB-28-1995
<INVESTMENTS-AT-COST> 121,990,219
<INVESTMENTS-AT-VALUE> 128,703,915
<RECEIVABLES> 2,405,284
<ASSETS-OTHER> 92,905
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 131,202,104
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 517,722
<TOTAL-LIABILITIES> 517,722
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 124,934,891
<SHARES-COMMON-STOCK> 11,617,264
<SHARES-COMMON-PRIOR> 12,684,797
<ACCUMULATED-NII-CURRENT> 275,469
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,239,674)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 6,713,696
<NET-ASSETS> 130,684,382
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 9,275,538
<OTHER-INCOME> 0
<EXPENSES-NET> (1,001,976)
<NET-INVESTMENT-INCOME> 8,273,562
<REALIZED-GAINS-CURRENT> (1,211,703)
<APPREC-INCREASE-CURRENT> (5,076,016)
<NET-CHANGE-FROM-OPS> 1,985,843
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (8,088,325)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 888,543
<NUMBER-OF-SHARES-REDEEMED> (2,212,985)
<SHARES-REINVESTED> 256,909
<NET-CHANGE-IN-ASSETS> (17,999,602)
<ACCUMULATED-NII-PRIOR> 90,232
<ACCUMULATED-GAINS-PRIOR> (26,831)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (804,364)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (1,001,976)
<AVERAGE-NET-ASSETS> 136,861,620
<PER-SHARE-NAV-BEGIN> 11.720
<PER-SHARE-NII> .680
<PER-SHARE-GAIN-APPREC> (.487)
<PER-SHARE-DIVIDEND> (.663)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 11.250
<EXPENSE-RATIO> .730
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 28, 1995 ANNUAL REPORT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 14
<NAME> FRANKLIN VIRGINIA TAX-FREE INCOME FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1995
<PERIOD-END> FEB-28-1995
<INVESTMENTS-AT-COST> 239,901,047
<INVESTMENTS-AT-VALUE> 251,880,870
<RECEIVABLES> 5,246,272
<ASSETS-OTHER> 181,697
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 257,308,839
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,344,130
<TOTAL-LIABILITIES> 1,344,130
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 246,867,740
<SHARES-COMMON-STOCK> 22,584,171
<SHARES-COMMON-PRIOR> 22,080,806
<ACCUMULATED-NII-CURRENT> 487,430
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (3,370,284)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 11,979,823
<NET-ASSETS> 255,964,709
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 16,578,797
<OTHER-INCOME> 0
<EXPENSES-NET> (1,737,365)
<NET-INVESTMENT-INCOME> 14,841,432
<REALIZED-GAINS-CURRENT> (3,093,260)
<APPREC-INCREASE-CURRENT> (7,958,005)
<NET-CHANGE-FROM-OPS> 3,790,167
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (14,860,932)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,064,568
<NUMBER-OF-SHARES-REDEEMED> (3,137,978)
<SHARES-REINVESTED> 576,775
<NET-CHANGE-IN-ASSETS> (4,948,362)
<ACCUMULATED-NII-PRIOR> 326,930
<ACCUMULATED-GAINS-PRIOR> (277,024)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (1,385,287)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (1,737,365)
<AVERAGE-NET-ASSETS> 253,096,502
<PER-SHARE-NAV-BEGIN> 11.820
<PER-SHARE-NII> .660
<PER-SHARE-GAIN-APPREC> (.499)
<PER-SHARE-DIVIDEND> (.651)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.330
<EXPENSE-RATIO> .690
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 28, 1995 ANNUAL REPORT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 15
<NAME> FRANKLIN ALABAMA TAX-FREE INCOME FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1995
<PERIOD-END> FEB-28-1995
<INVESTMENTS-AT-COST> 160,843,530
<INVESTMENTS-AT-VALUE> 166,958,827
<RECEIVABLES> 3,434,631
<ASSETS-OTHER> 105,011
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 170,498,469
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 447,600
<TOTAL-LIABILITIES> 447,600
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 165,397,420
<SHARES-COMMON-STOCK> 15,037,977
<SHARES-COMMON-PRIOR> 15,114,313
<ACCUMULATED-NII-CURRENT> 326,607
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,788,455)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 6,115,297
<NET-ASSETS> 170,050,869
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 11,176,207
<OTHER-INCOME> 0
<EXPENSES-NET> (1,212,315)
<NET-INVESTMENT-INCOME> 9,963,892
<REALIZED-GAINS-CURRENT> (1,785,827)
<APPREC-INCREASE-CURRENT> (6,044,705)
<NET-CHANGE-FROM-OPS> 2,133,360
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (9,804,407)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,898,610
<NUMBER-OF-SHARES-REDEEMED> (2,296,908)
<SHARES-REINVESTED> 321,962
<NET-CHANGE-IN-ASSETS> (8,363,590)
<ACCUMULATED-NII-PRIOR> 167,122
<ACCUMULATED-GAINS-PRIOR> (2,628)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (969,002)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (1,212,315)
<AVERAGE-NET-ASSETS> 169,531,224
<PER-SHARE-NAV-BEGIN> 11.800
<PER-SHARE-NII> .660
<PER-SHARE-GAIN-APPREC> (.500)
<PER-SHARE-DIVIDEND> (.650)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.310
<EXPENSE-RATIO> .720
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 28, 1995 ANNUAL REPORT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 16
<NAME> FRANKLIN FLORIDA TAX-FREE INCOME FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1995
<PERIOD-END> FEB-28-1995
<INVESTMENTS-AT-COST> 1,186,241,700
<INVESTMENTS-AT-VALUE> 1,243,128,028
<RECEIVABLES> 32,153,343
<ASSETS-OTHER> 228,201
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,275,509,572
<PAYABLE-FOR-SECURITIES> 5,900,980
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4,590,157
<TOTAL-LIABILITIES> 10,491,137
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,212,263,018
<SHARES-COMMON-STOCK> 111,493,189
<SHARES-COMMON-PRIOR> 115,643,077
<ACCUMULATED-NII-CURRENT> 3,546,965
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (7,677,876)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 56,886,328
<NET-ASSETS> 1,265,018,435
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 86,208,185
<OTHER-INCOME> 0
<EXPENSES-NET> (7,567,006)
<NET-INVESTMENT-INCOME> 78,641,179
<REALIZED-GAINS-CURRENT> (6,760,745)
<APPREC-INCREASE-CURRENT> (45,647,422)
<NET-CHANGE-FROM-OPS> 26,233,012
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (76,589,571)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 16,055,169
<NUMBER-OF-SHARES-REDEEMED> (21,883,676)
<SHARES-REINVESTED> 1,678,619
<NET-CHANGE-IN-ASSETS> (96,564,260)
<ACCUMULATED-NII-PRIOR> 1,495,357
<ACCUMULATED-GAINS-PRIOR> (917,131)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (5,976,798)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (7,567,006)
<AVERAGE-NET-ASSETS> 1,279,545,174
<PER-SHARE-NAV-BEGIN> 11.770
<PER-SHARE-NII> .690
<PER-SHARE-GAIN-APPREC> (.436)
<PER-SHARE-DIVIDEND> (.674)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.350
<EXPENSE-RATIO> .590
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE FRANKLIN TAX FREE TRUST FEBRUARY 28, 1995 ANNUAL
REPORT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 17
<NAME> FRANKLIN INDIANA TAX-FREE INCOME FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1995
<PERIOD-END> FEB-28-1995
<INVESTMENTS-AT-COST> 43,543,145
<INVESTMENTS-AT-VALUE> 45,787,173
<RECEIVABLES> 723,041
<ASSETS-OTHER> 169,531
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 46,679,745
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 96,288
<TOTAL-LIABILITIES> 96,288
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 45,509,290
<SHARES-COMMON-STOCK> 4,087,558
<SHARES-COMMON-PRIOR> 3,987,092
<ACCUMULATED-NII-CURRENT> 57,106
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,226,967)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,244,028
<NET-ASSETS> 46,583,457
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,041,275
<OTHER-INCOME> 0
<EXPENSES-NET> (369,596)
<NET-INVESTMENT-INCOME> 2,671,679
<REALIZED-GAINS-CURRENT> (1,083,250)
<APPREC-INCREASE-CURRENT> (1,368,046)
<NET-CHANGE-FROM-OPS> 220,383
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,657,277)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 719,792
<NUMBER-OF-SHARES-REDEEMED> (743,174)
<SHARES-REINVESTED> 123,848
<NET-CHANGE-IN-ASSETS> (1,286,082)
<ACCUMULATED-NII-PRIOR> 42,704
<ACCUMULATED-GAINS-PRIOR> (143,717)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (284,741)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (369,596)
<AVERAGE-NET-ASSETS> 45,729,795
<PER-SHARE-NAV-BEGIN> 12.010
<PER-SHARE-NII> .660
<PER-SHARE-GAIN-APPREC> (.608)
<PER-SHARE-DIVIDEND> (.662)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.400
<EXPENSE-RATIO> .810
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 28, 1995 ANNUAL REPORT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 18
<NAME> FRANKLIN LOUISIANA TAX-FREE INCOME FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1995
<PERIOD-END> FEB-28-1995
<INVESTMENTS-AT-COST> 98,184,845
<INVESTMENTS-AT-VALUE> 103,151,650
<RECEIVABLES> 1,865,650
<ASSETS-OTHER> 163,685
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 105,180,985
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 201,194
<TOTAL-LIABILITIES> 201,194
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 103,052,278
<SHARES-COMMON-STOCK> 9,517,644
<SHARES-COMMON-PRIOR> 10,035,247
<ACCUMULATED-NII-CURRENT> 214,417
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (3,253,709)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4,966,805
<NET-ASSETS> 104,979,791
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 7,268,568
<OTHER-INCOME> 0
<EXPENSES-NET> (811,658)
<NET-INVESTMENT-INCOME> 6,456,910
<REALIZED-GAINS-CURRENT> (3,100,285)
<APPREC-INCREASE-CURRENT> (2,523,882)
<NET-CHANGE-FROM-OPS> 832,743
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (6,308,597)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,009,092
<NUMBER-OF-SHARES-REDEEMED> (1,746,406)
<SHARES-REINVESTED> 219,711
<NET-CHANGE-IN-ASSETS> (10,991,343)
<ACCUMULATED-NII-PRIOR> 66,104
<ACCUMULATED-GAINS-PRIOR> (153,424)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (661,267)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (811,658)
<AVERAGE-NET-ASSETS> 107,928,577
<PER-SHARE-NAV-BEGIN> 11.560
<PER-SHARE-NII> .660
<PER-SHARE-GAIN-APPREC> (.549)
<PER-SHARE-DIVIDEND> (.641)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.030
<EXPENSE-RATIO> .750
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULLE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 28, 1995 ANNUAL REPORT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 19
<NAME> FRANKLIN NORTH CAROLINA TAX-FREE INCOME FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1995
<PERIOD-END> FEB-28-1995
<INVESTMENTS-AT-COST> 206,850,766
<INVESTMENTS-AT-VALUE> 212,417,242
<RECEIVABLES> 4,015,396
<ASSETS-OTHER> 215,346
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 216,647,984
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 384,488
<TOTAL-LIABILITIES> 384,488
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 213,556,997
<SHARES-COMMON-STOCK> 19,023,013
<SHARES-COMMON-PRIOR> 18,080,701
<ACCUMULATED-NII-CURRENT> 125,919
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (2,985,896)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 5,566,476
<NET-ASSETS> 216,263,496
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 13,652,825
<OTHER-INCOME> 0
<EXPENSES-NET> (1,480,163)
<NET-INVESTMENT-INCOME> 12,172,662
<REALIZED-GAINS-CURRENT> (2,746,697)
<APPREC-INCREASE-CURRENT> (7,384,751)
<NET-CHANGE-FROM-OPS> 2,041,214
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (12,187,559)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,493,601
<NUMBER-OF-SHARES-REDEEMED> (3,060,457)
<SHARES-REINVESTED> 509,168
<NET-CHANGE-IN-ASSETS> 723,989
<ACCUMULATED-NII-PRIOR> 140,816
<ACCUMULATED-GAINS-PRIOR> (239,199)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (1,181,708)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (1,480,163)
<AVERAGE-NET-ASSETS> 211,639,386
<PER-SHARE-NAV-BEGIN> 11.920
<PER-SHARE-NII> .650
<PER-SHARE-GAIN-APPREC> (.550)
<PER-SHARE-DIVIDEND> (.650)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.370
<EXPENSE-RATIO> .700
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
TAX-FREE TRUST FEBRUARY 28, 1995 ANNUAL REPORT AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 20
<NAME> FRANKLIN ARIZONA TAX-FREE INCOME FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1995
<PERIOD-END> FEB-28-1995
<INVESTMENTS-AT-COST> 679,663,827
<INVESTMENTS-AT-VALUE> 713,876,205
<RECEIVABLES> 10,806,403
<ASSETS-OTHER> 442,010
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 725,124,618
<PAYABLE-FOR-SECURITIES> 2,606,853
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,716,696
<TOTAL-LIABILITIES> 4,323,549
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 686,641,186
<SHARES-COMMON-STOCK> 64,885,691
<SHARES-COMMON-PRIOR> 68,826,579
<ACCUMULATED-NII-CURRENT> 1,398,060
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,450,555)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 34,212,378
<NET-ASSETS> 720,801,069
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 47,977,783
<OTHER-INCOME> 0
<EXPENSES-NET> (4,435,702)
<NET-INVESTMENT-INCOME> 43,542,081
<REALIZED-GAINS-CURRENT> (958,178)
<APPREC-INCREASE-CURRENT> (33,237,886)
<NET-CHANGE-FROM-OPS> 9,346,017
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (43,002,825)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 7,911,274
<NUMBER-OF-SHARES-REDEEMED> (13,236,415)
<SHARES-REINVESTED> 1,384,253
<NET-CHANGE-IN-ASSETS> (76,037,040)
<ACCUMULATED-NII-PRIOR> 858,804
<ACCUMULATED-GAINS-PRIOR> (492,377)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (3,571,548)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (4,435,702)
<AVERAGE-NET-ASSETS> 742,600,973
<PER-SHARE-NAV-BEGIN> 11.580
<PER-SHARE-NII> 0.650
<PER-SHARE-GAIN-APPREC> (0.481)
<PER-SHARE-DIVIDEND> (0.639)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.110
<EXPENSE-RATIO> 0.600
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
TAX-FREE TRUST FEBRUARY 28, 1995 ANNUAL REPORT AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 21
<NAME> FRANKLIN NEW JERSEY TAX-FREE INCOME FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1995
<PERIOD-END> FEB-28-1995
<INVESTMENTS-AT-COST> 503,622,331
<INVESTMENTS-AT-VALUE> 525,340,183
<RECEIVABLES> 9,572,784
<ASSETS-OTHER> 34,802
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 534,947,769
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,010,941
<TOTAL-LIABILITIES> 1,010,941
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 522,194,518
<SHARES-COMMON-STOCK> 47,326,824
<SHARES-COMMON-PRIOR> 47,457,617
<ACCUMULATED-NII-CURRENT> 544,751
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (10,520,293)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 21,717,852
<NET-ASSETS> 533,936,828
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 34,618,066
<OTHER-INCOME> 0
<EXPENSES-NET> (3,360,249)
<NET-INVESTMENT-INCOME> 31,257,817
<REALIZED-GAINS-CURRENT> (9,684,159)
<APPREC-INCREASE-CURRENT> (17,099,995)
<NET-CHANGE-FROM-OPS> 4,473,663
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (30,972,890)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 6,972,397
<NUMBER-OF-SHARES-REDEEMED> (8,453,669)
<SHARES-REINVESTED> 1,350,479
<NET-CHANGE-IN-ASSETS> (27,192,919)
<ACCUMULATED-NII-PRIOR> 259,824
<ACCUMULATED-GAINS-PRIOR> (836,134)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (2,640,430)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (3,360,249)
<AVERAGE-NET-ASSETS> 533,447,225
<PER-SHARE-NAV-BEGIN> 11.820
<PER-SHARE-NII> .660
<PER-SHARE-GAIN-APPREC> (.550)
<PER-SHARE-DIVIDEND> (.650)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.280
<EXPENSE-RATIO> .630
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE FRANKLIN TAX FREE TRUST FEBRUARY 28, 1995 ANNUAL REPORT
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 22
<NAME> FRANKLIN CONNECTICUT TAX-FREE INCOME FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1995
<PERIOD-END> FEB-28-1995
<INVESTMENTS-AT-COST> 146,092,122
<INVESTMENTS-AT-VALUE> 152,841,265
<RECEIVABLES> 2,782,386
<ASSETS-OTHER> 374,601
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 155,998,252
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 374,813
<TOTAL-LIABILITIES> 374,813
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 154,744,873
<SHARES-COMMON-STOCK> 14,621,232
<SHARES-COMMON-PRIOR> 14,514,694
<ACCUMULATED-NII-CURRENT> 234,709
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (6,105,286)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 6,749,143
<NET-ASSETS> 155,623,439
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 10,080,430
<OTHER-INCOME> 0
<EXPENSES-NET> (1,094,478)
<NET-INVESTMENT-INCOME> 8,985,952
<REALIZED-GAINS-CURRENT> (5,843,688)
<APPREC-INCREASE-CURRENT> (2,866,190)
<NET-CHANGE-FROM-OPS> 276,074
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (8,897,480)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,224,266
<NUMBER-OF-SHARES-REDEEMED> (2,493,706)
<SHARES-REINVESTED> 375,978
<NET-CHANGE-IN-ASSETS> (7,426,952)
<ACCUMULATED-NII-PRIOR> 146,237
<ACCUMULATED-GAINS-PRIOR> (261,598)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (892,225)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (1,094,478)
<AVERAGE-NET-ASSETS> 154,179,138
<PER-SHARE-NAV-BEGIN> 11.230
<PER-SHARE-NII> 0.620
<PER-SHARE-GAIN-APPREC> (0.597)
<PER-SHARE-DIVIDEND> (0.613)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.640
<EXPENSE-RATIO> 0.710
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 28, 1995 ANNUAL REPORT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 23
<NAME> FRANKLIN MARYLAND TAX-FREE INCOME FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1995
<PERIOD-END> FEB-28-1995
<INVESTMENTS-AT-COST> 147,037,427
<INVESTMENTS-AT-VALUE> 150,432,388
<RECEIVABLES> 3,365,424
<ASSETS-OTHER> 292,995
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 154,090,807
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 946,230
<TOTAL-LIABILITIES> 946,230
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 150,389,922
<SHARES-COMMON-STOCK> 14,026,485
<SHARES-COMMON-PRIOR> 13,796,559
<ACCUMULATED-NII-CURRENT> 300,019
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (940,325)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 3,394,961
<NET-ASSETS> 153,144,577
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 9,963,848
<OTHER-INCOME> 0
<EXPENSES-NET> (1,107,782)
<NET-INVESTMENT-INCOME> 8,856,066
<REALIZED-GAINS-CURRENT> (302,688)
<APPREC-INCREASE-CURRENT> (6,128,504)
<NET-CHANGE-FROM-OPS> 2,424,874
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (8,652,494)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,621,989
<NUMBER-OF-SHARES-REDEEMED> (2,767,206)
<SHARES-REINVESTED> 375,143
<NET-CHANGE-IN-ASSETS> (3,538,367)
<ACCUMULATED-NII-PRIOR> 96,447
<ACCUMULATED-GAINS-PRIOR> (637,637)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (877,941)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (1,107,782)
<AVERAGE-NET-ASSETS> 151,046,667
<PER-SHARE-NAV-BEGIN> 11.360
<PER-SHARE-NII> .630
<PER-SHARE-GAIN-APPREC> (.453)
<PER-SHARE-DIVIDEND> (.617)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 10.920
<EXPENSE-RATIO> .730
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FORM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 28, 1995 ANNUAL REPORT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 24
<NAME> FRANKLIN KENTUCKY TAX-FREE INCOME FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1995
<PERIOD-END> FEB-28-1995
<INVESTMENTS-AT-COST> 32,483,797
<INVESTMENTS-AT-VALUE> 32,292,335
<RECEIVABLES> 971,584
<ASSETS-OTHER> 118,284
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 33,382,203
<PAYABLE-FOR-SECURITIES> 495,699
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 55,200
<TOTAL-LIABILITIES> 550,899
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 33,787,449
<SHARES-COMMON-STOCK> 3,113,643
<SHARES-COMMON-PRIOR> 2,509,776
<ACCUMULATED-NII-CURRENT> 21,081
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (785,764)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (191,462)
<NET-ASSETS> 32,831,304
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,881,610
<OTHER-INCOME> 0
<EXPENSES-NET> (86,239)
<NET-INVESTMENT-INCOME> 1,795,371
<REALIZED-GAINS-CURRENT> (759,461)
<APPREC-INCREASE-CURRENT> (805,246)
<NET-CHANGE-FROM-OPS> 230,664
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,815,911)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 797,935
<NUMBER-OF-SHARES-REDEEMED> (277,290)
<SHARES-REINVESTED> 83,222
<NET-CHANGE-IN-ASSETS> 4,774,067
<ACCUMULATED-NII-PRIOR> 41,621
<ACCUMULATED-GAINS-PRIOR> (26,303)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (34,216)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (86,239)
<AVERAGE-NET-ASSETS> 30,225,856
<PER-SHARE-NAV-BEGIN> 11.180
<PER-SHARE-NII> .610
<PER-SHARE-GAIN-APPREC> (.625)
<PER-SHARE-DIVIDEND> (.625)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.540
<EXPENSE-RATIO> .290
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 28, 1995 ANNUAL REPORT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 25
<NAME> FRANKLIN FED INTERMED-TERM TAX-FREE INCOME FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1995
<PERIOD-END> FEB-28-1995
<INVESTMENTS-AT-COST> 73,692,480
<INVESTMENTS-AT-VALUE> 73,163,599
<RECEIVABLES> 1,234,152
<ASSETS-OTHER> 280,216
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 74,677,967
<PAYABLE-FOR-SECURITIES> 364,087
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 336,588
<TOTAL-LIABILITIES> 700,675
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 75,437,258
<SHARES-COMMON-STOCK> 7,060,177
<SHARES-COMMON-PRIOR> 6,259,709
<ACCUMULATED-NII-CURRENT> 164,387
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,095,472)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (528,881)
<NET-ASSETS> 73,977,292
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 4,206,338
<OTHER-INCOME> 0
<EXPENSES-NET> (403,376)
<NET-INVESTMENT-INCOME> 3,802,962
<REALIZED-GAINS-CURRENT> (1,082,205)
<APPREC-INCREASE-CURRENT> (1,170,078)
<NET-CHANGE-FROM-OPS> 1,550,679
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (3,704,591)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,033,884
<NUMBER-OF-SHARES-REDEEMED> (3,427,662)
<SHARES-REINVESTED> 194,246
<NET-CHANGE-IN-ASSETS> 6,374,318
<ACCUMULATED-NII-PRIOR> 66,016
<ACCUMULATED-GAINS-PRIOR> (13,267)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (250,402)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (403,376)
<AVERAGE-NET-ASSETS> 72,497,966
<PER-SHARE-NAV-BEGIN> 10.800
<PER-SHARE-NII> .540
<PER-SHARE-GAIN-APPREC> (.331)
<PER-SHARE-DIVIDEND> (.529)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.480
<EXPENSE-RATIO> .560
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE FRANKLIN TAX-FREE TRUST FEBRUARY 28, 1995
ANNUAL REPORT AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 26
<NAME> FRANKLIN ARIZONA INSURED TAX-FREE INCOME FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1995
<PERIOD-END> FEB-28-1995
<INVESTMENTS-AT-COST> 21,161,645
<INVESTMENTS-AT-VALUE> 21,093,084
<RECEIVABLES> 332,024
<ASSETS-OTHER> 26,635
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 21,451,743
<PAYABLE-FOR-SECURITIES> 612,174
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 45,110
<TOTAL-LIABILITIES> 657,284
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 21,254,218
<SHARES-COMMON-STOCK> 2,122,922
<SHARES-COMMON-PRIOR> 1,254,849
<ACCUMULATED-NII-CURRENT> 44,860
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (436,058)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (68,561)
<NET-ASSETS> 20,794,459
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 954,650
<OTHER-INCOME> 0
<EXPENSES-NET> (16,415)
<NET-INVESTMENT-INCOME> 938,235
<REALIZED-GAINS-CURRENT> (394,263)
<APPREC-INCREASE-CURRENT> 20,907
<NET-CHANGE-FROM-OPS> 564,879
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (915,004)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,124,842
<NUMBER-OF-SHARES-REDEEMED> (303,120)
<SHARES-REINVESTED> 46,351
<NET-CHANGE-IN-ASSETS> 7,899,015
<ACCUMULATED-NII-PRIOR> 21,629
<ACCUMULATED-GAINS-PRIOR> (41,795)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (16,415)
<AVERAGE-NET-ASSETS> 16,165,881
<PER-SHARE-NAV-BEGIN> 10.280
<PER-SHARE-NII> .550
<PER-SHARE-GAIN-APPREC> (.485)
<PER-SHARE-DIVIDEND> (.545)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 9.800
<EXPENSE-RATIO> .100
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 28, 1995 ANNUAL REPORT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 27
<NAME> FRANKLIN FLORIDA INSURED TAX-FREE INCOME FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1995
<PERIOD-END> FEB-28-1995
<INVESTMENTS-AT-COST> 46,380,712
<INVESTMENTS-AT-VALUE> 45,841,545
<RECEIVABLES> 919,979
<ASSETS-OTHER> 143,415
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 46,904,939
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 58,435
<TOTAL-LIABILITIES> 58,435
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 48,691,713
<SHARES-COMMON-STOCK> 4,914,966
<SHARES-COMMON-PRIOR> 3,193,936
<ACCUMULATED-NII-CURRENT> 13,973
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,320,015)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (539,167)
<NET-ASSETS> 46,846,504
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2,261,391
<OTHER-INCOME> 0
<EXPENSES-NET> (134,347)
<NET-INVESTMENT-INCOME> 2,127,044
<REALIZED-GAINS-CURRENT> (1,225,446)
<APPREC-INCREASE-CURRENT> 97,973
<NET-CHANGE-FROM-OPS> 999,571
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,149,615)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,424,782
<NUMBER-OF-SHARES-REDEEMED> (778,680)
<SHARES-REINVESTED> 74,928
<NET-CHANGE-IN-ASSETS> 14,696,176
<ACCUMULATED-NII-PRIOR> 36,544
<ACCUMULATED-GAINS-PRIOR> (94,569)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (43,007)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (134,347)
<AVERAGE-NET-ASSETS> 37,900,915
<PER-SHARE-NAV-BEGIN> 10.07
<PER-SHARE-NII> .520
<PER-SHARE-GAIN-APPREC> (.531)
<PER-SHARE-DIVIDEND> (.529)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.53
<EXPENSE-RATIO> .350
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
