As filed with the Securities and Exchange Commission on March 14, 1996
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. 22 (X)
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 23 (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)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(i)
[ ] on (date) pursuant to paragraph (a)(i)
[ ] 75 days after filing pursuant to paragraph (a)(ii)
[X] on June 1, 1996 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.
Declaration Pursuant to Rule 24f-2. The issuer has registered an indefinite
number or amount of securities under the Securities Act of 1933 pursuant to
Rule 24(f)(2) under the Investment Company Act of 1940. The Rule 24f-2
Notice for the issuers most recent fiscal year was filed on April 25, 1995.
FRANKLIN TAX-FREE TRUST
CROSS REFERENCE SHEET
FORM N-1A
Part A: Information Required in Prospectus
Franklin Michigan Tax-Free Income Fund (NEW SERIES)
N-1A Location in
Item No. Item Registration Statement
1. Cover Page Cover Page
2. Synopsis "Expense Table"
3. Condensed Financial N/A
Information
4. General Description of "What Is the Franklin Tax-Free
Registrant Trust?"; "How Does the Fund
Invest Its Assets?"; "What Are
the Fund's Potential Risks?";
"General Information"
5. Management of the Fund "Who Manages the Fund?"
5A. Management's Discussion of Not Applicable
Fund Performance
6. Capital Stock and Other "What Distributions Might I
Securities Receive from the Fund?"; How
Taxation Affects You and the
Fund"; "How Do I Get More
Information About My
Investment?"; "General
Information"
7. Purchase of Securities Being "How Do I Buy Shares?"; "What
Offered Programs and Privileges Are
Available to Me as a
Shareholder?"; "What If My
Investment Outlook
Changes?-Exchange Privilege";
"Telephone Transactions"; "How
Are Fund Shares Valued?"
8. Redemption or Repurchase "What If My Investment Outlook
Changes? - Exchange Privilege";
"How Do I Sell Shares?";
"Telephone Transactions"; "How
Do I Get More Information About
My Investment?"; "General
Information"
9. Pending Legal Proceedings Not Applicable
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 Michigan Tax-Free Income Fund (NEW SERIES),
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)
10. Cover Page Cover Page
11. Table of Contents Contents
12. General Information and "General Information"
History
13. Investment Objectives and "How Do the Funds Invest Their
Policies Assets?" "Investment
Restrictions"
14. Management of the Fund "Officers and Trustees";
"Investment Advisory and Other
Services"
15. Control Persons and "Officers and Trustees";
Principal Holders of "Investment Advisory and Other
Securities Services"; "General Information"
16. Investment Advisory and "Investment Advisory and Other
Other Services Services"; "The Funds'
Underwriter"
17. Brokerage Allocation and "How Do the Funds Purchase
Other Practices Securities For Their Portfolios?"
18. Capital Stock and Other See Prospectus "General
Securities Information"
19. Purchase, Redemption and "How Do I Buy and Sell Shares?";
Pricing of Securities Being "How Are Fund Shares Valued?"
Offered
20. Tax Status "Additional Information Regarding
Taxation"
21. Underwriters "The Funds' Underwriter"
22. Calculation of Performance "General Information"
Data
23. Financial Statements Financial Statements
FRANKLIN MICHIGAN TAX-FREE INCOME FUND
FRANKLIN
TAX-FREE TRUST
PROSPECTUS JUNE 1, 1996
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/DIAL BEN
The Michigan 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 28 separate series. This Prospectus relates only to the
Michigan Tax-Free Income Fund. The Fund's investment objective is to seek to
provide investors with as high a level of income exempt from federal income
taxes and the personal income taxes of Michigan as is consistent with prudent
investing, while seeking preservation of shareholders' capital.
This Prospectus is intended to set forth in a clear and concise manner
information about the Fund that you should know before investing. After reading
the Prospectus, you should retain it for future reference; it contains
information about the purchase and sale of shares and other items which you will
find useful.
An SAI concerning the Fund, dated May 1, 1995, as amended June 1, 1996, and as
may be further amended, provides a further discussion of certain areas in this
Prospectus and other matters which may be of interest to you. It has been filed
with the SEC and is incorporated herein by reference. A copy is available
without charge from the Trust or from Distributors at the address or telephone
number shown above.
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.
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
What Is the Franklin Tax-Free Trust?
How Does the Fund Invest Its Assets?
What Are the Fund's Potential Risks?
How You Participate In the Results of the Fund's Activities
Who Manages the Fund?
What Distributions Might I Receive from the Fund?
How Taxation Affects You and the Fund
How Do I Buy Shares?
What Programs and Privileges Are
Available to Me as a Shareholder?
What If My Investment Outlook Changes? - Exchange Privilege
How Do I Sell Shares?
Telephone Transactions
How Are Fund Shares Valued?
How Do I Get More Information About My Investment?
How Does the Fund Measure Performance?
General Information
Registering Your Account
Important Notice Regarding
Taxpayer IRS Certifications
Useful Terms and Definitions
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 you in understanding the various costs
and expenses that you will bear directly or indirectly in connection with an
investment in a Fund. The figures are based on contractual management and Rule
12b-1 fees and estimates of the other operating expenses of the Fund for the
current fiscal year.
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on
Purchases (as a percentage of offering
price) 4.25%
Deferred Sales Charge None*
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees (after fee waiver) 0 .19%**
Rule 12b-1 Fees 0.15%***
Other Expenses:
Shareholder Servicing Costs 0.04%
Reports to Shareholders 0.04%
Other Expenses 0.08%
Total Other Expenses 0.16%
Total Fund Operating Expenses 0.50%
*Investments of $1 million or more are not subject to a front-end sales charge;
however, a contingent deferred sales charge of 1% is generally imposed on
certain redemptions within a "contingency period" of 12 months of the calendar
month of such investments. See "How Do I Sell Shares of the Fund -- Contingent
Deferred Sales Charge."
**The Manager has agreed in advance to waive a portion of its management fees so
that the Fund's aggregate annual operating expenses do not exceed 0.50% of the
Fund's average net assets for the current fiscal year. Absent this reduction,
management fees and total operating expenses are expected to represent 0.63% and
0.94% of the Fund's average net assets. After February 28, 1997, the Manager may
terminate this arrangement 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.
You should be aware that the above table is not intended to reflect in precise
detail the fees and expenses associated with an investment in the Fund. Rather,
the table has been provided only to assist you in gaining a more complete
understanding of fees, charges and expenses. For a more detailed discussion of
these matters, you 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 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
47* 58
*Assumes that a contingent deferred sale charge will not apply to Class I
shares.
THIS EXAMPLE IS BASED ON THE 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 you as a result of your investment in the 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%.
WHAT IS THE FRANKLIN TAX-FREE TRUST
The Trust is an open-end management investment company, commonly called a
"mutual fund." The Trust was organized as a Massachusetts business trust in
September 1984 and registered with the SEC under the 1940 Act. The Trust
currently consists of 28 separate series, most of which offer two classes of
shares. Each Fund is a separate series of the Trust's shares and maintains a
totally separate investment portfolio.
Shares of the Fund may be considered Class I shares, as described under "Useful
Terms and Definitions," for redemptions, exchange and other purposes.
HOW DOES THE FUNDS INVEST ITS ASSETS?
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 individual
alternative minimum tax, and from the personal income taxes, if any, for
resident shareholders Michigan. The Fund's objective is a fundamental policy and
may not be changed without shareholder approval. There is, of course, no
assurance that the Fund's objective will be achieved.
Although not anticipated, it is possible that up to 20% of the Fund's net assets
could be in municipal securities from another state and the 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. The 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 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 the Fund may
generate short-term capital gain (taxable as ordinary income when distributed to
shareholders) as a result of market transactions. See "How Taxation Affects You
and the Fund." To the extent that Michigan requires that the 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 Fund will endeavor to
invest its net assets in such securities. This, however, is not a fundamental
policy and in the event the Manager believes that investments in other
permissible securities are necessary to protect the value of the 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.
The 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 Fund's 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 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 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 Manager believes that market
conditions, such as rising interest rates or other adverse factors, would cause
serious erosion of portfolio value, (i) 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 federal income tax and (ii) the 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 Michigan'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
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.
As a fundamental policy, the 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 its portfolio securities
to qualified securities dealers, although the Fund currently intends to limit
lending securities to no more than 5% of its total assets. More details in these
types of transactions as well as a complete description of the Fund's investment
restrictions are included under "Investment Restrictions" in the SAI.
TYPES OF SECURITIES THE FUND MAY PURCHASE
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 Fund may invest. The Fund will seek to invest in municipal securities of
such maturities that, in the judgment of the Fund and its Manager, will provide
a high level of current income consistent with prudent investment. The Manager
will also consider current market conditions.
It is possible that the 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.
Private Activity Bonds. 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 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 the Fund may also be fully taxable to a corporate
shareholder under the state franchise tax system.
Consistent with the Fund's investment objective, it may acquire private activity
bonds if, in the Manager's opinion, the bonds represent the most attractive
investment opportunity then available to the Fund.
VRDNs. The Fund may 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 obligation. These obligations bear
interest at rates that are not fixed, but that vary with changes in specified
market rates or indices on predesignated dates. Frequently VRDNs are secured by
letters of credit or other credit support arrangements provided by banks.
Because of the demand feature, the price of VRDNs may be higher and the yields
lower than they otherwise would be for obligations without a demand feature.
When-Issued Securities. 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 that
Fund's portfolio consistent with its investment objectives and policies and not
for the purpose of investment leverage.
Callable Bonds. 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 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 Fund,
depending on the price at which such bonds were redeemed.
Certificates of Participation. The Fund may 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. A COP is created
when long-term lease revenue obligations 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 obligations 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" clause. A
nonappropriation clause provides that, while the municipality will use its best
efforts to make lease payments, the municipality may terminate the lease
annually without penalty if the municipality's appropriating body does not
allocate the necessary funds. Local administrations, when faced with
increasingly tight budgets, 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. The private sector value of the property may be more or 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
(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 Manager to be of
comparable quality. Criteria considered by the rating agencies and the 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 reviews the
COPs held in each Fund's portfolio to assure that they constitute liquid
investments based on various factors reviewed by the 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.
Portfolio Turnover. The Fund anticipates that its annual portfolio turnover rate
generally will not exceed 100% but this rate should not be construed as a
limiting factor in the operation of its portfolio.
WHAT ARE THE FUNDS' POTENTIAL RISKS?
General. While an investment in the Fund is not without risk, certain policies
are followed in managing the Fund which may help to reduce such risk. There are
two categories of risks that the Fund is subject to: 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 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 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 the Fund generally will invest primarily in the securities of Michigan,
there are certain specific factors and considerations concerning that state
which may affect the credit and market risk of the municipal securities which
the Fund purchases. These factors are described in Appendix B to this Prospectus
and in the SAI.
The 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 Fund will not purchase 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. This is not a
fundamental policy of the Fund, and therefore can be modified without
shareholder approval.
HOW YOU PARTICIPATE IN THE RESULTS OF
THE FUNDS' ACTIVITIES
The assets of the Fund are invested in portfolio securities. If the securities
owned by the Fund increase in value, the value of your shares will increase. If
the securities owned by the Fund decrease in value, the value of your shares
will also decline. In this way, you 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, you may anticipate that the value of Fund
shares will fluctuate with movements in the broader bond markets.
In particular, changes in interest rates will affect the value of the 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.
WHO MANAGES THE FUND?
The Board has the primary responsibility for the overall management of the Fund
and for electing the officers of the Fund who are responsible for administering
its day-to-day operations.
Advisers serves as the Fund's investment manager. Advisers is a wholly-owned
subsidiary of 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 subsidiaries. Advisers acts as investment manager or administrator
to 36 U.S. registered investment companies (118 separate series) with aggregate
assets of over $80 billion, approximately $41 billion of which is in the
municipal securities market.
The team responsible for the day-to-day management of the Fund's portfolio is:
Thomas Kenny
Senior Vice President.
Franklin Advisers, Inc.
Mr. Kenny has been responsible for portfolio recommendations and decisions of
the Fund since its inception. 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.
Andrew Jennings, Sr.
Vice President
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.
Pursuant to a management agreement, the Manager supervises and implements the
Fund's investment policies and provides certain administrative services and
facilities which are necessary to conduct the Fund's business. The Manager
performs similar services for other funds and there may be times when the
actions taken with respect to the Fund's portfolio will differ from those taken
by the Manager on behalf of other funds. Neither the Manager (including its
affiliates) nor its officers, directors or employees nor the officers and
trustees of the Fund are prohibited from investing in securities held by the
Fund or other funds which are managed or administered by the Manager to the
extent such transactions comply with the Trust's Code of Ethics. Please see
"Investment Advisory and Other Services" and "General Information" in the SAI
for further information on securities transactions and a summary of the Trust's
Code of Ethics.
The Fund is responsible for its own operating expenses including, but not
limited to, the Manager's fee; taxes, if any; custodian, legal and auditing
fees; fees and expenses of trustees who are not members of, affiliated with, or
interested persons of the Manager; salaries of any personnel not affiliated with
the Manager; insurance premiums; trade association dues; expenses of obtaining
quotations for calculating the value of the Fund's net assets; and printing and
other expenses which are not expressly assumed by the Manager.
Under 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 net assets of the Fund; 1/24 of 1% (approximately 1/2 of 1% per
year) on 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 net assets of the Fund
in excess of $250 million.
During the start-up period of the Fund, Advisers has agreed in advance to waive
a portion of its management fees and to make certain payments to reduce expenses
so that the Fund's aggregate annual operating expenses do not exceed .50% of the
Fund's average net assets for the current fiscal year. The Manager may terminate
this arrangement at any time after the current fiscal year.
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. Currently, the most restrictive of such provisions
limits a fund's allowable expenses as a percentage of its average net assets for
each fiscal year to 2.5% of the first $30 million in assets, 2% of the next $70
million, and 1.5% of assets in excess of $100 million.
It is not anticipated that the Fund will incur a significant amount of brokerage
expenses because municipal securities are generally traded in principal
transactions that involve the receipt by the broker of a spread between the bid
and ask prices for the securities and not the receipt of commissions. In the
event that the Fund does participate in transactions involving brokerage
commissions, it 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 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 "How Do
the Funds Purchase Securities for Their Portfolios?" in the SAI.
Shareholder accounting and many of the clerical functions for the Fund are
performed by Investor Services in its capacity as transfer agent and
dividend-paying agent. Investor Services is a wholly-owned subsidiary of
Resources.
PLANS OF DISTRIBUTION
A plan of distribution has been approved and adopted for the Fund (the "Plan")
under the Plan, the Fund may reimburse Distributors or others for all expenses
incurred by Distributors or other 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 distributions or service fees paid to securities dealers or their firms or
others who have executed a servicing agreement with the Fund, Distributors or
its affiliates.
The maximum amount which the Fund may reimburse to Distributors or others under
the Plan for distribution expenses is 0.15% per annum of its average daily net
assets, payable on a quarterly basis. All expenses of distribution in excess of
0.15% 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
"The Funds' Underwriter" in the SAI.
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUNDS?
You may receive two types of distributions from a Fund:
1. INCOME DIVIDENDS. The Fund receives income generally in the form of
dividends, 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 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 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. Daily
allocation of net investment income will begin on the day after the Fund
receives your money or settlement of a wire order trade and will continue to
accrue through the day of receipt of your redemption request or the settlement
of a wire order trade.
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. THE FUND DOES NOT PAY
"INTEREST" OR GUARANTEE ANY FIXED RATE OF RETURN ON AN INVESTMENT IN ITS SHARES.
DISTRIBUTION OPTIONS
You may choose to receive your distributions from the Funds in any of these
ways:
1. Purchase additional shares of the Fund - You may purchase additional shares
of the Fund (without a sales charge or imposition of a contingent deferred sales
charge) by reinvesting capital gain distributions, or both dividend and capital
gain distributions. This is a convenient way to accumulate additional shares and
maintain or increase your earnings base.
2. Purchase shares of other Franklin Templeton Funds - You may direct your
distributions to purchase the same class of shares of another Franklin Templeton
Fund (without a sales charge or imposition of a contingent deferred sales
charge). Many shareholders find this a convenient way to diversify their
investments.
3. Receive distributions in cash - You may choose to receive dividends, or both
dividend and capital gain distributions in cash. You may have the money sent
directly to you, to another person, or to a checking account. If you choose to
send the money to a checking account, please see "Electronic Fund Transfers"
under "What Programs and Privileges Are Available to Me as a Shareholder?"
TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE SECTIONS 6 AND 7 OF THE
SHAREHOLDER APPLICATION INCLUDED WITH THIS PROSPECTUS OR TELL YOUR INVESTMENT
REPRESENTATIVE WHICH OPTION YOU PREFER. IF NO OPTION IS SELECTED, DIVIDEND AND
CAPITAL GAIN DISTRIBUTIONS WILL BE AUTOMATICALLY REINVESTED THE FUND. You may
change the distribution option selected at any time by notifying the Fund by
mail or by telephone. Please allow at least seven days prior to the reinvestment
date for the Fund to process the new option.
HOW TAXATION AFFECTS YOU AND THE FUND
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For additional information on tax matters
relating to the Fund and its shareholders, see "Additional Information Regarding
Taxation" in the SAI.
The Fund 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 net 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 continues to qualify to
pay exempt-interest dividends to you. 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 the 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 you have 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 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 will be subject to regular federal and state income
taxes in your hands. In any fiscal year, the Fund may elect not to distribute to
you 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 you
until the following January, will be treated, for tax purposes, as if received
by you 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 you have owned shares of the Fund and regardless of whether such
distributions are received in cash or in additional shares.
Redemptions and exchanges of the Fund's shares are taxable events on which you
may realize a gain or loss. Any loss incurred on sale or exchange of the 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.
The Fund will inform you of the source of your dividends and distributions at
the time they are paid and will, promptly after the close of each calendar year,
advise you 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. If you have not held shares of the Fund for a full
calendar year, you 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 your investment in the Fund.
Exempt-interest dividends of the Fund, although exempt from regular federal
income tax in your hands, are includable in the tax base for determining the
extent to which your social security or railroad retirement benefits will be
subject to regular federal income tax. You are required to disclose the receipt
of tax-exempt interest dividends on your federal income tax returns.
Interest on indebtedness incurred (directly or indirectly) by you to purchase or
carry the Fund's shares may not be fully deductible for federal income tax
purposes.
If you are not a U.S. person for purposes of federal income taxation, you should
consult with your financial or tax advisors regarding the applicability of U.S.
withholding or other taxes on distributions received by you from the 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 Fund with respect to distributions from the Fund to
investors in Michigan. Generally, individual shareholders of the Fund 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. Michigan'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."
You should consult your tax advisors with respect to the applicability of other
state and local intangible property or income taxes to your shares in the Fund
and to distributions and redemption proceeds received from the Fund.
Additional information on tax matters relating to the Fund and its shareholders
is included under the caption "Additional Information Regarding Taxation" in the
SAI.
HOW DO I BUY SHARES?
You may buy shares to open a Fund account with as little as $100 and make
additional investments at any time with as little as $25. To open you account,
contact your investment representative or complete and sign the enclosed
Shareholder Application and return it to the Fund with your check.
PURCHASE PRICE OF FUND SHARES
You may buy shares at the public offering price, unless you qualify to purchase
shares at a discount or without a sales charge as discussed below. The offering
price will be calculated to two decimal places using standard rounding criteria.
QUANTITY DISCOUNTS IN SALES CHARGES
The sales charge you pay when you buy shares may be reduces based upon the size
of your purchase, as shown in the table below.
TOTAL SALES CHARGE
AS A PERCENTAGE OF
AMOUNT ALLOWED TO
DEALER AS A
SIZE OF TRANSACTION NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE OFFERING PRICE INVESTED OFFERING PRICE*
Under $100,000 4.25% 4.44% 4.00%
$100,000 but less than 3.50% 3.63% 3.25%
$250,000
$250,000 but less than 2.75% 2.83% 2.50%
$500,000
$500,000 but less than 2.15% 2.20% 2.00%
$1,000,000
$1,000,000 or more None** None None***
*Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages indicated. Distributors may at times reallow
the entire sales charge to the securities dealer. A securities dealer who
receives 90% or more of the sales commission may be deemed an underwriter under
the Securities Act of 1933, as amended.
**A contingent deferred sales charge of 1% may be imposed on certain redemptions
of all or a part of an investment of $1 million or more. See "How Do I Sell
Shares? - Contingent Deferred Sales Charge."
***Please see "General - Other Payments to Securities Dealers" below for a
discussion of payments Distributors may make to securities dealers out of its
own resources.
Rights of Accumulation. To determine if you may pay a reduced sales charge, you
may add the cost or current value, whichever is higher, of your Class I and
Class II shares in other Franklin Templeton Funds, as well as those of your
spouse, children under the age of 21 and grandchildren under the age of 21, to
the amount of your current purchase. To receive the reduction, you or your
investment representative must notify Distributors that your investment
qualifies for a discount.
Letter of Intent. You may purchase shares at a reduced sales charge by
completing the Letter of Intent section of the Shareholder Application. A Letter
of Intent is a commitment by you to invest a specified dollar amount during a 13
month period. The amount you agree to invest determines the sales charge you pay
on. You or your investment representative must inform us that the Letter is in
effect each time you purchase shares.
BY COMPLETING THE LETTER OF INTENT SECTION OF THE SHAREHOLDER APPLICATION, YOU
ACKNOWLEDGE AND AGREE TO THE FOLLOWING:
You authorize Distributors to reserve five percent (5%) of the amount of
the total intended purchase in Fund shares registered in your name.
You grant Distributors a security interest in these shares and appoint
Distributors as attorney-in-fact with full power of substitution to redeem
any or all of these reserved shares to pay any unpaid sales charge if you do
not fulfill the terms of the Letter.
We will include the reserved shares in the total shares you own as
reflected on your periodic statements.
You will receive dividend and capital gain distributions on the reserved
shares; we will pay or reinvest these distributions as you direct.
Although you may exchange your shares, you may not liquidate reserved
shares until you complete the Letter or pay the higher sales charge.
If you would like more information about the Letter of Intent privilege, please
see "How Do I Buy and Sell Shares? - Letter of Intent" in the SAI or call our
Shareholder Services Department.
Group Purchases. If you are a member of a qualified group, you may purchase Fund
shares at the reduced sales charge applicable to the group as a whole. The sales
charge is based on the combined dollar value of the group members' existing
investments, plus the amount of the current purchase. For example, if group
members previously invested and still hold $80,000 of Fund shares and invest
$25,000, the sales charge will be 3.5%.
We define a qualified group as 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.
In addition, a qualified group must have more than 10 members, and be available
to arrange for meetings between our representatives and group members. It must
also agree to include sales and other materials related to the Franklin
Templeton Funds in publications and mailings to its members at reduced or no
cost to Distributors, and arrange for payroll deduction or other bulk
transmission of investments to the Fund.
If you select a payroll deduction plan, your investments will continue
automatically until you notify the Fund and your employer to discontinue further
investments. Due to the varying procedures used by employers to handle payroll
deductions, there may be a delay between the time of the payroll deduction and
the time the money reaches the Fund. We invest your purchase at the applicable
offering price per share determined on the day that the Fund receives both the
check and the payroll deduction data in required form.
PURCHASES AT NET ASSET VALUE
You may invest money from the following sources in Class I shares of the Fund
without paying front-end or contingent deferred sales charges.
(i) a distribution that you have received from a Franklin Templeton Fund or a
real estate investment trust ("REIT") sponsored or advised by Franklin
Properties, Inc., if the distribution is returned within 365 days of its payment
date. You may reinvest Class II distributions in either Class I or Class II
shares, but Class I distributions may only be invested in Class I shares under
this privilege. For more information, see "Distribution Options" under "What
Distributions Might I Receive from the Fund?" or call Shareholder Services at
1-800/632-2301; or
(ii) a redemption from a mutual fund with investment objectives similar to those
of the Fund, if (a) your investment in that fund was subject to either a
front-end or contingent deferred sales charge at the time of purchase, (b) the
fund is not part of the Franklin Templeton Funds, and (c) your redemption
occurred within the past 60 days.
You may also reinvest the proceeds from a redemption of any of the Franklin
Templeton Funds at net asset value. To do so, you must (a) have paid a sales
charge on the purchase or sale of the original shares, (b) reinvest the
redemption money in the same class of shares, and (c) request the reinvestment
of the money within 365 days of the redemption date. You may reinvest up to the
total amount of the redemption proceeds under this privilege. 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. While you will receive credit for any
contingent deferred sales charge paid on the shares redeemed, a new contingency
period will begin. Shares that were no longer subject to a contingent deferred
sales charge will be reinvested at net asset value and will not be subject to a
new contingent deferred sales charge. Shares exchanged into other Franklin
Templeton Funds are not considered "redeemed" for this privilege (see "What If
My Investment Outlook Changes? - Exchange Privilege").
If you immediately reinvested your redemption proceeds in a Franklin Bank
Certificate of Deposit ("CD") but you would like to reinvest them back into the
Franklin Templeton Funds as described above, you will have 365 days from the
date the CD (including any rollover) matures to do so.
If your securities dealer or another financial institution reinvests your money
in the Fund at net asset value for you, that person or institution may charge
you a fee for this service.
A redemption is a taxable transaction, but reinvestment without a sales charge
may affect the amount of gain or loss you recognize and the tax basis of the
shares reinvested. If you have a loss on the redemption, the loss may be
disallowed if you reinvest in the same fund within a 30-day period. If you would
like more information regarding the possible tax consequences of such a
reinvestment, please see the tax section of this Prospectus and the SAI.
Certain categories of investors also qualify to purchase Class I shares of the
Fund at net asset value regardless of the source of the investment proceeds. If
you or your account is included in one of the categories below, none of the
shares of the Fund you purchase will be subject to front-end or contingent
deferred sales charges:
(i) companies exchanging shares or selling assets pursuant to a merger,
acquisition or exchange offer;
(ii) accounts managed by the Franklin Templeton Group;
(iii) certain unit investment trusts and unit holders of these trusts
reinvesting distributions from the trusts in the Fund;
(iv) registered securities dealers and their affiliates, for their
investment accounts only;
(v) current employees of securities dealers and their affiliates and their
family members, in accordance with the internal policies and procedures of the
employing securities dealer and affiliate;
(vi) broker-dealers who have entered into a supplemental agreement with
Distributors, or 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);
(vii) 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").
IF YOU ARE SUCH AN INVESTOR, PLEASE CONSULT YOUR OWN LEGAL ADVISORS TO DETERMINE
WHETHER AND TO WHAT EXTENT THE SHARES OF THE FUND CONSTITUTE LEGAL INVESTMENTS.
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 the Manager on arbitrage rebate
calculations. If you are a securities dealer who has executed a dealer agreement
with Distributors and, through your services, an eligible governmental authority
invests in the Fund at net asset value, Distributors or one of its affiliates
may make a payment, out of its own resources, to you in an amount not to exceed
0.25% of the amount invested. Please contact the Franklin Templeton
Institutional Services Department for additional information;
(viii) officers, trustees, directors and full-time employees of the Franklin
Templeton Funds, or of the Franklin Templeton Group, and their family members.
Although you may pay sales charges on investments in accounts opened after your
association with us has ended, you may continue to invest in accounts opened
while you were with us without paying sales charges; or
(ix) trust companies and bank trust departments that exercise exclusive
discretionary investment authority over funds held in a fiduciary, agency,
advisory, custodial or similar capacity and agree to invest at least $1 million
in Franklin Templeton Funds over a 13-month period. We will accept orders for
such accounts by mail accompanied by a check or by telephone or other means of
electronic data transfer directly from the bank or trust company, with payment
by federal funds received by the close of business on the next business day
following such order.
If you qualify to buy shares at net asset value as discussed in this section,
please specify in writing the privilege that applies to your purchase and
include that written statement with your purchase order. We will not be
responsible for purchases that are not made at net asset value if this written
statement is not included with your order.
If you would like more information, please see "How Do I Buy and Sell Shares?"
in the SAI.
GENERAL
The Fund continuously offers its shares through securities dealers who have an
agreement with Distributors. The Fund and Distributors may refuse any order for
the purchase of shares. Currently, the Fund does not allow investments by Market
Timers.
Securities laws of states in which the Fund offers its shares may differ from
federal law. Banks and financial institutions that sell shares of the Fund may
be required to register as securities dealers pursuant to state law.
Other Payments to Securities Dealers. Distributors will pay the following
commissions, 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. These breakpoints are reset every 12 months for
purposes of additional purchases.
Distributors or one of its affiliates may also pay up to 1% of the purchase
price to securities dealers who initiate and are responsible for purchases made
at net asset value by any of the entities described in paragraph (ix) under
"Purchases at Net Asset Value" above. Please see "How Do I Buy and Sell Shares?"
in the SAI for the breakpoints applicable to these purchases.
Either Distributors or one of its affiliates, out of its own resources, may also
provide additional compensation to securities dealers in connection with the
sale of shares of the Franklin Templeton Funds. In some cases, this compensation
may be available only to securities dealers whose representatives have sold or
are expected to sell significant amounts of shares of the Franklin Templeton
Funds. Compensation may include financial assistance and payments made in
connection with conferences, sales or training programs for employees of the
securities dealer, seminars for the public, advertising, sales campaigns and/or
shareholder services, programs regarding one or more of the Franklin Templeton
Funds and other programs or events sponsored by securities dealers, and payment
for travel expenses of invited registered representatives and their families,
including lodging, in connection with business meetings or seminars located
within or outside the U.S. Securities dealers may not use sales of the Fund's
shares to qualify for this compensation if prohibited by the laws of any state
or self-regulatory agency, such as the National Association of Securities
Dealers, Inc. None of this compensation is paid for by the Fund or its
shareholders.
For additional information about shares of the Fund, please see "How Do I Buy
and Sell Shares?" in the SAI. The SAI also includes a listing of the officers
and trustees of the Fund who are affiliated with Distributors. See "Officers
and Trustees."
WHAT PROGRAMS AND PRIVILEGES ARE
AVAILABLE TO ME AS A SHAREHOLDER?
CERTAIN OF THE PROGRAMS AND PRIVILEGES DESCRIBED IN THIS SECTION MAY NOT BE
AVAILABLE DIRECTLY FROM THE FUND IF YOUR 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 "REGISTERING YOUR
ACCOUNT" IN THIS PROSPECTUS).
SHARE CERTIFICATES
Shares from an initial investment, as well as subsequent investments, including
the reinvestment of dividends and capital gain distributions, are generally
credited to an account in the name of an investor on the books of the 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 you, can be 2% or more of the value of the lost,
stolen or destroyed certificate. A certificate will be issued if requested by
you or your securities dealer.
CONFIRMATIONS
A confirmation statement will be sent to you quarterly to reflect the dividends
reinvested during the period and after each other transaction which affects your
account. This statement will also show the total number of shares you own,
including the number of shares in "plan balance" for your account.
AUTOMATIC INVESTMENT PLAN
The Automatic Investment Plan offers a convenient way to invest in the Fund.
Under the plan, you can arrange to have money transferred automatically from
your checking account to the Fund each month to buy additional shares. If you
are interested in this program, please refer to the Automatic Investment Plan
Application at the back of this Prospectus for the requirements of the program
or contact your investment representative. Of course, the market value of the
Fund's shares may fluctuate and a systematic investment plan such as this will
not assure a profit or protect against a loss. You may terminate the program at
any time by notifying Investor Services by mail or by phone.
SYSTEMATIC WITHDRAWAL PLAN
The Systematic Withdrawal Plan allows you to receive regular payments from your
account on a monthly, quarterly, semiannual or annual basis. To establish a
Systematic Withdrawal Plan, the value of your account must be at least $5,000
and the minimum payment amount for each withdrawal must be at least $50. Please
keep in mind that $50 is merely the minimum amount and is not a recommended
amount.
If you would like to establish a Systematic Withdrawal Plan, please complete the
Systematic Withdrawal Plan section of the Shareholder Application included with
this Prospectus and indicate how you would like to receive your payments. You
may choose to receive your payments in any of the following ways:
1. Purchase shares of other Franklin Templeton Funds - You may direct your
payments to purchase the same class of shares of another Franklin Templeton
Fund.
2. Receive payments in cash - You may choose to receive your payments in cash.
You may have the money sent directly to you, to another person, or to a checking
account. If you choose to have the money sent to a checking account, please see
"Electronic Fund Transfers" below.
There are no service charges for establishing or maintaining a Systematic
Withdrawal Plan. Once your plan is established, any distributions paid by the
Fund will be automatically reinvested in your account. Payments under the plan
will be made from the redemption of an equivalent amount of shares in your
account, generally on the first business day of the month in which a payment is
scheduled. You will generally receive your payments within three to five days
after the shares are redeemed.
Redeeming shares through a Systematic Withdrawal Plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the Fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Redemptions under a
Systematic Withdrawal Plan are considered a sale for federal income tax
purposes. Because the amount withdrawn under the plan may be more than your
actual yield or income, part of the payment may be a return of your investment.
While a Systematic Withdrawal Plan is in effect, shares must be held either in
plan balance or, where share certificates are outstanding, deposited with the
Fund. You should ordinarily not make additional investments in the Fund of less
than $5,000 or three times the amount of annual withdrawals under the plan
because of the sales charge on additional purchases. Shares redeemed under the
plan may also be subject to a contingent deferred sales charge. Please see
"Contingent Deferred Sales Charge" under "How Do I Sell Shares?"
You may terminate a Systematic Withdrawal Plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying Investor Services in
writing at least seven business days prior to the end of the month preceding a
scheduled payment. The Fund may also terminate a Systematic Withdrawal Plan by
notifying you in writing and will automatically terminate a Systematic
Withdrawal Plan if all shares in your account are withdrawn or if the Fund
receives notification of the shareholder's death or incapacity.
ELECTRONIC FUND TRANSFERS
You may choose to have distributions from the Fund or payments under a
Systematic Withdrawal Plan sent directly to a checking account. If the checking
account is maintained at a bank that is a member of the Automated Clearing
House, the payments may be made automatically by electronic funds transfer. If
you choose this option, please allow at least fifteen days for initial
processing. Any payments made during that time will be sent to the address of
record on your account.
INSTITUTIONAL ACCOUNTS
There may be additional methods of buying, selling or exchanging shares of
the Fund available to institutional accounts. For further information,
contact the Franklin Templeton Institutional Services Department at
1-800/321-8563.
WHAT IF MY INVESTMENT OUTLOOK CHANGES? - 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 funds are
offered to the public with a sales charge. If your investment objective or
outlook for the securities markets changes, Fund shares may be exchanged for the
same class of shares of another Franklin Templeton Fund eligible for sale in
your state of residence and in conformity with that fund's stated eligibility
requirements and investment minimums.
No exchanges between different classes of shares will be allowed. You may choose
to sell your shares of the Fund and buy Class II shares of another Franklin
Templeton Fund but such purchase will be subject to that fund's Class II
front-end and contingent deferred sales charges. Although there are no exchanges
between different classes of shares, Class II shareholders of a Franklin
Templeton Fund may elect to direct their dividends and capital gain
distributions to the Fund at net asset value.
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.
Before making an exchange, you should review the prospectus of the fund you wish
to exchange from and the fund you wish to exchange into for all specific
requirements or limitations on exercising the exchange privilege, for example,
limitations on a fund's sale of its shares, minimum holding periods for
exchanges at net asset value, or applicable sales charges.
You may exchange shares in any of the following ways:
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.
BY TELEPHONE
You or your investment representative of record, if any, may exchange shares of
the Fund by calling Investor Services at 1-800/632-2301 or the automated
TeleFACTS(R) system (day or night) at 1-800/247-1753. IF YOU DO NOT WISH THIS
PRIVILEGE EXTENDED TO A PARTICULAR ACCOUNT, YOU SHOULD NOTIFY THE FUND OR
INVESTOR SERVICES.
The telephone exchange privilege allows you to effect exchanges from the Fund
into an identically registered account of the same class of shares in one of the
other available Franklin Templeton Funds. The telephone exchange privilege is
available only for uncertificated shares or those which have previously been
deposited in your account. The Fund and Investor Services will employ reasonable
procedures to confirm that instructions communicated by telephone are genuine.
Please see "Telephone Transactions -- Verification Procedures."
During periods of drastic economic or market changes, it is possible that the
telephone exchange privilege may be difficult to implement and the TeleFACTS
option may not be available. In this event, you should follow the other exchange
procedures discussed in this section, including the procedures for processing
exchanges through securities dealers.
THROUGH SECURITIES DEALERS
As is the case with all purchases and redemptions of the Fund's shares, Investor
Services will accept exchange orders from securities dealers who execute a
dealer or similar agreement with Distributors. See also "By Telephone" above.
Such a dealer-ordered exchange will be effective only for uncertificated shares
on deposit in your 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 are made on the basis of the net asset value of the funds involved,
except as set forth below. Exchanges of shares of the Fund which were purchased
without a sales charge will be charged a sales charge in accordance with the
terms of the prospectus of the fund being purchased, unless the original
investment in the Franklin Templeton Funds was made pursuant to the privilege
permitting purchases at net asset value, as discussed under "How Do I Buy
Shares?" Exchanges of shares of the Fund which were purchased with a lower sales
charge into 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.
The contingency period during which a contingent deferred sales charge may be
assessed will be tolled (or stopped) for the period shares are exchanged into
and held in a Franklin or Templeton money market fund. If your account has
shares subject to a contingent deferred sales charge, shares will be exchanged
into the new account on a "first-in, first-out" basis. See "How Do I Sell
Shares?" -- Contingent Deferred Sales Charge" for a discussion of investments
subject to a contingent deferred sales charge.
If you request the exchange of the total value of your 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,
you 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 under "Additional Information Regarding Taxation" in the SAI
.
If a substantial portion of the Fund's shareholders should, within a short
period, elect to redeem their shares of the Fund pursuant to the exchange
privilege, the Fund might have to liquidate portfolio securities it might
otherwise hold and incur the additional costs related to such transactions. On
the other hand, increased use of the exchange privilege may result in periodic
large inflows of money. If this should occur, it is the general policy of the
Fund to initially invest this money in short-term, tax-exempt municipal
securities unless it is felt that attractive investment opportunities consistent
with the Fund's investment objective exist immediately. Subsequently, this money
will be withdrawn from such short-term tax-exempt municipal securities and
invested in portfolio securities in as orderly a manner as is possible when
attractive investment opportunities arise.
The exchange privilege may be modified or discontinued by the Fund at any time
upon 60 days' written notice to shareholders.
The Fund currently will not accept investments from Market Timers.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time and receive from the Fund the
value of the shares. You may sell shares in any of the following ways:
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. You 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 will receive
the price calculated on the following business day. The net asset value per
share 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. You are
requested to provide a telephone number where you may be reached during business
hours, or in the evening if preferred. Investor Services' ability to contact you
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 owners of the account;
(3) the proceeds (in any amount) are to be sent to any address other than the
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
that are members of a national securities exchange or a clearing agency or that
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.
When 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 owners exactly as the account is
registered, with the signatures guaranteed as referenced above. You are advised,
for your 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 applicable state
law since these accounts have varying requirements, depending upon the state of
residence.
Payment for redeemed shares will be sent to you within seven days after receipt
of the request in proper form.
BY TELEPHONE
If you complete the Franklin Templeton Telephone Redemption Authorization
Agreement (the "Agreement"), included with this Prospectus, you may redeem
shares of the Fund by telephone. You may obtain additional information about
telephone redemptions 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. You, however, bear the risk of loss in certain cases as
described under "Telephone Transactions Verification Procedures."
If your account has a completed Agreement on file, redemptions of uncertificated
shares or shares which have previously been deposited with the Fund or Investor
Services may be made for up to $50,000 per day per Fund account. Telephone
redemption requests received before the scheduled close of the Exchange
(generally 1:00 p.m. Pacific time) on any business day will be processed that
same day. The redemption check will be sent within seven days, made payable to
all the registered owners on the account, and will be sent only to the address
of record.
Redemption requests by telephone will not be accepted within 30 days following
an address change by telephone. In that case, you should follow the other
redemption procedures set forth in this Prospectus. Institutional accounts
(certain corporations, bank trust departments and government entities that
qualify to purchase shares at net asset value pursuant to the terms of this
Prospectus) that wish to execute redemptions in excess of $50,000 must complete
an Institutional Telephone Privileges Agreement which is available from the
Franklin Templeton Institutional Services Department by calling 1-800/321-8563.
THROUGH SECURITIES DEALERS
The Fund will accept redemption orders from securities dealers who have entered
into an agreement with Distributors. This is known as a repurchase. The only
difference between a normal redemption and a repurchase is that if you redeem
shares through a dealer, the redemption price will be the net asset value next
calculated after your dealer receives the order which is promptly transmitted to
the Fund, rather than on the day the Fund receives your written request in
proper form. The documents described under "By Mail" above, as well as a signed
letter of instruction, are required regardless of whether you redeem shares
directly or submit such shares to a securities dealer for repurchase. Your
letter should reference the Fund, 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 your redemption will be sent will begin when
the Fund receives all documents required to complete ("settle") the repurchase
in proper form. Your dealer may charge a fee for handling the order. See "How Do
I Buy and Sell Shares?" in the SAI for more information on the redemption of
shares.
CONTINGENT DEFERRED SALES CHARGE
In order to recover commissions paid to securities dealers, all or a portion of
investments of $1 million or more, redeemed within the contingency period of 12
months of the calendar month of such investment will be assessed a contingent
deferred sales charge, unless one of the exceptions described below applies. The
charge is 1% of the lesser of the value of the shares redeemed (exclusive of
reinvested dividends and capital gain distributions) or the net asset value at
the time of purchase of such shares, and is retained by Distributors. The
contingent deferred sales charge is waived in certain instances.
In determining whether a contingent deferred sales charge applies, shares not
subject to a contingent deferred sales charge are deemed to be redeemed first,
in the following order: (i) a calculated number of shares representing amounts
attributable to capital appreciation on shares held less than the contingency
period; (ii) shares purchased with reinvested dividends and capital gain
distributions; and (iii) other shares held longer than the contingency period.
Shares subject to a contingent deferred sales charge will then be redeemed on a
"first-in," "first-out" basis. For tax purposes, a contingent deferred sales
charge is treated as either a reduction in redemption proceeds or an adjustment
to the cost basis of the shares redeemed.
The contingent deferred sales charge is waived, as applicable, for: specified
net asset value purchases discussed under "How Do I Buy Shares? - Purchases at
Net Asset Value"; exchanges; any account fees; redemptions initiated by the Fund
due to an account falling below the minimum specified account size; redemptions
following the death of the shareholder or beneficial owner; and 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). For example, if an account maintained an annual balance of
$1,000,000, only $120,000 could be withdrawn through a once-yearly Systematic
Withdrawal Plan free of charge. Any amount over that $120,000 would be assessed
a 1% contingent deferred sales charge.
All investments made during a calendar month, regardless of when during the
month the investment occurred, will age one month on the last day of that month
and each subsequent month.
Unless otherwise specified, requests for redemptions of a SPECIFIED DOLLAR
amount will result in additional shares being redeemed to cover any applicable
contingent deferred sales charge, while requests for redemption of a SPECIFIC
NUMBER of shares will result in the applicable contingent deferred sales charge
being deducted from the total dollar amount redeemed.
ADDITIONAL INFORMATION REGARDING REDEMPTIONS
The 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.
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 you invested, depending on
fluctuations in the market value of securities owned by the Fund.
OTHER INFORMATION
Distribution or redemption checks sent to you 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 caused by your failure to cash these
checks.
"Cash" payments to or from the Fund may be made by check, draft or wire. The
Fund has no facility to receive, or pay out, cash in the form of currency.
For any information required about a proposed liquidation, you may call
Franklin's Shareholder Services Department. Securities dealers may call
Franklin's Dealer Services Department.
TELEPHONE TRANSACTIONS
By calling Investor Services at 1-800/632-2301, you or your investment
representative of record, if any, may be able to execute various telephone
transactions, including to: (i) effect a change in address, (ii) change a
dividend option, (iii) transfer Fund shares in one account to another
identically registered account in the Fund, (iv) request the issuance of
certificates (to be sent to the address of record only) and (v) exchange Fund
shares as described in this Prospectus by telephone. In addition, if you
complete and file an Agreement as described under "How Do I Sell Shares? - By
Telephone" you 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 you caused by an unauthorized transaction. The Fund and
Investor Services may be liable for any losses due to unauthorized or fraudulent
instructions in the event such reasonable procedures are not followed. You 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 privilege will be difficult to execute because of heavy
telephone volume. In these situations, you may wish to contact your investment
representative for assistance or send written instructions to the Fund as
detailed elsewhere in this Prospectus.
Neither the Fund nor Investor Services will be liable for any losses resulting
from your inability to execute a telephone transaction.
HOW ARE FUND SHARES VALUED?
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).
The net asset value per share of the Fund is determined by deducting the
aggregate gross value of all liabilities from the aggregate gross value of all
assets, and then dividing the difference by the number of shares outstanding.
Assets in the Fund's portfolio are valued as described under "How Are Fund
Shares Valued?" in the SAI.
HOW DO I GET MORE INFORMATION
ABOUT MY INVESTMENT?
Any questions or communications regarding your account should be directed to
Investor Services at the address shown on the back cover of this Prospectus.
From a touch-tone phone you may access TeleFACTS(R). By calling the TeleFACTS
system (day or night)at 1-800/247-1753, you may obtain account information,
current price and, if available, yield or other performance information specific
to the Fund or any Franklin Templeton Fund. In addition, you may process an
exchange, within the same class, into an identically registered Franklin
account; and request duplicate confirmation or year-end statements and deposit
slips.
The Fund code, which will be needed to access system information, is 179. The
system's automated operator will prompt you with easy to follow step-by-step
instructions from the main menu. Other features may be added in the future.
To assist you and securities dealers wishing to speak directly with a
representative, the following list of Franklin departments, telephone numbers
and hours of operation is provided.
HOURS OF OPERATION
(PACIFIC TIME)(MONDAY
DEPARTMENT NAME TELEPHONE NO. THROUGH FRIDAY)
Shareholder Services 1-800/632-2301 5:30a.m. to 5:00p.m.
Dealer Services 1-800/524-4040 5:30a.m. to 5:00p.m.
Fund Information 1-800/DIAL BEN 5:30a.m. to 8:00p.m.
8:30a.m. to 5:00p.m.
(Saturday)
Retirement Plans 1-800/527-2020 5:30a.m. to 5:00p.m.
TDD (hearing impaired) 1-800/851-0637 5:30a.m. to 5:00p.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.
HOW DOES THE FUND MEASURE PERFORMANCE?
Advertisements, sales literature and communications to you may contain several
measures of the Fund's performance, including current yield, various expressions
of total return, taxable equivalent yield, taxable equivalent and current
distribution rate. They may also 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 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 for each class 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 for the Fund, which are calculated
according to a formula prescribed by the SEC (see "General Information in 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
of the Fund are reflected in the current distribution rate or taxable equivalent
distribution rate which may be quoted to you. 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 that of a fund
which invests in tax-exempt obligations. Under certain circumstances, such as
when there has been a change in the amount of dividend payout or a fundamental
change in investment policies, it might be appropriate to annualize the
dividends paid during the period such policies were in effect, rather than using
the dividends during the past 12 months. The current distribution rate differs
from the current yield computation because it may include distributions to
shareholders from sources other than dividends and interest, such as short-term
capital gain, and is calculated over a different period of time.
In each case, performance figures are based upon past performance, reflect all
recurring charges against the Fund's 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 performance may be in any future period.
GENERAL INFORMATION
REPORTS TO SHAREHOLDERS
The Trust's fiscal year ends February 28. Annual Reports containing audited
financial statements of the Trust, including the auditors' report, and
Semi-Annual Reports containing unaudited financial statements are automatically
sent to shareholders. To reduce the volume of mail sent to each household as
well as to reduce Fund expenses, Investor Services will attempt to identify
related shareholders within a household, and send only one copy of the report.
Additional copies may be obtained, without charge, upon request to the Trust at
the telephone number or address set forth on the cover page of this Prospectus.
Additional information on Fund performance is included in the Trust's Annual
Report to Shareholders and under "General Information" in the SAI.
ORGANIZATION AND VOTING RIGHTS
The Trust was organized as a Massachusetts business trust on September 18, 1984.
The Agreement and Declaration of Trust permits the trustees to issue an
unlimited number of full and fractional shares of beneficial interest without
par value, which may be issued in any number of series and classes. Shares
issued will be fully paid and non-assessable and will have no preemptive,
conversion, or sinking rights. Shares of each series have equal and exclusive
rights as to dividends and distributions as declared by such series and the net
assets of such series upon liquidation or dissolution. Shares of each class of a
series have the same voting and other rights and preferences as the other
classes and series of the Trust for matters that affect the Trust as a whole.
Additional series or classes may be added in the future by the Board. Following
is a list of the 28 series currently authorized by the Board:
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 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, Michigan
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 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.
The Trust does not intend to hold annual shareholder meetings. The Trust may
however, hold a special shareholders' meeting of a series 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 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.
REDEMPTIONS BY THE FUND
The Fund reserves the right to redeem your shares, at net asset value, if your
account has a value of less than $50, but only where the value of your account
has been reduced by the prior voluntary redemption of shares and has been
inactive (except for the reinvestment of distributions) for a period of at least
six months, provided you are given advance notice. For more information see "How
Do I Buy and Sell Shares?" in the SAI.
REGISTERING YOUR ACCOUNT
An account registration should reflect your 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, you may transfer an account in the Fund carried in "street"
or "nominee" name by your 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 your
delivering securities dealer. To effect the transfer, you 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 your delivering securities dealer. Account transfers may be
effected electronically through the services of the NSCC.
The Fund may conclusively accept instructions from you or your nominee listed in
publicly available nominee lists, regardless of whether the account was
initially registered in the name of or by you, your nominee, or both. If a
securities dealer or other representative is of record on your account, you 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 Investor Services, 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 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. You may also
be subject to backup withholding if the IRS or a securities dealer notifies the
Fund that the number furnished by you is incorrect or that you are 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 you 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.
USEFUL TERMS AND DEFINITIONS
1940 Act - Investment Company Act of 1940, as amended.
Advisers - Franklin Advisers, Inc., the Fund's investment manager.
Board - The Board of Trustees of the Trust.
Class I and Class II - "Classes" of shares represent proportionate interests in
the same portfolio of investment securities but with different rights,
privileges and attributes, as determined by the trustees. Certain funds in the
Franklin Templeton Funds currently offer their shares in two classes, designated
"Class I" and "Class II." Because the Fund's sales charge structure and plan of
distribution are similar to those of Class I shares, shares of the Fund may be
considered Class I shares for redemption, exchange and other purposes.
Code - Internal Revenue Code of 1986, as amended.
Distributors - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter.
Exchange - New York Stock Exchange.
Franklin Funds - the mutual funds in the Franklin Group of Funds(R) except
Franklin Valuemark Funds and the Franklin Government Securities Trust.
Franklin Templeton Funds - the Franklin Funds and the Templeton Funds.
Franklin Templeton Group - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries.
Investor Services - Franklin/Templeton Investor Services, Inc.
Letter - Letter of Intent.
Manager - Franklin Advisers, Inc., the Fund's investment manager.
Market Timer(s) - Market Timers generally include market timing or allocation
services, accounts administered so as to buy, sell or exchange shares based on
predetermined market indicators, or any person or group whose transactions seem
to follow a timing pattern.
Net asset value (NAV) - the value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding. When you buy, sell or exchange shares, we will use
the NAV per share next calculated after we receive your request in proper form.
Offering price - The public offering price is equal to the net asset value per
share plus the 4.25% sales charge.
Proper Form (Purchases) - generally, the Fund must receive a completed
Shareholder Application accompanied by a negotiable check.
Resources - Franklin Resources, Inc.
SAI - Statement of Additional Information.
SEC - Securities and Exchange Commission.
Securities Dealer - financial institutions which, either directly or through
affiliates, have an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
TeleFACTS(R) - Franklin Templeton's automated customer servicing system.
Templeton Funds - 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.
U.S. - United States
APPENDIX A -
DESCRIPTION OF MICHIGAN TAX TREATMENT
The following information on the state income tax treatment of dividends from
Fund 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.
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 Tax-Free Income 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 Tax-Free Income 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.
APPENDIX B -
SPECIAL FACTORS AFFECTING THE FUND
The following information is a brief summary of factors affecting the Fund 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 Michigan, from independent municipal credit
reports and historically reliable sources, but has not been independently
verified by the Fund. The market value of the shares of the Fund may fluctuate
due to factors such as changes in interest rates, matters affecting Michigan or
for other reasons. Additional information is included in the SAI.
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 per capita income dropping from 108%
of the national average in 1977 to 98% of the national average in 1992. While
manufacturing remains important--23% of total jobs in 1991 versus 17%
nationally--it constitutes a smaller share than in the 1970s when it accounted
for 35% of total jobs. Manufacturing is concentrated in the automotive industry,
which has reduced its employment from 10.8% of total employment in 1979 to 6.9%
in 1989.
Michigan is, however, experiencing strong economic growth and total employment
has reached an all time high with unemployment below the national average for
the first time in 20 years. Michigan's employment is expected to grow by 2.9%
and 1.2% in 1995 and 1996, respectively, with estimated unemployment rates of
5.4% and 5.9%, respectively, for the same time periods.
APPENDIX C -
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.
FRANKLIN
TAX-FREE TRUST
STATEMENT OF
ADDITIONAL INFORMATION
MAY 1, 1995,
AS AMENDED JUNE 1, 1996
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/DIAL BEN
CONTENTS PAGE
How Do the Funds Invest Their Assets?
What Are the Funds' Potential Risks?
Investment Restrictions
Officers and Trustees
Investment Advisory and Other Services
How Do the Funds Purchase Securities for Their Portfolios?
How Do I Buy and Sell Shares?
How Are Fund Shares Valued?
Additional Information
Regarding Taxation
The Trust's Underwriter
General Information
Financial Statements
Appendix
Franklin Tax-Free Trust (the "Trust") is an open-end investment company
consisting of 28 separate series. This Statement of Additional Information (the
"SAI") relates to the ten series shown below, eight of which, as noted, are
currently offering two classes of shares:
CLASS I
Franklin Arizona Tax-Free Income Fund, Class I Franklin Colorado Tax-Free Income
Fund, Class I Franklin Connecticut Tax-Free Income Fund, Class I Franklin High
Yield Tax-Free Income Fund, Class I Franklin Indiana Tax-Free Income Fund, Class
I Franklin Michigan Tax-Free Income Fund, Class I Franklin New Jersey Tax-Free
Income Fund, Class I Franklin Oregon Tax-Free Income Fund, Class I Franklin
Pennsylvania Tax-Free Income Fund, Class I Franklin Puerto Rico Tax-Free Income
Fund, Class I
CLASS II
Franklin Arizona Tax-Free Income Fund, Class II Franklin Colorado Tax-Free
Income Fund, Class II Franklin Connecticut Tax-Free Income Fund, Class II
Franklin High Yield Tax-Free Income Fund, Class II Franklin New Jersey Tax-Free
Income Fund, Class II Franklin Oregon Tax-Free Income Fund, Class II Franklin
Pennsylvania Tax-Free Income Fund, Class II Franklin Puerto Rico Tax-Free Income
Fund, Class II
This class structure ("multiclass") allows you to consider, among other
features, the impact of sales charges and distribution fees ("Rule 12b-1 fees")
on your investment in a Fund.
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
and Michigan Funds 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 and Michigan Funds are
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 FUNDS' PROSPECTUS. THIS SAI IS INTENDED TO PROVIDE
A YOU WITH ADDITIONAL INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF THE
TRUST AND EACH FUND AND SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS.
A Prospectus for the Michigan Fund dated June 1, 1996 and a Prospectus for the
other Funds dated May 1, 1995, as amended December 5, 1995, provide the basic
information you 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 or telephone number shown above.
HOW DO THE FUNDS INVEST THEIR ASSETS?
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.
TYPES OF SECURITIES THE FUNDS MAY PURCHASE
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. A Fund may invest a portion of its assets in
convertible and step coupon bonds. The convertible bonds which a 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 on predetermined
dates chosen at the time of issuance.
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 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 will not have a more substantial impact than anticipated or that the Funds'
objectives 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 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 fundamental policies of each
Fund which means they may not be changed without the approval of a majority of
the outstanding voting securities of the Fund. Under the Investment Company Act
of 1940, as amended (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 (i) more than 50% of the outstanding shares of the Trust
or of such Fund or (ii) 67% or more of the shares of the Trust or of such Fund
present at a shareholder 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 Board of Trustees (the "Board") has the responsibility for the overall
management of the Trust, including general supervision and review of each Fund's
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
(*).
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 31 of the
investment companies in the Franklin Group of Funds.
Harris J. Ashton (63)
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 56 of the investment companies in the Franklin
Templeton Group of Funds.
S. Joseph Fortunato (63)
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 58 of the investment companies in the Franklin Templeton Group of Funds.
David W. Garbellano (81)
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 30 of the investment companies in the
Franklin Group of Funds.
*Charles B. Johnson (63)
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 57 of the investment companies in the Franklin
Templeton Group of Funds.
*Rupert H. Johnson, Jr. (55)
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 61 of the investment companies
in the Franklin Templeton Group of Funds.
Frank W. T. LaHaye (65)
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, trustee or managing general
partner, as the case may be, of 26 of the investment companies in the Franklin
Group of Funds.
Gordon S. Macklin (67)
8212 Burning Tree Road
Bethesda, MD 20817
Trustee
Chairman, White River Corporation (information services); Director, Fund
American Enterprises Holdings, Inc., Lockheed Martin 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 53 of the investment companies in the Franklin Templeton Group of Funds;
and formerly held the following positions: Chairman, Hambrecht and Quist Group;
Director, H & Q Healthcare Investors; and President, National Association of
Securities Dealers, Inc.
Harmon E. Burns (51)
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 61 of the investment companies in the Franklin Templeton Group of Funds.
Kenneth V. Domingues (63)
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 37 of the investment companies
in the Franklin Group of Funds.
Don Duerson
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Employee of Franklin Resources, Inc. and its subsidiaries in senior portfolio
management capacities; officer of one investment company in the Franklin
Group of Funds.
Martin L. Flanagan (35)
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, director and/or trustee of 61 of the investment companies in the
Franklin Templeton Group of Funds.
Deborah R. Gatzek (47)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Secretary
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Distributors, Inc.; Vice President, Franklin
Advisers, Inc. and officer of 61 of the investment companies in the Franklin
Templeton 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 37 of the investment
companies in the Franklin Group of Funds.
Edward V. McVey (58)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President/National Sales Manager, Franklin Templeton Distributors,
Inc.; and officer of 32 of the investment companies in the Franklin Group of
Funds.
The preceding table indicates those officers and trustees who are also
affiliated persons of Distributors and the investment manager. Trustees not
affiliated with the investment manager ("nonaffiliated trustees") are currently
paid fees of $1,300 per month plus $1,300 per meeting attended. As indicated
above, certain of the Trust's nonaffiliated trustees also serve as directors,
trustees or managing general partners of other investment companies in the
Franklin Group of FundsAE and the Templeton Group of Funds ("Franklin Templeton
Group of Funds") from which they may receive fees for their services. The
following table indicates the total fees paid to nonaffiliated trustees by the
Trust and by other funds in the Franklin Templeton Group of Funds.
NUMBER OF
TOTAL FEES BOARDS IN THE
RECEIVED FROM FRANKLIN
TOTAL FEES THE FRANKLIN TEMPLETON
RECEIVED FROM TEMPLETON GROUP GROUP OF FUNDS ON
THE TRUST* OF FUNDS** WHICH EACH
SERVES***
NAME
Frank H. Abbott,III $32,500 $176,870 30
Harris J. Ashton 31,200 319,925 54
S. Joseph Fortunato 31,200 336,065 56
David W. Garbellano 31,200 153,300 29
Frank W.T. LaHaye 31,200 150,817 25
Gordon S. Macklin 31,200 303,685 51
*For the fiscal year ended February 1, 1995 **For the calendar year ended
December 31, 1994.
***The number of boards is based on the number of registered investment
companies in the Franklin Templeton Group of Funds and does not include the
total number of series or funds within each investment company for which the
directors [trustees] are responsible. The Franklin Templeton Group of Funds
currently includes 61 registered investment companies, consisting of
approximately 162 U.S. based funds or series.
Nonaffiliated trustees are reimbursed for expenses incurred in connection with
attending board meetings, paid pro rata by each fund in the Franklin Templeton
Group of Funds for which they serve as director, trustee or managing general
partner. No officer or trustee received any other compensation directly from the
Trust. Certain officers or trustees who are shareholders of Franklin Resources,
Inc. ("Resources") may be deemed to receive indirect remuneration by virtue of
their participation, if any, in the fees paid to its subsidiaries.
As of April 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. Many of the Trust's trustees also
own shares in various of the other funds in the Franklin Templeton Group of
Funds. 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 Resources, a publicly owned
holding company whose shares are listed on the New York Stock Exchange (the
"Exchange"). Resources owns several other subsidiaries that are involved in
investment management and shareholder services.
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 Board to whom the Manager renders periodic reports of the
Trust's investment activities. Under the terms of the management agreement, the
Manager provides 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.. Please see the Statement of Operations in the
financial statements included in the Trust's Annual Report to Shareholders dated
February 28, 1995.
The Manager also provides management services to numerous other investment
companies or funds pursuant to management agreements with each fund. The Manager
may give advice and take action with respect to any of the other funds it
manages, or for its own account, which may differ from action taken by the
Manager on behalf of the Trust. Similarly, with respect to the Trust, the
Manager is not obligated to recommend, purchase or sell, or to refrain from
recommending, purchasing or selling any security that the Manager and access
persons, as defined by the 1940 Act, may purchase or sell for its or their own
account or for the accounts of any other fund. Furthermore, the Manager is not
obligated to refrain from investing in securities held by the Trust or other
funds which it manages or administers. Of course, any transactions for the
accounts of the Manager and other access persons will be made in compliance with
the Trust's Code of Ethics.
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 providing such continuance is
specifically approved at least annually by a vote of the Board 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.
Franklin/Templeton Investor Services, Inc. ("Investor Services"), 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 New York, Mutual Funds Division, 90 Washington Street, New York, New
York, 10286, acts as custodian of the securities and other assets of the Fund.
Bank of America NT & SA, 555 California Street, 4th Floor, San Francisco,
California 94104, acts as custodian for cash received in connection with the
purchase of Fund shares. 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.
HOW DO THE FUNDS PURCHASE
SECURITIES FOR THEIR PORTFOLIOS
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 will include a commission or
concession paid by the issuer to the underwriter, and purchases from dealers
will include a spread between the bid and ask prices. As a general rule, the
Funds do not 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 the Manager from dealers effecting transactions in
portfolio securities. The allocation of transactions in order to obtain
additional research services permits the Manager 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
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
broker-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 it is possible that the
ability to participate in volume transactions and to negotiate lower brokerage
commissions will be beneficial to a Fund.
During the past three fiscal years ended on February 28, 1995, the Funds paid no
brokerage commissions. As of February 28, 1995, the Funds did not own securities
of their regular broker-dealers.
HOW DO I BUY AND SELL 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 your account for the transaction as of a
date and with a foreign currency exchange factor determined by the drawee bank.
In connection with exchanges, it should be noted that since the proceeds from
the sale of shares of an investment company are generally not available until
the fifth business day following the redemption, the fund into which you are
seeking to exchange reserves 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 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. Please see "What If My Investment Outlook Changes? - Exchange
Privilege" in the Prospectus.
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.
If, in connection with the purchase of shares of a Fund, you submit a check or a
draft that is returned unpaid to a Fund, that Fund may impose a $10 charge
against your account for each returned item.
Dividend checks returned to the Funds marked "unable to forward" by the postal
service will be deemed to be a request by you to change your dividend option and
to reinvest all distributions and the proceeds will be reinvested in additional
shares at net asset value until new instructions are received.
Each Fund may deduct from your account the costs of its efforts to locate you if
mail is returned as undeliverable or the Fund is otherwise unable to locate you
or verify your 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 one of its affiliates, to help defray expenses
of maintaining a service office in Taiwan, including expenses related to local
literature fulfillment and communication facilities.
Class I shares of the Funds may be offered to investors in Taiwan through
securities firms known locally as Securities Investment Consulting Enterprises.
In conformity with local business practices in Taiwan, Class I shares will be
offered with the following schedule of sales charges:
SIZE OF PURCHASE - 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 a 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 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, either directly or
through affiliates, have an agreement with Distributors to handle customer
orders and accounts with the Funds. Such reference, however, is for convenience
only and does not indicate a legal conclusion of capacity.
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 you resulting from failure to do so must be settled between you and
the securities dealer. Any applicable contingent deferred sales charge will be
deducted from the redemption proceeds.
OTHER PAYMENTS TO SECURITIES DEALERS
As discussed in the Prospectus under "How Do I Buy Shares? - General," either
Distributors or one of its affiliates may make payments, out of its own
resources, to securities dealers who initiate and are responsible for purchases
of Class I shares made at net asset value by certain trust companies and trust
departments of banks as described 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 shares are redeemed within 12 months of the calendar month
of purchase. Other conditions may apply. All terms and conditions may be imposed
by an agreement between Distributors, or on if its affiliates, and the
securities dealer.
With respect to purchases made at net asset value by certain trust companies and
trust departments of banks, either Distributors or one of its affiliates, out of
its own resources, may pay up to 1% of the amount invested.
LETTER OF INTENT
You 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 you want to qualify for a reduced sales charge, you may
file with the Fund a signed Shareholder Application with the Letter of Intent
(the "Letter") section completed. After the Letter is filed, each additional
investment will be entitled to the sales charge applicable to the level of
investment indicated on the Letter. Sales charge reductions based 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. Your
holdings in the Franklin Templeton Funds, including Class II shares, acquired
more than 90 days before the Letter is filed will be counted towards completion
of the Letter but will not be entitled to a retroactive downward adjustment in
the sales charge. Any redemptions you make during the 13-month period will be
subtracted from the amount of the purchases for purposes of determining whether
the terms of the Letter have been completed. If the Letter is not completed
within the 13-month period, there will be an upward adjustment of the sales
charge, depending upon the amount actually purchased (less redemptions) during
the period. If you execute a Letter prior to a change in the sales charge
structure for a Fund, you will be entitled to complete the Letter at the lower
of the new sales charge structure, or the sales charge structure in effect at
the time the Letter was filed.
As mentioned in the Prospectus, five percent (5%) of the amount of the total
intended purchase will be reserved in Class I shares of the Fund registered in
your name. If the total purchases, less redemptions, equal the amount specified
under the Letter, the reserved shares will be deposited to an account in your
name or delivered to you or as you direct. If the total purchases, less
redemptions, exceed the amount specified under the Letter 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 (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, you will remit to
Distributors an amount equal to the difference in the dollar amount of sales
charge actually paid and the amount of sales charge that would have applied to
the aggregate purchases if the total of such purchases had been made at a single
time. Upon such remittance, the reserved shares held for your account will be
deposited to an account in your name or delivered to you or as you direct. If
within 20 days after written request the difference in sales charge is not paid,
the redemption of an appropriate number of reserved shares to realize the
difference will be made. In the event of a total redemption of the account prior
to fulfillment of the Letter, the additional sales charge due will be deducted
from the proceeds of the redemption, and the balance will be forwarded to you.
REDEMPTIONS IN KIND
Each Fund has committed itself to pay in cash (by check) all requests for
redemption by any shareholder of record, limited in amount, however, during any
90-day period to the lesser of $250,000 or 1% of the value of the Fund's net
assets at the beginning of the 90-day period. This commitment is irrevocable
without the prior approval of the Securities and Exchange Commission ("SEC"). In
the case of redemption requests in excess of these amounts, the trustees reserve
the right to make payments in whole or in part in securities or other assets of
the Fund, in case of an emergency, or if the payment of such a redemption in
cash would be detrimental to the existing shareholders of the Fund. In such
circumstances, the securities distributed would be valued at the price used to
compute the Fund's net assets. Should the Fund do so, you may incur brokerage
fees in converting the securities to cash. The Funds do not intend to redeem
illiquid securities in kind. Should it happen, however, you may not be able to
recover your investment in a timely manner and you may incur brokerage costs in
selling the securities.
REDEMPTIONS BY THE FUNDS
Due to the relatively high cost of handling small investments, each Fund
reserves the right to involuntarily redeem your shares at net asset value if
your account has a value of less than one-half of your initial required minimum
investment, but only where the value of your account has been reduced by the
your prior voluntary redemption of shares. Until further notice, it is the
present policy of the Funds not to exercise this right if your account has a
value of $50 or more. In any event, before a Fund redeems your shares and sends
you the proceeds, it will notify you that the value of the shares in your
account is less than the minimum amount and allow you 30 days to make an
additional investment in an amount which will increase the value of your account
to at least $100.
REPORTS TO SHAREHOLDERS
The Funds send annual and semiannual reports regarding each Fund's performance
and portfolio holdings to shareholders. If you would like to receive an interim
quarterly report, you may call Fund Information at 1-800/DIAL BEN.
SPECIAL SERVICES
The Franklin Templeton Institutional Services Department, provides specialized
services, including recordkeeping, for institutional investors of the Funds. The
cost of these services is not borne by the Funds.
Investor Services may pay certain financial institutions that maintain omnibus
accounts with the Funds on behalf of numerous beneficial owners for
recordkeeping operations performed with respect to such owners. For each
beneficial owner in the omnibus account, the Funds may reimburse Investor
Services an amount not to exceed the per account fee which the Funds normally
pay Investor Services. These financial institutions may also charge a fee for
their services directly to their clients.
HOW ARE FUND SHARES VALUED
As noted in the Prospectus, each Fund calculates the net asset value of each
class 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.
For the purpose of determining the aggregate net assets of a Fund, cash and
receivables are valued at their realizable amounts. Interest is recorded as
accrued and dividends are recorded on the ex-dividend date. Portfolio securities
for which market quotations are readily available are valued within the range of
the most recent bid and ask prices. 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. With the
approval of trustees, a Fund may utilize a pricing service, bank or securities
dealer to perform any of the above described functions.
Generally, trading in 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 value of these 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 scheduled close of the Exchange which will not be
reflected in the computation of the net asset value of each class of a Fund. If
events materially affecting the values of these securities occur during such
period, then the securities will be valued at their fair value as determined in
good faith by the Board.
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 distributions (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.
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
both classes of shares of each Fund. 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 Board 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.
Distributors pays the expenses of the 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.
Until April 30, 1994, income dividends for 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 Class I shares underwriting commissions
received by Distributors, 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
COMMISSIONS COMMISSIONS
FUND 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 or compensation under the Rule
12b-1 distribution plans relating to both classes. See "Plans of Distribution"
below. Except as noted, Distributors received no other compensation from the
Funds for acting as underwriter.
DISTRIBUTION PLANS
Each class has adopted a distribution plan pursuant to Rule 12b-1 under the 1940
Act ("Class I Plan" and "Class II Plan," respectively, or "Plan(s).)"
The Class I Plan (all Funds except the Michigan Fund). Under the Class I Plan,
each Fund may pay up to a maximum of 0.10% per annum of its average daily net
assets, payable quarterly, for expenses incurred in the promotion and
distribution of Class I shares.
In implementing the Class I Plan, the Board has determined that the annual fees
payable under the Class I Plan will be equal to the sum of: (i) the amount
obtained by multiplying 0.10% by the average daily net assets represented by
Class I shares of a Fund that were acquired by investors on or after May 1,
1994, the effective date of the plan ("New Assets"), and (ii) the amount
obtained by multiplying 0.05% by the average daily net assets represented by
Class I shares of 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
account. In addition, until such time as the maximum payment of 0.10% is reached
on a yearly basis, up to an additional 0.02% will be paid to Distributors under
the Plan. 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 is a Class I expense so that all Class I shareholders, regardless of
when they purchased their shares will bear Rule 12b-1 expenses at the same rate.
The initial rate will be at least 0.07% (0.05% plus 0.02%) of the average daily
net assets of Class I and, as Class I shares are sold on or after May 1, 1994,
will increase over time. Thus, as the proportion of Class I shares purchased on
or after May 1, 1994, increases in relation to outstanding Class I shares, the
expenses attributable to payments under the Plan will also increase (but will
not exceed 0.10% of average daily net assets). While this is the currently
anticipated calculation for fees payable under the Class I Plan, the Class I
Plan permits the Board to allow each Fund to pay a full 0.10% on all assets at
any time. The approval of the Board would be required to change the calculation
of the payments to be made under the Class I Plan.
Michigan Fund. Under the Plan the Michigan Fund may pay up to a maximum of
0.15% per annum of its average daily net assets for expenses incurred in the
promotion and distribution of its shares.
All Class I Plans. Pursuant to the Class I Plan, Distributors or others will be
entitled to be reimbursed each quarter (up to the maximum 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:
AGGREGATE PRINTING PAYMENTS
RULES AND PAYMENTS TO
12B-1 MAILING OF TO BROKERS
FEES PAID ADVER- PROSPEC- UNDER- OR
BY FUND TISING TUSES WRITERS DEALERS
------- ------ ----- ------- -------
Arizona Fund $ 428,271 $ 59,958 $ 34,262 $ 29,979 $ 304,072
Colorado Fund 113,322 14,079 10,688 7,403 81,152
Connecticut Fund 90,379 12,653 7,230 5,423 65,073
High Yield Fund 1,918,113 287,717 134,268 115,087 1,381,041
Indiana Fund 27,021 3,513 2,972 1,351 19,185
New Jersey Fund 310,985 40,428 27,989 18,659 223,909
Oregon Fund 210,327 30,647 17,306 11,268 151,106
Pennsylvania 343,475 44,652 30,913 20,608 247,302
Fund
Puerto Rico Fund 100,210 13,027 10,021 6,013 71,149
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 0.50% 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 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 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 at the time of investment.
Class I and Class II Plans. 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 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.
To the extent fees are for distribution or marketing functions, as distinguished
from administrative servicing or agency transactions, certain banks will not be
entitled to participate in the Plans as a result of applicable federal law
prohibiting certain banks from engaging in the distribution of mutual fund
shares. Such banking institutions, however, are permitted to receive fees under
the Plans for administrative servicing or for agency transactions. If you are a
customer of a bank that is prohibited from providing such services, you would be
permitted to remain a shareholder of the Fund, and alternate means for
continuing the servicing would be sought. In such an event, changes in the
services provided might occur and you might no longer be able to avail yourself
of any automatic investment or other services then being provided by the bank.
It is not expected that you would suffer any adverse financial consequences as a
result of any of these changes. 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 was approved by the public shareholders in April, 1994. Class
II Plan was approved by the sole initial shareholder of Class II shares in April
1995. Both Plans were approved by the trustees of the Fund, including those
trustees who are not interested persons, as defined in the 1940 Act. The Class I
Plan is effective through March 31, 1996 and the Class II Plan is effective
through April 30, 1996. Both Plans 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 with respect to any one class, by
vote of a majority of that class' 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 Plans and any related agreements may not be amended to increase materially
the amount to be spent for distribution expenses without approval by a majority
of the outstanding shares of the class, and all material amendments to the Plans
or any related agreements shall be approved by a vote of the non-interested
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 at least quarterly on
the amounts and purpose of any payment made under the Plans and any related
agreements, as well as to furnish the Board with such other information as may
reasonably be requested in order to enable the Board to make an informed
determination of whether the Plans should be continued.
GENERAL INFORMATION
PERFORMANCE
As noted in the Prospectus, each Fund may from time to time quote various
performance figures for each class to illustrate past performance and may
occasionally cite statistics to reflect 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 for each class 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 that 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 to 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 each class, you 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 your investment in a Fund. This charge will
affect actual performance less the longer you retain your investment in a 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 FROM
OF THE 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 the Prospectus, a Fund may quote total rates of return for each
class in addition to the average annual total return for each class. These
quotations are computed in the same manner as the average annual compounded
rates, except they will be based on the actual return of a class for a specified
period rather than on 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 FUND FROM
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
CURRENT YIELD
The current yield of each class reflects the income per share earned by a Fund's
portfolio investments and is determined by dividing the net investment income
per share of each class 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 of a class 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 = 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
30-DAY TAX EQUIVALENT YIELD
Each Fund may also quote a tax equivalent yield for each class that demonstrates
the taxable yield necessary to produce an after-tax yield equivalent to that of
a fund which invests in tax-exempt obligations. Tax equivalent yield is computed
by dividing the portion of the class' yield (computed as indicated above) that
is tax-exempt by one minus the highest applicable combined federal and state
income tax rate (and adding the product to the portion of the class' yield that
is not tax-exempt, if any). The 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 may be necessary as tax rates are 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 shareholders of a class. 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 of a class
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 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 an
index considered representative of the types of securities in which the Funds
invest. A beta of more than 1.00 indicates volatility greater than the market,
and a beta of less than 1.00 indicates volatility less than the market. Another
measure of volatility or risk is standard deviation. Standard deviation is used
to measure variability of net asset value or total return around an average over
a specified period of time. The idea is that greater volatility means greater
risk undertaken in achieving performance.
OTHER PERFORMANCE QUOTATIONS
For investors who are permitted to purchase Class I shares of a Fund at net
asset value, sales literature pertaining to Class I 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 belonging to the
Templeton Group of Funds. Resources is the parent company of the advisors and
underwriter of both the Franklin Group of Funds and Templeton Group of Funds.
COMPARISONS
To help you better evaluate how an investment in a Fund may satisfy your
investment objective, advertisements and other materials regarding the Funds may
discuss certain measures of performance of each class 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.
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 highlights or summarizes the information discussed in more
detail in the communication.
Advertisements or information may also compare the performance of a class to the
return on certificates of deposit or other investments. You 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 comparisons of performance you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the Fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not be
identical to the formula used by the Fund to calculate its figures. In addition
there can be no assurance that a Fund will continue its 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 you 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 you in
determining how much money must be invested on a monthly basis in order to have
a projected amount available in the future to fund a child's college education.
(Projected college cost estimates are based upon current costs published by the
College Board.)
MISCELLANEOUS INFORMATION
Each Fund is a member of the Franklin Templeton Group of Funds, 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 48 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 $135
billion in assets under management for more than 3.9 million U.S. based mutual
fund shareholder and other accounts. The Franklin Group of Funds and the
Templeton Group of Funds offers to the public 114 U.S.-based mutual funds. A
Fund may identify itself by its NASDAQ symbol or CUSIP number.
Franklin is a leader in the tax-free mutual fund industry and manages more than
$41 billion in municipal bond assets for over half a million investors.
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.
The Dalbar Surveys, Inc. broker/dealer survey has ranked Franklin number one
in service quality for five of the past seven years.
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 annual amount of time, the average taxpayer works to satisfy his or
her tax obligations to the federal, state and local taxing authorities.
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.
Employees of Resources or its subsidiaries who are access persons under the 1940
Act are permitted to engage in personal securities transactions subject to the
following general restrictions and procedures: (i) the trade must receive
advance clearance from a compliance officer and must be completed within 24
hours after clearance; (ii) copies of all brokerage confirmations must be sent
to a 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; and (iii) access persons involved in preparing and making
investment decisions must, in addition to (i) and (ii) above, file annual
reports of their securities holdings each January and inform the compliance
officer (or other designated personnel) if they own a security that is being
considered for a fund or other client transaction or if they are recommending a
security in which they have an ownership interest for purchase or sale by a fund
or other client.
As a shareholder of a Massachusetts business trust, you could, under certain
circumstances, be held personally liable as a partner for its obligations. The
Trust's Agreement and 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 if you are 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 you 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. Furthermore, the activities
of the Trust as an investment company, as distinguished from an operating
company, would not likely give rise to liabilities in excess of the Trust's
total assets. Thus, the risk of you 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 your 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.
FINANCIAL STATEMENTS
The audited financial statements contained in the Annual Report to Shareholders
of the Trust dated February 28, 1995, including the auditor's report, and the
unaudited financial statements in the Semi-Annual Report to Shareholders of the
Trust dated August 31, 1995, are incorporated herein by reference.
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 five 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 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.
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.
NEW JERSEY
Due to the recent recession, New Jersey depleted its operating fund balance by
fiscal 1991. During fiscal years 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 reflects the pressures of
development, its considerable capital needs and the subsidy requirements for
certain agencies. Debt ratios increased substantially in the 1970s. 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
deterioration 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.
FORM N-1A
PART C
Other Information
Item 24 Financial Statements and Exhibits
a) Financial Statements
1) Unaudited Financial Statements incorporated herein by reference to the
Registrant's Semi-Annual Report to Shareholders dated August 31, 1995
as filed with the SEC on Form Type N-30D on October 31, 1995.
(i) Statements of Investments in Securities and Net Assets - August
31, 1995
(ii) Statements of Assets and Liabilities - August 31, 1995
(iii) Statements of Operations - for the six months ended August 31,
1995
(iv) Statements of Changes in Net Assets - for the six months ended
August 31, 1995 and the year ended February 28, 1995
(v) Notes to Financial Statements
2) Audited Financial Statements incorporated herein by reference to the
Registrant's Annual Report To Shareholders dated February 28, 1995 as
filed with the SEC on Form Type N-30D on April 26, 1995.
(i) Report of Independent Auditors
(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, 1995 and 1994
b) Exhibits:
The following exhibits are incorporated by reference as noted, except
Exhibits 5(ii), 6(i), 6(ii), 8(iv), 8(v), 11(i) and 15(ii) which are
attached.
(1) copies of the charter as now in effect;
(i) Restated Agreement and Declaration of Trust dated
October 26, 1984
Filing: Post Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: April 28, 1995
(ii) Certificate of Amendment of Agreement and Declaration
of Trust dated July 16, 1991
Filing: Post Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: April 28, 1995
(iii)Certificate of Amendment of Agreement and Declaration
of Trust dated April 21, 1992
Filing: Post Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: April 28, 1995
(iv) Certificate of Amendment of Agreement and Declaration
of Trust dated December 14, 1993
Filing: Post Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: April 28, 1995
(v) Certificate of Amendment of Agreement and Declaration
of Trust dated March 21, 1995
Filing: Post Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: April 28, 1995
(2) copies of the existing By-Laws or instruments corresponding thereto;
(i) By-Laws
Filing: Post Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: April 28, 1995
(ii) Amendment to By-Laws dated December 8, 1987
Filing: Post Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: April 28, 1995
(iii)Amendments to By-Laws dated April 21, 1992
Filing: Post Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: April 28, 1995
(iv) Certificate of Amendment of By-Laws dated December 14,
1993
Filing: Post Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: April 28, 1995
(v) Certificate of Secretary dated February 28, 1994
Filing: Post Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: April 28, 1995
(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
Filing: Post Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: April 28, 1995
(ii) Amendment to Management Agreement between Franklin Tax-Free Trust
and Franklin Advisers, Inc. dated August 1, 1995
(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) Amended and Restated Distribution Agreement between the Registrant
and Franklin/Templeton Distributors, Inc. dated March 29, 1995
(ii) Forms of Dealer Agreements between Franklin/Templeton Distributors,
Inc. and securities dealers
(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
Filing: Post Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: April 28, 1995
(ii) Amendment to Custodian Agreement between Registrant
and Bank of America NT & SA dated April 2, 1990
Filing: Post Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: April 28, 1995
(iii)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. 55 to
Registration Statement on Form N-1A
File No. 2-12647
Filing Date: March 1, 1996
(iv) Master Custodian Agreement between Registrant and Bank of New
York dated February 16, 1996
(v) Terminal Link Agreement between Registrant and Bank of New York
dated February 16, 1996
(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
Filing: Post Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: April 28, 1995
(ii) Amendment to Agreement between Registrant and
Financial Guaranty Insurance Company
Registrant: Franklin New York Tax-Free Trust
Filing: Post-Effective Amendment No. 12
to Registration Statement 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
Filing: Post Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: April 28, 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
Filing: Post Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: April 28, 1995
(ii) Letter of Understanding dated April 12, 1994
Filing: Post Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: April 28, 1995
(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 Distribution Plans pursuant to Rule 12b-1
on behalf of the following funds:
Dated July 1, 1993
Franklin Arizona Insured Tax-Free Income Fund
Franklin Federal Intermediate-Term Tax-Free Income Fund
Franklin Florida Insured Tax-Free Income Fund
Dated May 4, 1994
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
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
Filing: Post Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: April 28, 1995
(ii) Class II shares Distribution Plan pursuant to
Rule 12b-1 on behalf of the following funds dated March 30, 1995:
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
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
(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 compensation of performance quotation
Registrant: Franklin New York Tax-Free Trust
Filing: Post-Effective Amendment No. 12 to Registration
Statement on Form N-1A
File No. 33-7785
Filing Date: April 25, 1995
(17) Power of Attorney
(i) Power of Attorney dated February 16, 1995
Filing: Post Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: April 28, 1995
(ii) Certificate of Secretary dated February 16, 1995
Filing: Post Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: April 28, 1995
Item 25 Persons Controlled by or under Common Control with Registrant
None
Item 26 Number of Holders of Securities
As of December 31, 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 3,746 22
Arizona Insured Fund 663 N/A
Arizona Fund 14,124 63
Colorado Fund 5,688 31
Connecticut Fund 3,992 32
Federal Intermediate Fund 2,112 N/A
Florida Insured Fund 1,330 N/A
Florida Fund 23,824 111
Georgia Fund 3,562 25
High Yield Fund 91,235 982
Indiana Fund 1,711 N/A
Insured Fund 35,629 170
Kentucky Fund 936 N/A
Louisiana Fund 2,487 9
Maryland Fund 4,839 38
Massachusetts Insured Fund 6,739 71
Michigan Insured Fund 28,580 145
Michigan Fund (NEW SERIES) N/A N/A
Minnesota Insured Fund 13,269 37
Missouri Fund 6,958 46
New Jersey Fund 16,191 121
North Carolina Fund 5,963 61
Ohio Insured Fund 17,580 107
Oregon Fund 9,112 68
Pennsylvania Fund 18,034 112
Puerto Rico Fund 6,501 23
Texas Fund 2,856 5
Virginia Fund 6,835 61
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 Franklin Gold Fund, Franklin Premier Return
Fund, Franklin Equity Fund, AGE High Income Fund, Inc., Franklin Custodian
Funds, Inc., Franklin Money Fund, Franklin California Tax-Free Income Fund,
Inc., Franklin Federal Money Fund, Franklin Tax-Exempt Money Fund, Franklin New
York Tax-Free Income Fund, Inc., Franklin Federal Tax-Free Income Fund, Franklin
California Tax-Free Trust, Franklin New York Tax-Free Trust, Franklin Investors
Securities Trust, Institutional Fiduciary Trust, Franklin Value Investors Trust,
Franklin Tax-Advantaged International Bond Fund, Franklin Tax-Advantaged U.S.
Government Securities Fund, Franklin Tax-Advantaged High Yield Securities Fund,
Franklin Municipal Securities Trust, Franklin Managed Trust, Franklin Strategic
Series, Franklin Templeton International Trust, Franklin Real Estate Securities
Trust, Franklin Templeton Global Trust, Franklin Templeton Money Fund Trust,
Franklin Templeton Japan Fund, Templeton American Trust, Inc., Templeton Capital
Accumulator Fund, Inc., Templeton Developing Markets Trust, Templeton Funds,
Inc., Templeton Global Investment Trust, Templeton Global Opportunities Trust,
Templeton Growth Fund, Inc., Templeton Income Trust, Templeton Institutional
Funds, Inc., Templeton Real Estate Securities Fund, Templeton Smaller Companies
Growth Fund, Inc., and Templeton Variable Products Series Fund.
(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.
(iii)The Registrant hereby undertakes to file a Post-Effective Amendment on
behalf of Franklin Michigan Tax-Free Income Fund using Financial Statements
which need not be certified, within four to six months from the effective
date of Registrant's Registration Statement under the Securities Act of
1933.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant 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 14th day of March, 1996.
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: March 14, 1996
Martin L. Flanagan* Principal Financial
Martin L. Flanagan Officer
Dated: March 14, 1996
Diomedes Loo-Tam* Principal Accounting
Diomedes Loo-Tam Officer
Dated: March 14, 1996
Frank H. Abbott, III* Trustee
Frank H. Abbott, III Dated: March 14, 1996
Harris J. Ashton* Trustee
Harris J. Ashton Dated: March 14, 1996
S. Joseph Fortunato* Trustee
S. Joseph Fortunato Dated: March 14, 1996
David W. Garbellano* Trustee
David W. Garbellano Dated: March 14, 1996
Charles B. Johnson* Trustee
Charles B. Johnson Dated: March 14, 1996
Frank W. T. LaHaye* Trustee
Frank W. T. LaHaye Dated: March 14, 1996
Gordon S. Macklin* Trustee
Gordon S. Macklin Dated: March 14, 1996
*By /s/ Larry L. Greene
(Attorney-in-Fact)
Pursuant to Powers of Attorney previously filed
FRANKLIN TAX-FREE TRUST
REGISTRATION STATEMENT
EXHIBITS INDEX
EXHIBIT NO. DESCRIPTION LOCATION
EX-99.B1(i) Restated Agreement and *
Declaration of Trust
dated October 26, 1984
EX-99.B1(ii) Certificate of Amendment of *
Agreement and
Declaration of Trust
dated July 16, 1991
EX-99.B1(iii) Certificate of Amendment of *
Agreement and
Declaration of Trust
dated April 21, 1992
EX-99.B1(iv) Certificate of Amendment of *
Agreement and
Declaration of Trust
dated December 14, 1993
EX-99.B1(v) Certificate of Amendment of *
Agreement and
Declaration of Trust
dated March 21, 1995
EX-99.B2(i) By-Laws *
EX-99.B2(ii) Amendment to By-Laws dated *
December 8, 1987
EX-99.B2(iii) Amendments to By-Laws dated *
April 21, 1992
EX-99.B2(iv) Certificate of Amendment dated *
December 14, 1993
EX-99.B2(v) Certificate of Secretary dated *
February 28, 1994
EX-99.B5(i) Management Agreement between *
Registrant
and Franklin Advisers,
Inc. dated December 1,
1986
EX-99.B5(ii) Amendment to Management Attached
Agreement dated Auagust
1, 1995
EX-99.B6(i) Amended and Restated Attached
Distribution Agreement between
Registrant and
Franklin/Templeton
Distributors, Inc. dated
March 29, 1995
EX-99.B6(ii) Forms of Dealer Agreements Attached
between Franklin/Templeton
Distributors, Inc. and
securities dealers
EX-99.B8(i) Custodian Agreement between *
Registrant and
Bank of America NT & SA
dated March 1, 1985
EX-99.B8(ii) Amendment to Custodian *
Agreement between
Registrant and Bank of America
NT & SA dated
April 2, 1990
EX-99.B8(iii) Custodian Agreements between *
Registrant and
Citibank Delaware
EX-99.B8(iv) Master Custodian Agreement Attached
between Registrant and Bank of
New York dated February 16,
1996
EX-99.B8(v) Terminal Link Agreement Attached
between Registrant and
Bank of New York dated
February 16, 1996
EX-99.B9(i) Agreement between Registrant *
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 *
April 21, 1995
EX-99.B11(i) Consent of Independent Attached
Auditors
EX-99.B13(i) Letter of Understanding dated *
September 21, 1992
EX-99.B13(ii) Letter of Understanding dated *
April 12, 1995
EX-99.B15(i) Distribution Plans *
dated July 1, 1993 and
May 4, 1994
EX-99.B15(ii) Class II shares Attached
Distribution Plan dated
March 30, 1995
EX-99.B16(i) Schedule for computation of *
performance quotation
EX-99.B17(i) Power of Attorney dated *
February 16, 1995
EX-99.B17(ii) Certificate of Secretary dated *
February 16, 1995
*Incorporated by Reference
AMENDMENT TO MANAGEMENT AGREEMENT
This Amendment dated as of August 1, 1995 , is to the Management Agreement
dated December 1, 1986, by and between FRANKLIN TAX-FREE TRUST, a Massachusetts
business trust (the "Trust"), on behalf of its series now or hereafter subject
to the Management Agreement, (the "Funds"), and FRANKLIN ADVISERS, INC., a
California corporation, (the "Manager"). The undersigned parties, intending to
be legally bound, hereby agree as follows:
(1) Paragraph 4 B. is amended to read:
B. The management fee payable by a Fund shall be reduced or
eliminated to the extent that Distributors has actually received cash payments
of tender offer solicitation fees less certain cost and expenses incurred in
connection therewith and to the extent necessary to comply with the limitations
on expenses which may be borne by the Fund as set forth in the laws, regulations
and administrative interpretations of those states in which the Fund's shares
are registered. The Manager may waive all or a portion of its fees provided for
hereunder and such waiver shall be treated as a reduction in purchase price of
its services. The Manager shall be contractually bound hereunder by the terms of
any publicly announced waiver of its fee, or any limitation of a Funds'
expenses, as if such waiver or limitation were full set forth herein.
(2) All other provisions of the Management Agreement dated December 1,
1986, remain in full force and effect.
IN WITNESS WHEREOF, we have signed this Amendment as of the date and year
first above written.
FRANKLIN TAX-FREE TRUST
By /s/ Deborah R. Gatzek
FRANKLIN ADVISERS, INC.
By /s/ Harmon E. Burns
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: /s/ Deborah R. Gatzek
Accepted:
Franklin/Templeton Distributors, Inc.
By: /s/ Gregory E. Johnson
DATED: March 29, 1995
DEALER AGREEMENT
Effective: May 1, 1995
Dear Securities Dealer:
Franklin/Templeton Distributors, Inc. ("we" or "us") invites you to participate
in the distribution of shares of the Franklin and Templeton mutual funds (the
"Funds") for which we now or in the future serve as principal underwriter,
subject to the terms of this Agreement. We will notify you from time to time of
the Funds which are eligible for distribution and the terms of compensation
under this Agreement. This Agreement supersedes any prior dealer agreements
between us, as stated in paragraph 18, below.
1. Licensing.
(a) You represent that you are a member in good standing of the National
Association of Securities Dealers, Inc. ("NASD") and are presently licensed to
the extent necessary by the appropriate regulatory agency of each state in which
you will offer and sell shares of the Funds. You agree that termination or
suspension of such membership with the NASD, or of your license to do business
by any state or federal regulatory agency, at any time shall terminate or
suspend this Agreement forthwith and shall require you to notify us in writing
of such action. If you are not a member of the NASD but are a dealer subject to
the laws of a foreign country, you agree to conform to the rules of fair
practice of such association. This Agreement is in all respects subject to Rule
26 of the Rules of Fair Practice of the NASD which shall control any provision
to the contrary in this Agreement.
(b) You agree to notify us immediately in writing if at any time you are
not a member in good standing of the Securities Investor Protection Corporation
("SIPC").
2. Sales of Fund Shares. You may offer and sell shares of each Fund and class
only at the public offering price which shall be applicable to, and in effect at
the time of, each transaction. The procedures relating to all orders and the
handling of them shall be subject to the terms of the then current prospectus
and statement of additional information (hereafter, the "prospectus") and new
account application, including amendments, for each such Fund, and our written
instructions from time to time. This Agreement is not exclusive, and either
party may enter into similar agreements with third parties.
3. Duties of Dealer: In General. You agree:
(a) To act as principal, or as agent on behalf of your customers, in all
transactions in shares of the Funds except as provided in paragraph 4 hereof.
You shall not have any authority to act as agent for the issuer (the Funds), for
the Principal Underwriter, or for any other dealer in any respect, nor will you
represent to any third party that you have such authority or are acting in such
capacity.
(b) To purchase shares only from us or from your customers.
(c) To enter orders for the purchase of shares of the Funds only from us
and only for the purpose of covering purchase orders you have already received
from your customers or for your own bona fide investment.
(d) To maintain records of all sales and redemptions of shares made
through you and to furnish us with copies of such records on request.
(e) To distribute prospectuses and reports to your customers in
compliance with applicable legal requirements, except to the extent that we
expressly undertake to do so on your behalf.
(f) That you will not withhold placing customers' orders for shares so
as to profit yourself as a result of such withholding or place orders for shares
in amounts just below the point at which sales charges are reduced so as to
benefit from a higher sales charge applicable to an amount below the breakpoint.
(g) That if any shares confirmed to you hereunder are repurchased or
redeemed by any of the Funds within seven business days after such confirmation
of your original order, you shall forthwith refund to us the full concession
allowed to you on such orders. We shall forthwith pay to the appropriate Fund
our share, if any, of the "charge" on the original sale and shall also pay to
such Fund the refund from you as herein provided. We shall notify you of such
repurchase or redemption within a reasonable time after settlement. Termination
or cancellation of this Agreement shall not relieve you or us from the
requirements of this subparagraph.
(h) That if payment for the shares purchased is not received within the
time customary or the time required by law for such payment, the sale may be
canceled forthwith without any responsibility or liability on our part or on the
part of the Funds, or at our option, we may sell the shares which you ordered
back to the Funds, in which latter case we may hold you responsible for any loss
to the Funds or loss of profit suffered by us resulting from your failure to
make payment as aforesaid. We shall have no liability for any check or other
item returned unpaid to you after you have paid us on behalf of a purchaser. We
may refuse to liquidate the investment unless we receive the purchaser's signed
authorization for the liquidation.
(i) That you shall assume responsibility for any loss to the Funds
caused by a correction made subsequent to trade date, provided such correction
was not based on any error, omission or negligence on our part, and that you
will immediately pay such loss to the Funds upon notification.
(j) That if on a redemption which you have ordered, instructions in
proper form, including outstanding certificates, are not received within the
time customary or the time required by law, the redemption may be canceled
forthwith without any responsibility or liability on our part or on the part of
any Fund, or at our option, we may buy the shares redeemed on behalf of the
Fund, in which latter case we may hold you responsible for any loss to the Fund
or loss of profit suffered by us resulting from your failure to settle the
redemption.
4. Duties of Dealer: Retirement Accounts. In connection with orders for the
purchase of shares on behalf of an Individual Retirement Account, Self-Employed
Retirement Plan or other retirement accounts, by mail, telephone, or wire, you
shall act as agent for the custodian or trustee of such plans (solely with
respect to the time of receipt of the application and payments), and you shall
not place such an order until you have received from your customer payment for
such purchase and, if such purchase represents the first contribution to such a
plan, the completed documents necessary to establish the plan. You agree to
indemnify us and Franklin Templeton Trust Company and/or Templeton Funds Trust
Company as applicable for any claim, loss, or liability resulting from incorrect
investment instructions received from you which cause a tax liability or other
tax penalty.
5. Conditional Orders; Certificates. We will not accept from you any conditional
orders for shares of any of the Funds. Delivery of certificates for shares
purchased shall be made by the Funds only against constructive receipt of the
purchase price, subject to deduction for your concession and our portion of the
sales charge, if any, on such sale. No certificates will be issued unless
specifically requested.
6. Dealer Compensation.
(a) On each purchase of shares by you from us, the total sales charges
and your dealer concessions shall be as stated in each Fund's then current
prospectus, subject to NASD rules and applicable state and federal laws. Such
sales charges and dealer concessions are subject to reductions under a variety
of circumstances as described in the Funds' prospectuses. For an investor to
obtain these reductions, we must be notified at the time of the sale that the
sale qualifies for the reduced charge. If you fail to notify us of the
applicability of a reduction in the sales charge at the time the trade is
placed, neither we nor any of the Funds will be liable for amounts necessary to
reimburse any investor for the reduction which should have been effected.
(b) In accordance with the Funds' prospectuses, we or our affiliates
may, but are not obligated to, make payments to dealers from our own resources
as compensation for certain sales which are made at net asset value and are not
subject to any contingent deferred sales charges ("Qualifying Sales"). If you
notify us of a Qualifying Sale, we may make a contingent advance payment up to
the maximum amount available for payment on the sale. If any of the shares
purchased in a Qualifying Sale are redeemed within twelve months of the end of
the month of purchase, we shall be entitled to recover any advance payment
attributable to the redeemed shares by reducing any account payable or other
monetary obligation we may owe to you or by making demand upon you for repayment
in cash. We reserve the right to withhold advances to any dealer, if for any
reason we believe that we may not be able to recover unearned advances from such
dealer. In addition, dealers will generally be required to enter into a
supplemental agreement with us with respect to such compensation and the
repayment obligation prior to receiving any payments.
7. Redemptions. Redemptions or repurchases of shares will be made at the net
asset value of such shares, less any applicable deferred sales or redemption
charges, in accordance with the applicable prospectuses. Except as permitted by
applicable law, you agree not to purchase any shares from your customers at a
price lower than the redemption or repurchase prices then computed by the Funds.
You shall, however, be permitted to sell shares for the account of the record
owner to the Funds at the repurchase price then currently in effect for such
shares and may charge the owner a fair commission for handling the transaction.
8. Exchanges. Telephone exchange orders will be effective only for shares in
plan balance (uncertificated shares) or for which share certificates have been
previously deposited and may be subject to any fees or other restrictions set
forth in the applicable prospectuses. You may charge the shareholder a fair
commission for handling an exchange transaction. Exchanges from a Fund sold with
no sales charge to a Fund which carries a sales charge, and exchanges from a
Fund sold with a sales charge to a Fund which carries a higher sales charge may
be subject to a sales charge in accordance with the terms of each Fund's
prospectus. You will be obligated to comply with any additional exchange
policies described in each Fund's prospectus, including without limitation any
policy restricting or prohibiting "Timing Accounts" as therein defined.
9. Transaction Processing. All orders are subject to acceptance by us and by the
Fund or its transfer agent, and become effective only upon confirmation by us.
If required by law, each transaction shall be confirmed in writing on a fully
disclosed basis and if confirmed by us, a copy of each confirmation shall be
sent simultaneously to you if you so request. All sales are made subject to
receipt of shares by us from the Funds. We reserve the right in our discretion,
without notice, to suspend the sale of shares or withdraw the offering of shares
entirely. Telephone orders will be effected at the price(s) next computed on the
day they are received from you if, as set forth in each Fund's current
prospectus, they are received prior to the time the price of its shares is
calculated. Orders received after that time will be effected at the price(s)
computed on the next business day. All orders must be accompanied by payment in
U.S. dollars. Orders payable by check must be drawn payable in U.S. dollars on a
U.S. bank, for the full amount of the investment.
10. Multiple Classes. We may from time to time provide to you written compliance
guidelines or standards relating to the sale or distribution of Funds offering
multiple classes of shares with different sales charges and distribution-related
operating expenses. In addition, you will be bound by any applicable rules or
regulations of government agencies or self-regulatory organizations generally
affecting the sale or distribution of mutual funds offering multiple classes of
shares.
11. Rule 12b-1 Plans. You are also invited to participate in all Plans adopted
by the Funds (the "Plan Funds") pursuant to Rule 12b-1 under the 1940 Act.
To the extent you provide administrative and other services, including, but not
limited to, furnishing personal and other services and assistance to your
customers who own shares of a Plan Fund, answering routine inquiries regarding a
Fund, assisting in changing account designations and addresses, maintaining such
accounts or such other services as a Fund may require, to the extent permitted
by applicable statutes, rules, or regulations, we shall pay you a Rule 12b-1
servicing fee. To the extent that you participate in the distribution of Fund
shares which are eligible for a Rule 12b-1 distribution fee, we shall also pay
you a Rule 12b-1 distribution fee. All Rule 12b-1 servicing and distribution
fees shall be based on the value of shares attributable to customers of your
firm and eligible for such payment, and shall be calculated on the basis and at
the rates set forth in the compensation schedule then in effect. Without prior
approval by a majority of the outstanding shares of a Fund, the aggregate annual
fees paid to you pursuant to each Plan shall not exceed the amounts stated as
the "annual maximums" in each Fund's prospectus, which amount shall be a
specified percent of the value of the Fund's net assets held in your customers'
accounts which are eligible for payment pursuant to this Agreement (determined
in the same manner as each Fund uses to compute its net assets as set forth in
its effective Prospectus).
You shall furnish us and each Fund with such information as shall reasonably be
requested by the Boards of Directors, Trustees or Managing General Partners
(hereinafter referred to as "Directors") of such Funds with respect to the fees
paid to you pursuant to the Schedule. We shall furnish to the Boards of
Directors of the Plan Funds, for their review on a quarterly basis, a written
report of the amounts expended under the Plans and the purposes for which such
expenditures were made.
The Plans and provisions of any agreement relating to such Plans must be
approved annually by a vote of the Plan Funds' Directors, including such persons
who are not interested persons of the Plan Funds and who have no financial
interest in the Plans or any related agreement ("Rule 12b-1 Directors"). The
Plans or the provisions of this Agreement relating to such Plans may be
terminated at any time by the vote of a majority of the Plan Funds' Boards of
Directors, including Rule 12b-1 Directors, or by a vote of a majority of the
outstanding shares of the Plan Funds, on sixty (60) days' written notice,
without payment of any penalty. The Plans or the provisions of this Agreement
may also be terminated by any act that terminates the Underwriting Agreement
between us and the Plan Funds, and/or the management or administration agreement
between Franklin Advisers, Inc. or Templeton Investment Counsel, Inc. or their
affiliates and the Plan Funds. In the event of the termination of the Plans for
any reason, the provisions of this Agreement relating to the Plans will also
terminate.
Continuation of the Plans and provisions of this Agreement relating to such
Plans are conditioned on Rule 12b-1 Directors being ultimately responsible for
selecting and nominating any new Rule 12b-1 Directors. Under Rule 12b-1,
Directors of any of the Plan Funds have a duty to request and evaluate, and
persons who are party to any agreement related to a Plan have a duty to furnish,
such information as may reasonably be necessary to an informed determination of
whether the Plan or any agreement should be implemented or continued. Under Rule
12b-1, Plan Funds are permitted to implement or continue Plans or the provisions
of this Agreement relating to such Plans from year-to-year only if, based on
certain legal considerations, the Boards of Directors are able to conclude that
the Plans will benefit the Plan Funds. Absent such yearly determination the
Plans and the provisions of this Agreement relating to the Plans must be
terminated as set forth above. In addition, any obligation assumed by a Fund
pursuant to this Agreement shall be limited in all cases to the assets of such
Fund and no person shall seek satisfaction thereof from shareholders of a Fund.
You agree to waive payment of any amounts payable to you by us under a Fund's
Plan of Distribution pursuant to Rule 12b-1 until such time as we are in receipt
of such fee from the Fund.
The provisions of the Rule 12b-1 Plans between the Plan Funds and us, insofar as
they relate to Plans, shall control over the provisions of this Agreement in the
event of any inconsistency.
12. Registration of Shares. Upon request, we shall notify you of the states or
other jurisdictions in which each Fund's shares are currently registered or
qualified for sale to the public. We shall have no obligation to register or
qualify, or to maintain registration or qualification of, Fund shares in any
state or other jurisdiction. We shall have no responsibility, under the laws
regulating the sale of securities in any U.S. or foreign jurisdiction, for the
qualification or status of persons selling Fund shares or for the manner of sale
of Fund shares. Except as stated in this paragraph, we shall not, in any event,
be liable or responsible for the issue, form, validity, enforceability and value
of such shares or for any matter in connection therewith, and no obligation not
expressly assumed by us in this Agreement shall be implied. Nothing in this
Agreement, however, shall be deemed to be a condition, stipulation or provision
binding any person acquiring any security to waive compliance with any provision
of the Securities Act of 1933, or of the rules and regulations of the Securities
and Exchange Commission, or to relieve the parties hereto from any liability
arising under the Securities Act of 1933.
13. Additional Registrations. If it is necessary to register or qualify the
shares in any foreign jurisdictions in which you intend to offer the shares of
any Funds, it will be your responsibility to arrange for and to pay the costs of
such registration or qualification; prior to any such registration or
qualification, you will notify us of your intent and of any limitations that
might be imposed on the Funds, and you agree not to proceed with such
registration or qualification without the written consent of the Funds and of
ourselves.
14. Fund Information. No person is authorized to give any information or make
any representations concerning shares of any Fund except those contained in the
Fund's current prospectus or in materials issued by us as information
supplemental to such prospectus. We will supply prospectuses, reasonable
quantities of supplemental sale literature, sales bulletins, and additional
information as issued. You agree not to use other advertising or sales material
relating to the Funds except that which (a) conforms to the requirements of any
applicable laws or regulations of any government or authorized agency in the
U.S. or any other country, having jurisdiction over the offering or sale of
shares of the Funds, and (b) is approved in writing by us in advance of such
use. Such approval may be withdrawn by us in whole or in part upon notice to
you, and you shall, upon receipt of such notice, immediately discontinue the use
of such sales literature, sales material and advertising. You are not authorized
to modify or translate any such materials without our prior written consent.
15. Indemnification. You further agree to indemnify, defend and hold harmless
the Principal Underwriter, the Funds, their officers, directors and employees
from any and all losses, claims, liabilities and expenses arising out of (1) any
alleged violation of any statute or regulation (including without limitation the
securities laws and regulations of the United States or any state or foreign
country) or any alleged tort or breach of contract, in or related to the offer
and sale by you of shares of the Funds pursuant to this Agreement (except to the
extent that our negligence or failure to follow correct instructions received
from you is the cause of such loss, claim, liability or expense), (2) any
redemption or exchange pursuant to telephone instructions received from you or
your agent or employees, or (3) the breach by you of any of the terms and
conditions of this Agreement.
16. Termination; Succession; Amendment. Each party to this Agreement may cancel
its participation in this Agreement by giving written notice to the other
parties. Such notice shall be deemed to have been given and to be effective on
the date on which it was either delivered personally to the other parties or any
officer or member thereof, or was mailed postpaid or delivered to a telegraph
office for transmission to the other parties' Chief Legal Officers at the
addresses shown herein or in the most recent NASD Manual. This Agreement shall
terminate immediately upon the appointment of a Trustee under the Securities
Investor Protection Act or any other act of insolvency by you. The termination
of this Agreement by any of the foregoing means shall have no effect upon
transactions entered into prior to the effective date of termination. A trade
placed by you subsequent to your voluntary termination of this Agreement will
not serve to reinstate the Agreement. Reinstatement, except in the case of a
temporary suspension of a dealer, will only be effective upon written
notification by us. Unless terminated, this Agreement shall be binding upon each
party's successors or assigns. This Agreement may be amended by us at any time
by written notice to you and your placing of an order or acceptance of payments
of any kind after the effective date and receipt of notice of any such Amendment
shall constitute your acceptance of such Amendment.
17. Setoff; Dispute Resolution. Should any of your concession accounts with us
have a debit balance, we may offset and recover the amount owed from any other
account you have with us, without notice or demand to you. In the event of a
dispute concerning any provision of this Agreement, either party may require the
dispute to be submitted to binding arbitration under the commercial arbitration
rules of the NASD or the American Arbitration Association. Judgment upon any
arbitration award may be entered by any state or federal court having
jurisdiction. This Agreement shall be construed in accordance with the laws of
the State of California, not including any provision which would require the
general application of the law of another jurisdiction.
18. Acceptance; Cumulative Effect. This Agreement is cumulative and supersedes
any agreement previously in effect. It shall be binding upon the parties hereto
when signed by us and accepted by you. If you have a current dealer agreement
with us, your first trade or acceptance of payments from us after receipt of
this Agreement, as it may be amended pursuant to paragraph 16, above, shall
constitute your acceptance of its terms. Otherwise, your signature below shall
constitute your acceptance of its terms.
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By:
Greg Johnson, President
777 Mariners Island Blvd. San Mateo, CA 94404 Attention: Chief Legal Officer
(for legal notices only) 415/312-2000
700 Central Avenue St. Petersburg, Florida 33701-3628 813/823-8712
Dealer: If you have NOT previously signed a Dealer Agreement with us, please
complete and sign this section and return the original to us.
DEALER NAME
By:
(Signature)
Name:
Title:
Address:
Telephone:
NASD CRD #
Franklin Templeton Dealer #
(Internal Use Only)
95.89/104 (05/95)
MUTUAL FUND PURCHASE AND SALES AGREEMENT
FOR ACCOUNTS OF BANK AND TRUST COMPANY CUSTOMERS
Effective: July 1, 1995
1. INTRODUCTION
The parties to this Agreement are a bank or trust company ("Bank") and
Franklin/Templeton Distributors, Inc. ("FTDI"). This Agreement sets forth the
terms and conditions under which FTDI will execute purchases and redemptions of
shares of the Franklin or Templeton mutual funds for which FTDI now or in the
future serves as principal underwriter ("Funds"), at the request of the Bank
upon the order and for the account of Bank's customers ("Customers"). In this
Agreement, "Customer" shall include the beneficial owners of an account and any
agent or attorney-in-fact duly authorized or appointed to act on the owners'
behalf with respect to the account. FTDI will notify Bank from time to time of
the Funds which are eligible for distribution and the terms of compensation
under this Agreement. This Agreement is not exclusive, and either party may
enter into similar agreements with third parties. This Agreement supersedes any
prior agreements between the parties, as stated in paragraph 6(j), below.
2. REPRESENTATIONS AND WARRANTIES OF BANK
Bank warrants and represents to FTDI and the Funds that:
a) Bank is a "bank" as defined in Section 3(a)(6) of the Securities and Exchange
Act of 1934, as amended (the "34 Act"):
"The term 'bank' means (A) a banking institution organized under the laws
of the United States, (B) a member bank of the Federal Reserve System, (C) any
other banking institution, whether incorporated or not, doing business under the
law of any State or of the United States, a substantial portion of the business
of which consists of receiving deposits or exercising a fiduciary power similar
to those permitted to national banks under the authority of the Comptroller of
the Currency pursuant to the first section of Public Law 87-722 (12 U.S.C. 92a),
and which is supervised and examined by State or Federal authority having
supervision over banks, and which is not operated for the purpose of evading the
provisions of this title, and (D) a receiver, conservator, or other liquidating
agent of any institution or firm included in clauses (A), (B) or (C) of this
paragraph."
b) Bank is authorized to enter into this Agreement, and Bank's performance of
its obligations and receipt of consideration under this Agreement will not
violate any law, regulation, charter, agreement, or regulatory restriction to
which Bank is subject.
c) Bank has received all regulatory agency approvals and taken all legal and
other steps necessary for offering the services Bank will provide to Customers
in connection with this Agreement.
3. REPRESENTATIONS AND WARRANTIES OF THE PRINCIPAL UNDERWRITER
FTDI warrants and represents to Bank that:
a) FTDI is a broker/dealer registered under the '34 Act.
b) FTDI is the principal underwriter of the Funds.
4. COVENANTS OF BANK
For each Transaction under this Agreement, Bank will:
a) be authorized to engage in the Transaction;
b) act as agent for the Customer;
c) act solely at the request of and for the account of the Customer;
d) not submit an order unless Bank has already received the order from the
Customer;
e) not submit a purchase order unless Bank has already delivered to the
Customer a copy of the then current prospectus for the Fund(s) whose
shares are to be purchased;
f) not withhold placing any Customer's order for the purpose of profiting from
the delay;
g) have no beneficial ownership of the securities in any purchase Transaction
(the Customer will have the full beneficial ownership), unless Bank is the
Customer (in which case, Bank will not engage in the Transaction unless the
Transaction is legally permissible for Bank); and
h) not accept or withhold any Fee otherwise allowed under Sections 5(d) and (e)
of this Agreement, if prohibited by the Employee Retirement Income Security Act
("ERISA") or trust or similar laws to which Bank is subject, in the case of
purchases or redemptions (hereinafter, "Transactions") of Fund shares involving
retirement plans, trusts, or similar accounts.
i) maintain records of all sales and redemptions of shares made through Bank and
to furnish FTDI with copies of such records on request.
j) distribute prospectuses, statements of additional information and reports to
Bank's customers in compliance with applicable legal requirements, except to the
extent that FTDI expressly undertakes to do so on behalf of Bank.
While this Agreement is in effect, Bank will:
k) not purchase any shares from any person at a price lower than the redemption
price then quoted by the applicable Fund;
l) repay FTDI the full Fee received by Bank under Sections 5(d) and (e) of this
Agreement, for any shares purchased under this Agreement which are repurchased
by the Fund within 7 business days after the purchase; in turn, FTDI shall pay
to the Fund the amount repaid by Bank and will notify Bank of any such
repurchase within a reasonable time;
m) in connection with orders for the purchase of shares on behalf of an
Individual Retirement Account, Self-Employed Retirement Plan or other retirement
accounts, by mail, telephone, or wire, Bank shall act as agent for the custodian
or trustee of such plans (solely with respect to the time of receipt of the
application and payments) and shall not place such an order until Bank has
received from its customer payment for such purchase and, if such purchase
represents the first contribution to such a plan, the completed documents
necessary to establish the plan. Bank agrees to indemnify FTDI and Franklin
Templeton Trust Company and/or Templeton Funds Trust Company as applicable for
any claim, loss, or liability resulting from incorrect investment instructions
received from Bank which cause a tax liability or other tax penalty.
n) be responsible for compliance with all laws and regulations, including those
of the applicable federal and state bank regulatory authorities, with regard to
Bank and Bank's Customers; and
o) immediately notify FTDI in writing at the address given below, should Bank
cease to be a bank as set forth in Section 2(a) of this Agreement.
5. TERMS AND CONDITIONS FOR TRANSACTIONS
a) Price
Transaction orders received from Bank will be accepted only at the public
offering price and in compliance with procedures applicable to each order as set
forth in the then current prospectus and statement of additional information
(hereinafter, collectively, "prospectus") for the applicable Fund. All orders
must be accompanied by payment in U.S. dollars. Orders payable by check must be
drawn payable in U.S. dollars on a U.S. bank, for the full amount of the
investment. All sales are made subject to receipt of shares by FTDI from the
Funds. FTDI reserves the right in its discretion, without notice, to suspend the
sale of shares or withdraw the offering of shares entirely.
b) Orders and Confirmations
All purchase orders are subject to acceptance or rejection by FTDI and by
the Fund or its transfer agent at their sole discretion, and become effective
only upon confirmation by FTDI. Transaction orders shall be made using the
procedures and forms required by FTDI from time to time. Orders received on any
business day after the time for calculating the price of Fund shares as set
forth in each Fund's current prospectus will be effected at the price determined
on the next business day. A written confirming statement will be sent to Bank
and to Customer upon settlement of each Transaction.
c) Multiple Class Guidelines
FTDI may from time to time provide to Bank written compliance guidelines
or standards relating to the sale or distribution of Funds offering multiple
classes of shares with different sales charges and distribution-related
operating expenses. In addition, Bank will be bound by any applicable rules or
regulations of government agencies or self-regulatory organizations generally
affecting the sale or distribution of mutual funds offering multiple classes of
shares.
d) Payments by Bank for Purchases
On the settlement date for each purchase, Bank shall either (i) remit the
full purchase price by wire transfer to an account designated by FTDI, or (ii)
following FTDI's procedures, wire the purchase price less the Fee allowed by
Section 5(e) of this Agreement. Twice monthly, FTDI will pay Bank Fees not
previously paid to or withheld by Bank. Each calendar month, FTDI, as
applicable, will prepare and mail an activity statement summarizing all
Transactions.
e) Fees and Payments
Where permitted by the prospectus for each Fund, a charge, concession, or
fee ("Fee") may be paid to Bank, related to services provided by Bank in
connection with Transactions. The amount of the Fee, if any, is set by the
relevant prospectus. Adjustments in the Fee are available for certain purchases,
and Bank is solely responsible for notifying FTDI when any purchase order is
qualified for such an adjustment. If Bank fails to notify FTDI of the
applicability of a reduction in the sales charge at the time the trade is
placed, neither FTDI nor any of the Funds will be liable for amounts necessary
to reimburse any investor for the reduction which should have been effected.
In accordance with the Funds' prospectuses, FTDI or its affiliates may,
but are not obligated to, make payments from their own resources to banks or
dealers as compensation for certain sales which are made at net asset value and
are not subject to any contingent deferred sales charges ("Qualifying Sales").
If Bank notifies FTDI of a Qualifying Sale, FTDI may make a contingent advance
payment up to the maximum amount available for payment on the sale. If any of
the shares purchased in a Qualifying Sale are redeemed within twelve months of
the end of the month of purchase, FTDI shall be entitled to recover any advance
payment attributable to the redeemed shares by reducing any account payable or
other monetary obligation FTDI may owe to Bank or by making demand upon Bank for
repayment in cash. FTDI reserves the right to withhold advances to any bank or
dealer, if for any reason it believes that it may not be able to recover
unearned advances from such bank or dealer. In addition, banks and dealers will
generally be required to enter into a supplemental agreement with FTDI with
respect to such compensation and the repayment obligation prior to receiving any
payments.
f) Rule 12b-1 Plans
Bank is also invited to participate in all Plans adopted by the Funds (the
"Plan Funds") pursuant to Rule 12b-1 under the 1940 Act.
To the extent Bank provides administrative and other services, including,
but not limited to, furnishing personal and other services and assistance to
Bank's customers who own shares of a Plan Fund, answering routine inquiries
regarding a Fund, assisting in changing account designations and addresses,
maintaining such accounts or such other services as a Fund may require, to the
extent permitted by applicable statutes, rules, or regulations, FTDI shall pay
Bank Rule 12b-1 fees. All Rule 12b-1 fees shall be based on the value of shares
attributable to customers of Bank and eligible for such payment, and shall be
calculated on the basis and at the rates set forth in the compensation schedule
then in effect. Without prior approval by a majority of the outstanding shares
of a Fund, the aggregate annual fees paid to Bank pursuant to each Plan shall
not exceed the amounts stated as the "annual maximums" in each Fund's
prospectus, which amount shall be a specified percent of the value of the Fund's
net assets held in Bank's customers' accounts which are eligible for payment
pursuant to this Agreement (determined in the same manner as each Fund uses to
compute its net assets as set forth in its effective Prospectus).
Bank shall furnish FTDI and each Fund with such information as shall
reasonably be requested by the Board of Directors, Trustees or Managing General
Partners (hereinafter referred to as "Directors") of such Funds with respect to
the fees paid to Bank pursuant to the Schedule. FTDI shall furnish to the Boards
of Directors of the Plan Funds, for their review on a quarterly basis, a written
report of the amounts expended under the Plans and the purposes for which such
expenditures were made.
The Plans and provisions of any agreement relating to such Plans must be
approved annually by a vote of the Plan Funds' Directors, including such persons
who are not interested persons of the Plan Funds and who have no financial
interest in the Plans or any related agreement ("Rule 12b-1 Directors"). The
Plans or the provisions of this Agreement relating to such Plans may be
terminated at any time by the vote of a majority of the Plan Funds' Boards of
Directors, including Rule 12b-1 Directors, or by a vote of a majority of the
outstanding shares of the Plan Funds, on sixty (60) days' written notice,
without payment of any penalty. The Plans or the provisions of this Agreement
may also be terminated by any act that terminates the Underwriting Agreement
between FTDI and the Plan Funds, and/or the management or administration
agreement between Franklin Advisers, Inc. or Templeton Investment Counsel, Inc.
or their affiliates and the Plan Funds. In the event of the termination of the
Plans for any reason, the provisions of this Agreement relating to the Plans
will also terminate.
Continuation of the Plans and provisions of this Agreement relating to
such Plans are conditioned on Rule 12b-1 Directors being ultimately responsible
for selecting and nominating any new Rule 12b-1 Directors. Under Rule 12b-1,
Directors of any of the Plan Funds have a duty to request and evaluate, and
persons who are party to any agreement related to a Plan have a duty to furnish,
such information as may reasonably be necessary to an informed determination of
whether the Plan or any agreement should be implemented or continued. Under Rule
12b-1, Plan Funds are permitted to implement or continue Plans or the provisions
of this Agreement relating to such Plans from year-to-year only if, based on
certain legal considerations, the Boards of Directors are able to conclude that
the Plans will benefit the Plan Funds. Absent such yearly determination, the
Plans and the provisions of this Agreement relating to the Plans must be
terminated as set forth above. In addition, any obligation assumed by a Fund
pursuant to this Agreement shall be limited in all cases to the assets of such
Fund and no person shall seek satisfaction thereof from shareholders of a Fund.
Bank agrees to waive payment of any amounts payable to Bank by FTDI under a
Fund's Plan of Distribution pursuant to Rule 12b-1 until such time as FTDI is in
receipt of such fee from the Fund.
The provisions of the Rule 12b-1 Plans between the Plan Funds and FTDI,
insofar as they relate to Plans, shall control over the provisions of this
Agreement in the event of any inconsistency.
g) Other Distribution Services
From time to time, FTDI may offer telephone and other augmented services
in connection with Transactions under this Agreement. If Bank uses any such
service, Bank will be subject to the procedures applicable to the service,
whether or not Bank has executed any agreement required for the service.
h) Conditional Orders; Certificates
FTDI will not accept any conditional Transaction orders. Delivery of
certificates or confirmations for shares purchased shall be made by the Fund
conditional upon receipt of the purchase price, subject to deduction of any Fee.
No certificates will be issued unless specifically requested.
i) Cancellation of Orders
If payment for shares purchased is not received within the time customary
or the time required by law for such payment, the sale may be canceled without
notice or demand, and neither FTDI nor the Fund(s) shall have any responsibility
or liability for such a cancellation; alternatively, the unpaid shares may be
sold back to the Fund, and Bank shall be liable for any resulting loss to FTDI
or to the Fund(s). FTDI shall have no liability for any check or other item
returned unpaid to Bank after Bank has paid FTDI on behalf of a purchaser. FTDI
may refuse to liquidate the investment unless it receives the purchaser's signed
authorization for the liquidation.
j) Order Corrections
Bank shall assume responsibility for any loss to a Fund(s) caused by a
correction made subsequent to trade date, provided such correction was not based
on any error, omission or negligence on FTDI's part, and Bank will immediately
pay such loss to the Fund(s) upon notification.
k) Redemptions; Cancellation
Redemptions or repurchases of shares will be made at the net asset value
of such shares, less any applicable deferred sales or redemption charges, in
accordance with the applicable prospectuses. As agent, Bank may sell shares for
the account of the record owner to the Funds at the repurchase price then
currently in effect for such shares and may charge the owner a fair fee for
handling the transaction. If on a redemption which Bank has ordered,
instructions in proper form, including outstanding certificates, are not
received within the time customary or the time required by law, the redemption
may be canceled forthwith without any responsibility or liability on the part of
FTDI or any Fund, or at its option FTDI may buy the shares redeemed on behalf of
the Fund, in which latter case it may hold Bank responsible for any loss to the
Fund or loss of profit suffered by FTDI resulting from Bank's failure to settle
the redemption.
l) Exchanges
Telephone exchange orders will be effective only for shares in plan
balance (uncertificated shares) or for which share certificates have been
previously deposited and may be subject to any fees or other restrictions set
forth in the applicable prospectuses. Bank may charge the shareholder a fair fee
for handling an exchange transaction. Exchanges from a Fund sold with no sales
charge to a Fund which carries a sales charge, and exchanges from a Fund sold
with a sales charge to a Fund which carries a higher sales charge may be subject
to a sales charge in accordance with the terms of each Fund's prospectus. Bank
will be obligated to comply with any additional exchange policies described in
each Fund's prospectus, including without limitation any policy restricting or
prohibiting "Timing Accounts" as therein defined.
m) Qualification of Shares; Indemnification
Upon request, FTDI shall notify Bank of the states or other jurisdictions
in which each Fund's shares are currently registered or qualified for sale to
the public. FTDI shall have no obligation to register or qualify, or to maintain
registration or qualification of, Fund shares in any state or other
jurisdiction. FTDI shall have no responsibility, under the laws regulating the
sale of securities in any U.S. or foreign jurisdiction, for the qualification or
status of persons selling Fund shares or for the manner of sale of Fund shares.
Except as stated in this paragraph, FTDI shall not, in any event, be liable or
responsible for the issue, form, validity, enforceability and value of such
shares or for any matter in connection therewith, and no obligation not
expressly assumed by FTDI in this Agreement shall be implied. If it is necessary
to register or qualify shares of any Fund in any foreign jurisdictions in which
Bank intends to offer such shares, it will be Bank's responsibility to arrange
for and to pay the costs of such registration or qualification; prior to any
such registration or qualification Bank will notify FTDI of its intent and of
any limitations that might be imposed on the Funds and Bank agrees not to
proceed with such registration or qualification without the written consent of
the Funds and of FTDI.
Bank further agrees to indemnify, defend and hold harmless the Principal
Underwriter, the Funds, their officers, directors and employees from any and all
losses, claims, liabilities and expenses, arising out of (1) any alleged
violation of any statute or regulation (including without limitation the
securities laws and regulations of the United States or any state or foreign
country) or any alleged tort or breach of contract, in or related to the offer
and sale by Bank of shares of the Funds pursuant to this Agreement (except to
the extent that FTDI's negligence or failure to follow correct instructions
received from Bank is the cause of such loss, claim, liability or expense), (2)
any redemption or exchange pursuant to telephone instructions received from Bank
or its agents or employees, or (3) the breach by Bank of any of the terms and
conditions of this Agreement.
However, nothing in this Agreement shall be deemed to be a condition,
stipulation, or provision binding any person acquiring any security to waive
compliance with any provision of the Securities Act of 1933, or of the rules and
regulations of the Securities and Exchange Commission, or to relieve the parties
hereto from any liability arising under the Securities Act of 1933.
n) Prospectus and Sales Materials; Limit on Advertising
No person is authorized to give any information or make any
representations concerning shares of any Fund except those contained in the
Fund's current prospectus or in materials issued by FTDI as information
supplemental to such prospectus. FTDI will supply prospectuses, reasonable
quantities of supplemental sale literature, sales bulletins, and additional
information as issued. Bank agrees not to use other advertising or sales
material relating to the Funds except that which (a) conforms to the
requirements of any applicable laws or regulations of any government or
authorized agency in the U.S. or any other country, having jurisdiction over the
offering or sale of shares of the Funds, and (b) is approved in writing by FTDI
in advance of such use. Such approval may be withdrawn by FTDI in whole or in
part upon notice to Bank, and Bank shall, upon receipt of such notice,
immediately discontinue the use of such sales literature, sales material and
advertising. Bank is not authorized to modify or translate any such materials
without the prior written consent of FTDI.
o) Customer Information
(1) Definition. For purposes of this paragraph 5(h)(iv), 'Customer
Information' means customer names and other identifying information pertaining
to Bank's mutual fund customers which is furnished by Bank to FTDI in the
ordinary course of business under this Agreement. Customer Information shall not
include any information obtained from other sources.
(2) Permitted Uses. FTDI may use Customer Information to fulfill its
obligations under this Agreement, the Distribution Agreements between the Funds
and FTDI, the Funds' prospectuses, or other duties imposed by law. In addition,
FTDI or its affiliates may use Customer Information in communications to
shareholders to market the Funds or other investment products or services,
including without limitation variable annuities, variable life insurance, and
retirement plans and related services. FTDI may also use Customer Information if
it obtains Bank's prior written consent.
(3) Prohibited Uses. Except as stated above, FTDI shall not disclose
Customer Information to third parties, and shall not use Customer Information in
connection with any advertising, marketing or solicitation of any products or
services, provided that Bank offers or soon expect to offer comparable products
or services to mutual fund customers and have so notified FTDI.
(4) Survival; Termination. The agreements described in this paragraph
5(h)(iv) shall survive the termination of this Agreement, but shall terminate as
to any account upon FTDI's receipt of valid notification of either the
termination of that account with Bank or the transfer of that account to another
bank or dealer.
6. GENERAL
a) Successors and Assignments
This Agreement binds Bank and FTDI and their respective heirs, successors
and assigns. Bank may not assign its right and duties under this Agreement
without the advance, written authorization of FTDI.
b) Paragraph Headings
The paragraph headings of this Agreement are for convenience only, and
shall not be deemed to define, limit, or describe the scope or intent of this
Agreement.
c) Severability
Should any provision of this Agreement be determined to be invalid or
unenforceable under any law, rule, or regulation, that determination shall not
affect the validity or enforceability of any other provision of this Agreement.
d) Waivers
There shall be no waiver of any provision of this Agreement except a
written waiver signed by Bank and FTDI. No written waiver shall be deemed a
continuing waiver or a waiver of any other provision, unless the waiver
expresses such intention.
e) Sole Agreement
This Agreement is the entire agreement of Bank and FTDI and supersedes all
oral negotiations and prior writings.
f) Governing Law
This Agreement shall be construed in accordance with the laws of the State
of California, not including any provision which would require the general
application of the law of another jurisdiction, and shall be binding upon the
parties hereto when signed by FTDI and accepted by Bank, either by Bank's
signature in the space provided below or by Bank's first trade entered after
receipt of this Agreement.
g) Arbitration
Should any of Bank's concession accounts with FTDI have a debit balance,
FTDI may offset and recover the amount owed from any other account Bank has with
FTDI, without notice or demand to Bank. Either party may submit any dispute
under this Agreement to binding arbitration under the commercial arbitration
rules of the American Arbitration Association. Judgment upon any arbitration
award may be entered by any state or federal court having jurisdiction.
h) Amendments
FTDI may amend this Agreement at any time by depositing a written notice
of the amendment in the U.S. mail, first class postage pre-paid, addressed to
Bank's address given below. Bank's placement of any Transaction order or
acceptance of any payments after the effective date and receipt of notice of any
such amendment shall constitute Bank's acceptance of the amendment.
i) Term and Termination
This Agreement shall continue in effect until terminated. FTDI or Bank may
terminate this Agreement at any time by written notice to the other, but such
termination shall not affect the payment or repayment of Fees on Transactions
prior to the termination date. Termination also will not affect the indemnities
given under this Agreement.
j) Acceptance; Cumulative Effect
This Agreement is cumulative and supersedes any agreement previously in
effect. It shall be binding upon the parties hereto when signed by FTDI and
accepted by Bank. If Bank has a current agreement with FTDI, Bank's first trade
or acceptance of payments from FTDI after receipt of this Agreement, as it may
be amended pursuant to paragraph 6(h), above, shall constitute Bank's acceptance
of the terms of this Agreement. Otherwise, Bank's signature below shall
constitute Bank's acceptance of these terms.
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By:
Greg Johnson, President
777 Mariners Island Blvd. San Mateo, CA 94404 Attention: Chief Legal Officer
(for legal notices only)
415/312-2000
700 Central Avenue St. Petersburg, Florida 33701-3628
813/823-8712
To the Bank or Trust Company: If you have not previously signed an agreement
with us for the sale of mutual fund shares to your customers, please complete
and sign this section and return the original to us.
BANK or TRUST COMPANY
(Firm's name)
By:
(Signature)
Name:
Title:Address:
Telephone:
MASTER CUSTODY AGREEMENT
THIS CUSTODY AGREEMENT ("Agreement") is made and entered into as of
February 16, 1996, by and between each Investment Company listed on Exhibit A,
for itself and for each of its Series listed on Exhibit A, and BANK OF NEW YORK,
a New York corporation authorized to do a banking business (the "Custodian").
RECITALS
A. Each Investment Company is an investment company registered under
the Investment Company Act of 1940, as amended (the "Investment Company Act")
that invests and reinvests, for itself or on behalf of its Series, in Domestic
Securities and Foreign Securities.
B. The Custodian is, and has represented to each Investment Company
that the Custodian is, a "bank" as that term is defined in Section 2(a)(5) of
the Investment Company Act of 1940, as amended, and is eligible to receive and
maintain custody of investment company assets pursuant to Section 17(f) and Rule
17f-2 thereunder.
C. The Custodian and each Investment Company, for itself and for
each of its Series, desire to provide for the retention of the Custodian as a
custodian of the assets of each Investment Company and each Series, on the terms
and subject to the provisions set forth herein.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and
agreements contained herein, and for other good and valuable consideration, the
receipt and adequacy of which are hereby acknowledged, the parties hereto agree
as follows:
Section 1.0 FORM OF AGREEMENT
Although the parties have executed this Agreement in the form of a
Master Custody Agreement for administrative convenience, this Agreement shall
create a separate custody agreement for each Investment Company and for each
Series designated on Exhibit A, as though each Investment Company had separately
executed an identical custody agreement for itself and for each of its Series.
No rights, responsibilities or liabilities of any Investment Company or Series
shall be attributed to any other Investment Company or Series.
Section 1.1 DEFINITIONS
For purposes of this Agreement, the following terms shall have the
respective meanings specified below:
"Agreement" shall mean this Custody Agreement.
"Board" shall mean the Board of Trustees, Directors or Managing
General Partners, as applicable, of an Investment Company.
"Business Day" with respect to any Domestic Security means any day,
other than a Saturday or Sunday, that is not a day on which banking institutions
are authorized or required by law to be closed in The City of New York and, with
respect to Foreign Securities, a London Business Day. "London Business Day"
shall mean any day on which dealings and deposits in U.S. dollars are transacted
in the London interbank market.
"Custodian" shall mean Bank of New York.
"Domestic Securities" shall have the meaning provided in Subsection
2.1 hereof.
"Executive Committee" shall mean the executive committee of a Board.
"Foreign Custodian" shall have the meaning provided in Section 4.1
hereof.
"Foreign Securities" shall have the meaning provided in Section 2.1
hereof.
"Foreign Securities Depository" shall have the meaning provided in
Section 4.1 hereof.
"Fund" shall mean an entity identified on Exhibit A as an Investment
Company, if the Investment Company has no series, or a Series.
"Investment Company" shall mean an entity identified on Exhibit A
under the heading "Investment Company."
"Investment Company Act" shall mean the Investment Company Act of
1940, as amended.
"Securities" shall have the meaning provided in Section 2.1 hereof.
"Securities System" shall have the meaning provided in Section 3.1
hereof.
"Securities System Account" shall have the meaning provided in
Subsection 3.8(a) hereof.
"Series" shall mean a series of an Investment Company which is
identified as such on Exhibit A.
"Shares" shall mean shares of beneficial interest of the Investment
Company.
"Subcustodian" shall have the meaning provided in Subsection 3.7
hereof, but shall not include any Foreign Custodian.
"Transfer Agent" shall mean the duly appointed and acting transfer
agent for each Investment Company.
"Writing" shall mean a communication in writing, a communication by
telex, facsimile transmission, bankwire or other teleprocess or electronic
instruction system acceptable to the Custodian.
Section 2. APPOINTMENT OF CUSTODIAN; DELIVERY OF ASSETS
2.1 Appointment of Custodian. Each Investment Company hereby
appoints and designates the Custodian as a custodian of the assets of each Fund,
including cash denominated in U.S. dollars or foreign currency ("cash"),
securities the Fund desires to be held within the United States ("Domestic
Securities") and securities it desires to be held outside the United States
("Foreign Securities"). Domestic Securities and Foreign Securities are sometimes
referred to herein, collectively, as "Securities." The Custodian hereby accepts
such appointment and designation and agrees that it shall maintain custody of
the assets of each Fund delivered to it hereunder in the manner provided for
herein.
2.2 Delivery of Assets. Each Investment Company may deliver to the
Custodian Securities and cash owned by the Funds, payments of income, principal
or capital distributions received by the Funds with respect to Securities owned
by the Funds from time to time, and the consideration received by the Funds for
such Shares or other securities of the Funds as may be issued and sold from time
to time. The Custodian shall have no responsibility whatsoever for any property
or assets of the Funds held or received by the Funds and not delivered to the
Custodian pursuant to and in accordance with the terms hereof. All Securities
accepted by the Custodian on behalf of the Funds under the terms of this
Agreement shall be in "street name" or other good delivery form as determined by
the Custodian.
2.3 Subcustodians. The Custodian may appoint BNY Western Trust
Company as a Subcustodian to hold assets of the Funds in accordance with the
provisions of this Agreement. In addition, upon receipt of Proper Instructions
and a certified copy of a resolution of the Board or of the Executive Committee,
and certified by the Secretary or an Assistant Secretary, of an Investment
Company, the Custodian may from time to time appoint one or more other
Subcustodians or Foreign Custodians to hold assets of the affected Funds in
accordance with the provisions of this Agreement.
2.4 No Duty to Manage. The Custodian, a Subcustodian or a Foreign
Custodian shall not have any duty or responsibility to manage or recommend
investments of the assets of any Fund held by them or to initiate any purchase,
sale or other investment transaction in the absence of Proper Instructions or
except as otherwise specifically provided herein.
Section 3. DUTIES OF THE CUSTODIAN WITH RESPECT TO ASSETS OF THE FUNDS HELD
BY THE CUSTODIAN
3.1 Holding Securities. The Custodian shall hold and physically
segregate from any property owned by the Custodian, for the account of each
Fund, all non-cash property delivered by each Fund to the Custodian hereunder
other than Securities which, pursuant to Subsection 3.8 hereof, are held through
a registered clearing agency, a registered securities depository, the Federal
Reserve's book-entry securities system (referred to herein, individually, as a
"Securities System"), or held by a Subcustodian, Foreign Custodian or in a
Foreign Securities Depository.
3.2 Delivery of Securities. Except as otherwise provided in
Subsection 3.5 hereof, the Custodian, upon receipt of Proper Instructions, shall
release and deliver Securities owned by a Fund and held by the Custodian in the
following cases or as otherwise directed in Proper Instructions:
(a) except as otherwise provided herein, upon sale of such
Securities for the account of the Fund and receipt by the Custodian, a
Subcustodian or a Foreign Custodian of payment therefor;
(b) upon the receipt of payment by the Custodian, a
Subcustodian or a Foreign Custodian in connection with any repurchase agreement
related to such Securities entered into by the Fund;
(c) in the case of a sale effected through a Securities
System, in accordance with the provisions of Subsection 3.8 hereof;
(d) to a tender agent or other authorized agent in connection
with (i) a tender or other similar offer for Securities owned by the Fund, or
(ii) a tender offer or repurchase by the Fund of its own Shares;
(e) to the issuer thereof or its agent when such Securities
are called, redeemed, retired or otherwise become payable; provided, that in any
such case, the cash or other consideration is to be delivered to the Custodian,
a Subcustodian or a Foreign Custodian;
(f) to the issuer thereof, or its agent, for transfer into the
name or nominee name of the Fund, the name or nominee name of the Custodian, the
name or nominee name of any Subcustodian or Foreign Custodian; or for exchange
for a different number of bonds, certificates or other evidence representing the
same aggregate face amount or number of units; provided that, in any such case,
the new Securities are to be delivered to the Custodian, a Subcustodian or
Foreign Custodian;
(g) to the broker selling the same for examination in
accordance with the "street delivery" custom;
(h) for exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, or reorganization of the issuer of such
Securities, or pursuant to a conversion of such Securities; provided that, in
any such case, the new Securities and cash, if any, are to be delivered to the
Custodian or a Subcustodian;
(i) in the case of warrants, rights or similar securities, the
surrender thereof in connection with the exercise of such warrants, rights or
similar Securities or the surrender of interim receipts or temporary Securities
for definitive Securities; provided that, in any such case, the new Securities
and cash, if any, are to be delivered to the Custodian, a subcustodian or a
Foreign Custodian;
(j) for delivery in connection with any loans of Securities
made by the Fund, but only against receipt by the Custodian, a Subcustodian or a
Foreign Custodian of adequate collateral as determined by the Fund (and
identified in Proper Instructions communicated to the Custodian), which may be
in the form of cash or obligations issued by the United States government, its
agencies or instrumentalities, except that in connection with any loans for
which collateral is to be credited to the account of the Custodian, a
Subcustodian or a Foreign Custodian in the Federal Reserve's book-entry
securities system, the Custodian will not be held liable or responsible for the
delivery of Securities owned by the Fund prior to the receipt of such
collateral;
(k) for delivery as security in connection with any borrowings
by the Fund requiring a pledge of assets by the Fund, but only against receipt
by the Custodian, a Subcustodian or a Foreign Custodian of amounts borrowed;
(l) for delivery in accordance with the provisions of any
agreement among the Fund, the Custodian, a Subcustodian or a Foreign Custodian
and a broker-dealer relating to compliance with the rules of registered clearing
corporations and of any registered national securities exchange, or of any
similar organization or organizations, regarding escrow or other arrangements in
connection with transactions by the Fund;
(m) for delivery in accordance with the provisions of any
agreement among the Fund, the Custodian, a Subcustodian or a Foreign Custodian
and a futures commission merchant, relating to compliance with the rules of the
Commodity Futures Trading Commission and/or any contract market, or any similar
organization or organizations, regarding account deposits in connection with
transactions by the Fund;
(n) upon the receipt of instructions from the Transfer Agent
for delivery to the Transfer Agent or to the holders of Shares in connection
with distributions in kind in satisfaction of requests by holders of Shares for
repurchase or redemption; and
(o) for any other proper purpose, but only upon receipt of
Proper Instructions, and a certified copy of a resolution of the Board or of the
Executive Committee certified by the Secretary or an Assistant Secretary of the
Fund, specifying the securities to be delivered, setting forth the purpose for
which such delivery is to be made, declaring such purpose to be a proper
purpose, and naming the person or persons to whom delivery of such securities
shall be made.
3.3 Registration of Securities. Securities held by the Custodian, a
Subcustodian or a Foreign Custodian (other than bearer Securities) shall be
registered in the name or nominee name of the appropriate Fund, in the name or
nominee name of the Custodian or in the name or nominee name of any Subcustodian
or Foreign Custodian. Each Fund agrees to hold the Custodian, any such nominee,
Subcustodian or Foreign Custodian harmless from any liability as a holder of
record of such Securities.
3.4 Bank Accounts. The Custodian shall open and maintain a separate
bank account or accounts for each Fund, subject only to draft or order by the
Custodian acting pursuant to the terms of this Agreement, and shall hold in such
account or accounts, subject to the provisions hereof, all cash received by it
hereunder from or for the account of each Fund, other than cash maintained by a
Fund in a bank account established and used in accordance with Rule 17f-3 under
the Fund Act. Funds held by the Custodian for a Fund may be deposited by it to
its credit as Custodian in the banking departments of the Custodian, a
Subcustodian or a Foreign Custodian. Such funds shall be deposited by the
Custodian in its capacity as Custodian and shall be withdrawable by the
Custodian only in that capacity. In the event a Fund's account for any reason
becomes overdrawn, or in the event an action requested in Proper Instructions
would cause such an account to become overdrawn, the Custodian shall immediately
notify the affected Fund.
3.5 Collection of Income; Trade Settlement; Crediting of Accounts.
The Custodian shall collect income payable with respect to Securities owned by
each Fund, settle Securities trades for the account of each Fund and credit and
debit each Fund's account with the Custodian in connection therewith as stated
in this Subsection 3.5. This Subsection shall not apply to repurchase
agreements, which are treated in Subsection 3.2(b), above.
(a) Upon receipt of Proper Instructions, the Custodian shall
effect the purchase of a Security by charging the account of the Fund on the
contractual settlement date, and by making payment against delivery. If the
seller or selling broker fails to deliver the Security within a reasonable
period of time, the Custodian shall notify the Fund and credit the transaction
amount to the account of the Fund, but the Custodian shall have no further
liability or responsibility for the transaction.
(b) Upon receipt of Proper Instructions, the Custodian shall
effect the sale of a Security by withdrawing a certificate or other indicia of
ownership from the account of the Fund and by making delivery against payment,
and shall credit the account of the Fund with the amount of such proceeds on the
contractual settlement date. If the purchaser or the purchasing broker fails to
make payment within a reasonable period of time, the Custodian shall notify the
Fund, debit the Fund's account for any amounts previously credited to it by the
Custodian as proceeds of the transaction and, if delivery has not been made,
redeposit the Security into the account of the Fund.
(c) The Fund is responsible for ensuring that the Custodian
receives timely and accurate Proper Instructions to enable the Custodian to
effect settlement of any purchase or sale. If the Custodian does not receive
such instructions within the required time period, the Custodian shall have no
liability of any kind to any person, including the Fund, for failing to effect
settlement on the contractual settlement date. However, the Custodian shall use
its best reasonable efforts to effect settlement as soon as possible after
receipt of Proper Instructions.
(d) The Custodian shall credit the account of the Fund with
interest income payable on interest bearing Securities on payable date.
Dividends and other amounts payable with respect to Domestic Securities and
Foreign Securities shall be credited to the account of the Fund when received by
the Custodian. The Custodian shall not be required to commence suit or
collection proceedings or resort to any extraordinary means to collect such
income and other amounts payable with respect to Securities owned by the Fund.
The collection of income due the Fund on Domestic Securities loaned pursuant to
the provisions of Subsection 3.2(j) shall be the responsibility of the Fund. The
Custodian will have no duty or responsibility in connection therewith, other
than to provide the Fund with such information or data as may be necessary to
assist the Fund in arranging for the timely delivery to the Custodian of the
income to which the Fund is entitled. The Custodian shall have no liability to
any person, including the Fund, if the Custodian credits the account of the Fund
with such income or other amounts payable with respect to Securities owned by
the Fund (other than Securities loaned by the Fund pursuant to Subsection 3.2(j)
hereof) and the Custodian subsequently is unable to collect such income or other
amounts from the payors thereof within a reasonable time period, as determined
by the Custodian in its sole discretion. In such event, the Custodian shall be
entitled to reimbursement of the amount so credited to the account of the Fund.
3.6 Payment of Fund Monies. Upon receipt of Proper Instructions
the Custodian shall pay out monies of a Fund in the following cases or as
otherwise directed in Proper Instructions:
(a) upon the purchase of Securities, futures contracts or
options on futures contracts for the account of the Fund but only, except as
otherwise provided herein, (i) against the delivery of such securities, or
evidence of title to futures contracts or options on futures contracts, to the
Custodian or a Subcustodian registered pursuant to Subsection 3.3 hereof or in
proper form for transfer; (ii) in the case of a purchase effected through a
Securities System, in accordance with the conditions set forth in Subsection 3.8
hereof; or (iii) in the case of repurchase agreements entered into between the
Fund and the Custodian, another bank or a broker-dealer (A) against delivery of
the Securities either in certificated form to the Custodian or a Subcustodian or
through an entry crediting the Custodian's account at the appropriate Federal
Reserve Bank with such Securities or (B) against delivery of the confirmation
evidencing purchase by the Fund of Securities owned by the Custodian or such
broker-dealer or other bank along with written evidence of the agreement by the
Custodian or such broker-dealer or other bank to repurchase such Securities from
the Fund;
(b) in connection with conversion, exchange or surrender of
Securities owned by the Fund
as set forth in Subsection 3.2 hereof;
(c) for the redemption or repurchase of Shares issued by the
Fund;
(d) for the payment of any expense or liability incurred by
the Fund, including but not limited to the following payments for the account of
the Fund: custodian fees, interest, taxes, management, accounting, transfer
agent and legal fees and operating expenses of the Fund whether or not such
expenses are to be in whole or part capitalized or treated as deferred expenses;
and
(e) for the payment of any dividends or distributions
declared by the Board with respect to the Shares.
3.7 Appointment of Subcustodians. The Custodian may appoint BNY
Western Trust Company or, upon receipt of Proper Instructions, another bank or
trust company, which is itself qualified under the Investment Company Act to act
as a custodian (a "Subcustodian"), as the agent of the Custodian to carry out
such of the duties of the Custodian hereunder as a Custodian may from time to
time direct; provided, however, that the appointment of any Subcustodian shall
not relieve the Custodian of its responsibilities or liabilities hereunder.
3.8 Deposit of Securities in Securities Systems. The Custodian may
deposit and/or maintain Domestic Securities owned by a Fund in a Securities
System in accordance with applicable Federal Reserve Board and Securities and
Exchange Commission rules and regulations, if any, and subject to the following
provisions:
(a) the Custodian may hold Domestic Securities of the Fund in
the Depository Trust Company or the Federal Reserve's book entry system or, upon
receipt of Proper Instructions, in another Securities System provided that such
securities are held in an account of the Custodian in the Securities System
("Securities System Account") which shall not include any assets of the
Custodian other than assets held as a fiduciary, custodian or otherwise for
customers;
(b) the records of the Custodian with respect to Domestic
Securities of the Fund which are maintained in a Securities System shall
identify by book-entry those Domestic Securities belonging to the Fund;
(c) the Custodian shall pay for Domestic Securities purchased
for the account of the Fund upon (i) receipt of advice from the Securities
System that such securities have been transferred to the Securities System
Account, and (ii) the making of an entry on the records of the Custodian to
reflect such payment and transfer for the account of the Fund. The Custodian
shall transfer Domestic Securities sold for the account of the Fund upon (A)
receipt of advice from the Securities System that payment for such securities
has been transferred to the Securities System Account, and (B) the making of an
entry on the records of the Custodian to reflect such transfer and payment for
the account of the Fund. Copies of all advices from the Securities System of
transfers of Domestic Securities for the account of the Fund shall be maintained
for the Fund by the Custodian and be provided to the Fund at its request. Upon
request, the Custodian shall furnish the Fund confirmation of the transfer to or
from the account of the Fund in the form of a written advice or notice; and
(d) upon request, the Custodian shall provide the Fund with
any report obtained by the Custodian on the Securities System's accounting
system, internal accounting control and procedures for safeguarding domestic
securities deposited in the Securities System.
3.9 Segregated Account. The Custodian shall upon receipt of Proper
Instructions establish and maintain a segregated account or accounts for and on
behalf of a Fund, into which account or accounts may be transferred cash and/or
Securities, including Securities maintained in an account by the Custodian
pursuant to Section 3.8 hereof, (i) in accordance with the provisions of any
agreement among the Fund, the Custodian and a broker-dealer or futures
commission merchant, relating to compliance with the rules of registered
clearing corporations and of any national securities exchange (or the Commodity
Futures Trading Commission or any registered contract market), or of any similar
organization or organizations, regarding escrow or other arrangements in
connection with transactions by the Fund, (ii) for purposes of segregating cash
or securities in connection with options purchased, sold or written by the Fund
or commodity futures contracts or options thereon purchased or sold by the Fund,
and (iii) for other proper corporate purposes, but only, in the case of this
clause (iii), upon receipt of, in addition to Proper Instructions, a certified
copy of a resolution of the Board or of the Executive Committee certified by the
Secretary or an Assistant Secretary, setting forth the purpose or purposes of
such segregated account and declaring such purposes to be proper corporate
purposes.
3.10 Ownership Certificates for Tax Purposes. The Custodian shall
execute ownership and other certificates and affidavits for all federal and
state tax purposes in connection with receipt of income or other payments with
respect to domestic securities of each Fund held by it and in connection with
transfers of such securities.
3.11 Proxies. The Custodian shall, with respect to the Securities
held hereunder, promptly deliver to each Fund all proxies, all proxy soliciting
materials and all notices relating to such Securities. If the Securities are
registered otherwise than in the name of a Fund or a nominee of a Fund, the
Custodian shall use its best reasonable efforts, consistent with applicable law,
to cause all proxies to be promptly executed by the registered holder of such
Securities in accordance with Proper Instructions.
3.12 Communications Relating to Fund Portfolio Securities. The
Custodian shall transmit promptly to each Fund all written information
(including, without limitation, pendency of calls and maturities of Securities
and expirations of rights in connection therewith and notices of exercise of put
and call options written by the Fund and the maturity of futures contracts
purchased or sold by the Fund) received by the Custodian from issuers of
Securities being held for the Fund. With respect to tender or exchange offers,
the Custodian shall transmit promptly to each Fund all written information
received by the Custodian from issuers of the Securities whose tender or
exchange is sought and from the party (or its agents) making the tender or
exchange offer. If a Fund desires to take action with respect to any tender
offer, exchange offer or any other similar transaction, the Fund shall notify
the Custodian at least three Business Days prior to the date of which the
Custodian is to take such action.
3.13 Reports by Custodian. The Custodian shall each business day
furnish each 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, the
Custodian shall furnish each Fund with a list of the cash and portfolio
securities showing the quantity of the 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. The Custodian shall furnish such other reports as may be mutually
agreed upon from time-to-time.
Section 4. CERTAIN DUTIES OF THE CUSTODIAN WITH RESPECT TO ASSETS OF THE
FUNDS HELD OUTSIDE THE UNITED STATES
4.1 Custody Outside the United States. Each Fund authorizes the
Custodian to hold Foreign Securities and cash in custody accounts which have
been established by the Custodian with (i) its foreign branches, (ii) foreign
banking institutions, foreign branches of United States banks and subsidiaries
of United States banks or bank holding companies (each a "Foreign Custodian")
and (iii) Foreign Securities depositories or clearing agencies (each a "Foreign
Securities Depository"); provided, however, that the appropriate Board or
Executive Committee has approved in advance the use of each such Foreign
Custodian and Foreign Securities Depository and the contract between the
Custodian and each Foreign Custodian and that such approval is set forth in
Proper Instructions and a certified copy of a resolution of the Board or of the
Executive Committee certified by the Secretary or an Assistant Secretary of the
appropriate Investment Company. Unless expressly provided to the contrary in
this Section 4, custody of Foreign Securities and assets held outside the United
States by the Custodian, a Foreign Custodian or through a Foreign Securities
Depository shall be governed by this Agreement, including Section 3 hereof.
4.2 Assets to be Held. The Custodian shall limit the securities and
other assets maintained in the custody of its foreign branches, Foreign
Custodians and Foreign Securities Depositories to: (i) "foreign securities", as
defined in paragraph (c) (1) of Rule 17f-5 under the Fund Act, and (ii) cash and
cash equivalents in such amounts as the Custodian or an affected Fund may
determine to be reasonably necessary to effect the Fund's Foreign Securities
transactions.
4.3 Omitted.
4.4 Segregation of Securities. The Custodian shall identify on its
books and records as belonging to the appropriate Fund, the Foreign Securities
of each Fund held by each Foreign Custodian.
4.5 Agreements with Foreign Custodians. Each agreement between the
Custodian and a Foreign Custodian shall be substantially in the form as
delivered to the Investment Companies for their Boards' review, and shall not be
amended in a way that materially adversely affects any Fund without the prior
written consent of the Fund. Upon request, the Custodian shall certify to the
Funds that an agreement between the Custodian and a Foreign Custodian meets the
requirements of Rule 17f-5 under the 1940 Act.
4.6 Access of Independent Accountants of the Funds. Upon request of
a Fund, the Custodian will use its best reasonable efforts to arrange for the
independent accountants or auditors of the Fund to be afforded access to the
books and records of any Foreign Custodian insofar as such books and records
relate to the custody by any such Foreign Custodian of assets of the Fund.
4.7 Transactions in Foreign Custody Accounts. Upon receipt of Proper
Instructions, the Custodian shall instruct the appropriate Foreign Custodian to
transfer, exchange or deliver Foreign Securities owned by a Fund, but, except to
the extent explicitly provided herein, only in any of the cases specified in
Subsection 3.2. Upon receipt of Proper Instructions, the Custodian shall pay out
or instruct the appropriate Foreign Custodian to pay out monies of a Fund in any
of the cases specified in Subsection 3.6. Notwithstanding anything herein to the
contrary, settlement and payment for Foreign Securities received for the account
of a Fund and delivery of Foreign Securities maintained for the account of a
Fund may be effected in accordance with the customary or established securities
trading or securities processing practices and procedures in the jurisdiction or
market in which the transaction occurs, including, without limitation,
delivering securities to the purchaser thereof or to a dealer therefor (or an
agent for such purchaser or dealer) against a receipt with the expectation of
receiving later payment for such securities from such purchaser or dealer.
Foreign Securities maintained in the custody of a Foreign Custodian may be
maintained in the name of such entity or its nominee name to the same extent as
set forth in Section 3.3 of this Agreement and each Fund agrees to hold any
Foreign Custodian and its nominee harmless from any liability as a holder of
record of such securities.
4.8 Liability of Foreign Custodian. Each agreement between the
Custodian and a Foreign Custodian shall, unless otherwise mutually agreed to by
the Custodian and a Fund, require the Foreign Custodian to exercise reasonable
care or, alternatively, impose a contractual liability for breach of contract
without an exception based upon a standard of care in the performance of its
duties and to indemnify and hold harmless the Custodian from and against any
loss, damage, cost, expense, liability or claim arising out of or in connection
with the Foreign Custodian's performance of such obligations, excepting,
however, Citibank, N.A., and its subsidiaries and branches, where the
indemnification is limited to direct money damages and requires that the claim
be promptly asserted. At the election of a Fund, it shall be entitled to be
subrogated to the rights of the Custodian with respect to any claims against a
Foreign Custodian as a consequence of any such loss, damage, cost, expense,
liability or claim if and to the extent that the Fund has not been made whole
for any such loss, damage, cost, expense, liability or claim, unless such
subrogation is prohibited by local law.
4.9 Monitoring Responsibilities.
(a) The Custodian will promptly inform each Fund in the event
that the Custodian learns of a material adverse change in the financial
condition of a Foreign Custodian or learns that a Foreign Custodian's financial
condition has declined or is likely to decline below the minimum levels required
by Rule 17f-5 of the 1940 Act.
(b) The custodian will furnish such information as may be
reasonably necessary to assist each Investment Company's Board in its annual
review and approval of the continuance of all contracts or arrangements with
Foreign Subcustodians.
Section 5. PROPER INSTRUCTIONS
As used in this Agreement, the term "Proper Instructions" means
instructions of a Fund received by the Custodian via telephone or in Writing
which the Custodian believes in good faith to have been given by Authorized
Persons (as defined below) or which are transmitted with proper testing or
authentication pursuant to terms and conditions which the Custodian may specify.
Any Proper Instructions delivered to the Custodian by telephone shall promptly
thereafter be confirmed in accordance with procedures, and limited in subject
matter, as mutually agreed upon by the parties. Unless otherwise expressly
provided, all Proper Instructions shall continue in full force and effect until
canceled or superseded. If the Custodian requires test arrangements,
authentication methods or other security devices to be used with respect to
Proper Instructions, any Proper Instructions given by the Funds thereafter shall
be given and processed in accordance with such terms and conditions for the use
of such arrangements, methods or devices as the Custodian may put into effect
and modify from time to time. The Funds shall safeguard any testkeys,
identification codes or other security devices which the Custodian shall make
available to them. The Custodian may electronically record any Proper
Instructions given by telephone, and any other telephone discussions, with
respect to its activities hereunder. As used in this Agreement, the term
"Authorized Persons" means such officers or such agents of a Fund as have been
properly appointed pursuant to a resolution of the appropriate Board or
Executive Committee, a certified copy of which has been provided to the
Custodian, to act on behalf of the Fund under this Agreement. Each of such
persons shall continue to be an Authorized Person until such time as the
Custodian receives Proper Instructions that any such officer or agent is no
longer an Authorized Person.
Section 6. ACTIONS PERMITTED WITHOUT EXPRESS AUTHORITY
The Custodian may in its discretion, without express authority from
a Fund:
(a) make payments to itself or others for minor expenses of
handling Securities or other similar items relating to its duties under this
Agreement, provided that all such payments shall be accounted for to the Fund;
(b) endorse for collection, in the name of the Fund, checks,
drafts and other negotiable instruments; and
(c) in general, attend to all non-discretionary details in
connection with the sale, exchange, substitution, purchase, transfer and other
dealings with the Securities and property of the Fund except as otherwise
provided in Proper Instructions.
Section 7. EVIDENCE OF AUTHORITY
The Custodian shall be protected in acting upon any instructions
(conveyed by telephone or in Writing), notice, request, consent, certificate or
other instrument or paper believed by it to be genuine and to have been properly
given or executed by or on behalf of a Fund. The Custodian may receive and
accept a certified copy of a resolution of a Board or Executive Committee as
conclusive evidence (a) of the authority of any person to act in accordance with
such resolution or (b) of any determination or of any action by the Board or
Executive Committee as described in such resolution, and such resolution may be
considered as in full force and effect until receipt by the Custodian of written
notice by an Authorized Person to the contrary.
Section 8. DUTY OF CUSTODIAN TO SUPPLY INFORMATION
The Custodian shall cooperate with and supply necessary information
in its possession (to the extent permissible under applicable law) to the entity
or entities appointed by the appropriate Board to keep the books of account of a
Fund and/or compute the net asset value per Share of the outstanding Shares of a
Fund.
Section 9. RECORDS
The Custodian shall create and maintain all records relating to its
activities under this Agreement which are required with respect to such
activities under Section 31 of the Investment Company Act and Rules 31a-1 and
31a-2 thereunder. All such records shall be the property of the appropriate
Investment Company and shall at all times during the regular business hours of
the Custodian be open for inspection by duly authorized officers, employees or
agents of the Investment Company and employees and agents of the Securities and
Exchange Commission. The Custodian shall, at a Fund's request, supply the Fund
with a tabulation of Securities and Cash owned by the Fund and held by the
Custodian and shall, when requested to do so by the Fund and for such
compensation as shall be agreed upon between the Fund and the Custodian, include
certificate numbers in such tabulations.
Section 10. COMPENSATION OF CUSTODIAN
The Custodian shall be entitled to reasonable compensation for its
services and expenses as Custodian, as agreed upon from time to time between
each Investment Company, on behalf of each Fund, and the Custodian. In addition,
should the Custodian in its discretion advance funds (to include overdrafts) to
or on behalf of a Fund pursuant to Proper Instructions, the Custodian shall be
entitled to prompt reimbursement of any amounts advanced. In the event of such
an advance, and to the extent permitted by the 1940 Act and the Fund's policies,
the Custodian shall have a continuing lien and security interest in and to the
property of the Fund in the possession or control of the Custodian or of a third
party acting in the Custodian's behalf, until the advance is reimbursed. Nothing
in this Agreement shall obligate the Custodian to advance funds to or on behalf
of a Fund, or to permit any borrowing by a Fund except for borrowings for
temporary purposes, to the extent permitted by the Fund's policies.
Section 11. RESPONSIBILITY OF CUSTODIAN
The Custodian shall be responsible for the performance of only such
duties as are set forth herein or contained in Proper Instructions and shall use
reasonable care in carrying out such duties. The Custodian shall be liable to a
Fund for any loss which shall occur as the result of the failure of a Foreign
Custodian engaged directly or indirectly by the Custodian to exercise reasonable
care with respect to the safekeeping of securities and other assets of the Fund
to the same extent that the Custodian would be liable to the Fund if the
Custodian itself were holding such securities and other assets. Nothing in this
Agreement shall be read to limit the responsibility or liability of the
Custodian or a Foreign Custodian for their failure to exercise reasonable care
with regard to any decision or recommendation made by the Custodian or
Subcustodian regarding the use or continued use of a Foreign Securities
Depository. In the event of any loss to a Fund by reason of the failure of the
Custodian or a Foreign Custodian engaged by such Foreign Custodian or the
Custodian to utilize reasonable care, the Custodian shall be liable to the Fund
to the extent of the Fund's damages, to be determined based on the market value
of the property which is the subject of the loss at the date of discovery of
such loss and without reference to any special conditions or circumstances. The
Custodian shall be held to the exercise of reasonable care in carrying out this
Agreement, and shall not be liable for acts or omissions unless the same
constitute negligence or willful misconduct on the part of the Custodian or any
Foreign Custodian engaged directly or indirectly by the Custodian. Each Fund
agrees to indemnify and hold harmless the Custodian and its nominees from all
taxes, charges, expenses, assessments, claims and liabilities (including legal
fees and expenses) incurred by the Custodian or its nominess in connection with
the performance of this Agreement with respect to such Fund, except such as may
arise from any negligent action, negligent failure to act or willful misconduct
on the part of the indemnified entity or any Foreign Custodian. The Custodian
shall be entitled to rely, and may act, on advice of counsel (who may be counsel
for a Fund) on all matters and shall be without liability for any action
reasonably taken or omitted pursuant to such advice. The Custodian need not
maintain any insurance for the benefit of any Fund.
All collections of funds or other property paid or distributed in
respect of Securities held by the Custodian, agent, Subcustodian or Foreign
Custodian hereunder shall be made at the risk of the Funds. The Custodian shall
have no liability for any loss occasioned by delay in the actual receipt of
notice by the Custodian, agent, Subcustodian or by a Foreign Custodian of any
payment, redemption or other transaction regarding securities in respect of
which the Custodian has agreed to take action as provided in Section 3 hereof.
The Custodian shall not be liable for any action taken in good faith upon Proper
Instructions or upon any certified copy of any resolution of the Board and may
rely on the genuineness of any such documents which it may in good faith believe
to be validly executed. Notwithstanding the foregoing, the Custodian shall not
be liable for any loss resulting from, or caused by, the direction of a Fund to
maintain custody of any Securities or cash in a foreign country including, but
not limited to, losses resulting from nationalization, expropriation, currency
restrictions, civil disturbance, acts of war or terrorism, insurrection,
revolution, nuclear fusion, fission or radiation or other similar occurrences,
or events beyond the control of the Custodian. Finally, the Custodian shall not
be liable for any taxes, including interest and penalties with respect thereto,
that may be levied or assessed upon or in respect of any assets of any Fund held
by the Custodian.
Section 12. LIMITED LIABILITY OF EACH INVESTMENT COMPANY
The Custodian acknowledges that it has received notice of and
accepts the limitations of liability as set forth in each Investment Company's
Agreement and Declaration of Trust, Articles of Incorporation, or Agreement of
Limited Partnership. The Custodian agrees that each Fund's obligation hereunder
shall be limited to the assets of the Fund, and that the Custodian shall not
seek satisfaction of any such obligation from the shareholders of the Fund nor
from any Board Member, officer, employee, or agent of the Fund or the Investment
Company on behalf of the Fund.
Section 13. EFFECTIVE PERIOD; TERMINATION
This Agreement shall become effective as of the date of its
execution and shall continue in full force and effect until terminated as
hereinafter provided. This Agreement may be terminated by each Investment
Company, on behalf of a Fund, or by the Custodian by 90 days notice in Writing
to the other provided that any termination by an Investment Company shall be
authorized by a resolution of the Board, a certified copy of which shall
accompany such notice of termination, and provided further, that such resolution
shall specify the names of the persons to whom the Custodian shall deliver the
assets of the affected Funds held by the Custodian. If notice of termination is
given by the Custodian, the affected Investment Companies shall, within 90 days
following the giving of such notice, deliver to the Custodian a certified copy
of a resolution of the Boards specifying the names of the persons to whom the
Custodian shall deliver assets of the affected Funds held by the Custodian. In
either case the Custodian will deliver such assets to the persons so specified,
after deducting therefrom any amounts which the Custodian determines to be owed
to it hereunder (including all costs and expenses of delivery or transfer of
Fund assets to the persons so specified). If within 90 days following the giving
of a notice of termination by the Custodian, the Custodian does not receive from
the affected Investment Companies certified copies of resolutions of the Boards
specifying the names of the persons to whom the Custodian shall deliver the
assets of the Funds held by the Custodian, the Custodian, at its election, may
deliver such assets to a bank or trust company doing business in the State of
California to be held and disposed of pursuant to the provisions of this
Agreement or may continue to hold such assets until a certified copy of one or
more resolutions as aforesaid is delivered to the Custodian. The obligations of
the parties hereto regarding the use of reasonable care, indemnities and payment
of fees and expenses shall survive the termination of this Agreement.
Section 14. MISCELLANEOUS
14.1 Relationship. Nothing contained in this Agreement shall (i)
create any fiduciary, joint venture or partnership relationship between the
Custodian and any Fund or (ii) be construed as or constitute a prohibition
against the provision by the Custodian or any of its affiliates to any Fund of
investment banking, securities dealing or brokerages services or any other
banking or financial services.
14.2 Further Assurances. Each party hereto shall furnish to the
other party hereto such instruments and other documents as such other party may
reasonably request for the purpose of carrying out or evidencing the
transactions contemplated by this Agreement.
14.3 Attorneys' Fees. If any lawsuit or other action or proceeding
relating to this Agreement is brought by a party hereto against the other party
hereto, the prevailing party shall be entitled to recover reasonable attorneys'
fees, costs and disbursements (including allocated costs and disbursements of
in-house counsel), in addition to any other relief to which the prevailing party
may be entitled.
14.4 Notices. Except as otherwise specified herein, each notice or
other communication hereunder shall be in Writing and shall be delivered to the
intended recipient at the following address (or at such other address as the
intended recipient shall have specified in a written notice given to the other
parties hereto):
if to a Fund or Investment Company: if to the Custodian:
[Fund or Investment Company] The Bank of New York
c/o Franklin Resources, Inc. Mutual Fund Custody Manager
777 Mariners Island Blvd. BNY Western Trust Co.
San Mateo, CA 94404 550 Kearney St., Suite 60
Attention: Chief Legal Officer San Francisco, CA 94108
14.5 Headings. The underlined headings contained herein are for
convenience of reference only, shall not be deemed to be a part of this
Agreement and shall not be referred to in connection with the interpretation
hereof.
14.6 Counterparts. This Agreement may be executed in counterparts,
each of which shall constitute an original and both of which, when taken
together, shall constitute one agreement.
14.7 Governing Law. This Agreement shall be construed in accordance
with, and governed in all respects by, the laws of the State of New York
(without giving effect to principles of conflict of laws).
14.8 Force Majeure. Notwithstanding the provisions of Section 11
hereof regarding the Custodian's general standard of care, no failure, delay or
default in performance of any obligation hereunder shall constitute an event of
default or a breach of this agreement, or give rise to any liability whatsoever
on the part of one party hereto to the other, to the extent that such failure to
perform, delay or default arises out of a cause beyond the control and without
negligence of the party otherwise chargeable with failure, delay or default;
including, but not limited to: action or inaction of governmental, civil or
military authority; fire; strike; lockout or other labor dispute; flood; war;
riot; theft; earthquake; natural disaster; breakdown of public or common carrier
communications facilities; computer malfunction; or act, negligence or default
of the other party. This paragraph shall in no way limit the right of either
party to this Agreement to make any claim against third parties for any damages
suffered due to such causes.
14.9 Successors and Assigns. This Agreement shall be binding upon,
and shall inure to the benefit of, the parties hereto and their respective
successors and assigns, if any.
14.10 Waiver. No failure on the part of any person to exercise any
power, right, privilege or remedy hereunder, and no delay on the part of any
person in the exercise of any power, right, privilege or remedy hereunder, shall
operate as a waiver thereof; and no single or partial exercise of any such
power, right, privilege or remedy shall preclude any other or further exercise
thereof or of any other power, right, privilege or remedy.
14.11 Amendments. This Agreement may not be amended, modified,
altered or supplemented other than by means of an agreement or instrument
executed on behalf of each of the parties hereto.
14.12 Severability. In the event that any provision of this
Agreement, or the application of any such provision to any person or set of
circumstances, shall be determined to be invalid, unlawful, void or
unenforceable to any extent, the remainder of this Agreement, and the
application of such provision to persons or circumstances other than those as to
which it is determined to be invalid, unlawful, void or unenforceable, shall not
be impaired or otherwise affected and shall continue to be valid and enforceable
to the fullest extent permitted by law.
14.13 Parties in Interest. None of the provisions of this Agreement
is intended to provide any rights or remedies to any person other than the
Investment Companies, for themselves and for the Funds, and the Custodian and
their respective successors and assigns, if any.
14.14 Pre-Emption of Other Agreements. In the event of any conflict
between this Agreement, including without limitation any amendments hereto, and
any other agreement which may now or in the future exist between the parties,
the provisions of this Agreement shall prevail.
14.15 Variations of Pronouns. Whenever required by the context
hereof, the singular number shall include the plural, and vice versa; the
masculine gender shall include the feminine and neuter genders; and the neuter
gender shall include the masculine and feminine genders.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered as of the date first above written.
THE BANK OF NEW YORK
By: _____________________________
Its: _____________________________
THE INVESTMENT COMPANIES LISTED ON EXHIBIT A
By: ______________________________
Harmon E. Burns
Their: Vice President
By: ______________________________
Deborah R. Gatzek
Their: Vice President & Secretary
THE BANK OF NEW YORK
MASTER CUSTODY AGREEMENT
EXHIBIT A
The following is a list of the Investment Companies and their respective Series
for which the Custodian shall serve under the Master Custody Agreement dated as
of February 16, 1996.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Adjustable Rate Securities Delaware Business Trust U.S. Government Adjustable Rate Mortgage
Portfolios Portfolio
Adjustable Rate Securities Portfolio
AGE High Income Fund, Inc. Colorado Corporation
Franklin California Tax-Free Income Maryland Corporation
Fund, Inc.
Franklin California Tax-Free Trust Massachusetts Business Franklin California Insured Tax-Free Income
Trust Fund
Franklin California Tax-Exempt Money Fund
Franklin California Intermediate-Term Tax-Free
Income Fund
Franklin Custodian Funds, Inc. Maryland Corporation Growth Series
Utilities Series
Dynatech Series
Income Series
U.S. Government Securities Series
- -------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------------------------------------------------------------------------
Franklin Equity Fund California Corporation
Franklin Federal Money Fund California Corporation
Franklin Federal Tax- Free Income California Corporation
Fund
Franklin Gold Fund California Corporation
Franklin Government Securities Trust Massachusetts Business
Trust
Franklin Templeton International Delaware Business Trust Templeton Pacific Growth Fund
Trust Franklin International Equity Fund
Franklin Investors Securities Trust Massachusetts Business Franklin Global Government Income Fund
Trust Franklin Short-Intermediate U.S. Gov't
Securities Fund
Franklin Convertible Securities Fund
Franklin Adjustable U.S. Government Securities
Fund
Franklin Equity Income Fund
Franklin Adjustable Rate Securities Fund
- -------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------------------------------------------------------------------------
Franklin Managed Trust Massachusetts Business Franklin Corporate Qualified Dividend Fund
Trust Franklin Rising Dividends Fund
Franklin Investment Grade Income Fund
Franklin Institutional Rising Dividends Fund
Franklin Money Fund California Corporation
Franklin Municipal Securities Trust Delaware Business Trust Franklin Hawaii Municipal Bond Fund
Franklin California High Yield Municipal Fund
Franklin Washington Municipal Bond Fund
Franklin Tennessee Municipal Bond Fund
Franklin Arkansas Municipal Bond Fund
Franklin New York Tax-Free Income New York Corporation
Fund, Inc.
Franklin New York Tax-Free Trust Massachusetts Business Franklin New York Tax-Exempt Money Fund
Trust Franklin New York Intermediate-Term Tax-Free
Income Fund
Franklin New York Insured Tax-Free Income Fund
- -------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------------------------------------------------------------------------
Franklin Tax-Advantaged California Limited
International Bond Fund Partnership
Franklin Tax-Advantaged U.S. California Limited
Government Securities Fund Partnership
Franklin Tax-Advantaged High Yield California Limited
Securities Fund. Partnership
Franklin Premier Return Fund California Corporation
Franklin Real Estate Securities Delaware Business Trust Franklin Real Estate Securities Fund
Trust
Franklin Strategic Mortgage Delaware Business Trust
Portfolio
Franklin Strategic Series Delaware Business Trust Franklin California Growth Fund
Franklin Strategic Income Fund
Franklin MidCap Growth Fund
Franklin Institutional MidCap Growth Fund
Franklin Global Utilities Fund
Franklin Small Cap Growth Fund
Franklin Global Health Care Fund
Franklin Natural Resources Fund
Franklin Tax-Exempt Money Fund California Corporation
- -------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES---(IF APPLICABLE)
- -------------------------------------------------------------------------------------------------------------
Franklin Tax-Free Trust Massachusetts Business Franklin Massachusetts Insured Tax-Free Income Fund
Franklin Michigan Insured Tax-Free Income Fund
Franklin Minnesota Insured Tax-Free Income Fund
Franklin Insured Tax-Free Income Fund
Franklin Ohio Insured Tax-Free Income Fund
Franklin Puerto Rico Tax-Free Income Fund
Franklin Arizona Tax-Free Income Fund
Franklin Colorado Tax-Free Income Fund
Franklin Georgia Tax-Free Income Fund
Franklin Pennsylvania Tax-Free Income Fund
Franklin High Yield Tax-Free Income Fund
Franklin Missouri Tax-Free Income Fund
Franklin Oregon Tax-Free Income Fund
Franklin Texas Tax-Free Income Fund
Franklin Virginia Tax-Free Income Fund
Franklin Alabama Tax-Free Income Fund
Franklin Florida Tax-Free Income Fund
Franklin Connecticut Tax-Free Income Fund
Franklin Indiana Tax-Free Income Fund
Franklin Louisiana Tax-Free Income Fund
Franklin Maryland Tax-Free Income Fund
- -------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------------------------------------------------------------------------
Franklin Tax-Free Trust Massachusetts Business Franklin North Carolina Tax-Free Income Fund
(cont.) Trust Franklin New Jersey Tax-Free Income Fund
Franklin Kentucky Tax-Free Income Fund
Franklin Federal Intermediate-Term Tax-Free
Income Fund
Franklin Arizona Insured Tax-Free Income Fund
Franklin Florida Insured Tax-Free Income fund
Franklin Templeton Global Trust Massachusetts Business Franklin Templeton German Government Bond Fund
Trust Franklin Templeton Global Currency Fund
Franklin Templeton Hard Currency Fund
Franklin Templeton High Income Currency Fund
Franklin Templeton Money Fund Trust Delaware Business Trust Franklin Templeton Money Fund II
Franklin Value Investors Trust Massachusetts Business Franklin Balance Sheet Investment Fund
Trust Franklin MicroCap Value Fund
Franklin Value Fund
- -------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------------------------------------------------------------------------
Franklin Valuemark Funds Massachusetts Business Money Market Fund
Trust Growth and Income Fund
Precious Metals
Fund Real Estate
Securities Fund
Utility Equity Fund
High Income Fund
Templeton Global
Income Securities
Fund Investment
Grade Intermediate
Bond Fund Income
Securities Fund
U.S. Government
Securities Fund
Zero Coupon Fund -
2000 Zero Coupon
Fund - 2005 Zero
Coupon Fund - 2010
Adjustable U.S.
Government Fund
Rising Dividends
Fund Templeton
Pacific Growth Fund
Templeton
International
Equity Fund
Templeton
Developing Markets
Equity Fund
Templeton Global
Growth Fund
Templeton Global
Asset Allocation
Fund Small Cap Fund
- -------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------------------------------------------------------------------------
Institutional Fiduciary Trust Massachusetts Business Money Market Portfolio
Trust Franklin Late Day Money Market Portfolio
Franklin U.S. Government Securities Money
Market
Portfolio
Franklin U.S. Treasury Money Market Portfolio
Franklin Institutional Adjustable U.S.
Government
Securities Fund
Franklin Institutional Adjustable Rate
Securities Fund
Franklin U.S. Government Agency Money Market
Fund
Franklin Cash Reserves Fund
MidCap Growth Portfolio Delaware Business Trust
The Money Market Portfolios Delaware Business Trust The Money Market Portfolio
The U.S. Government Securities Money Market
Portfolio
CLOSED END FUNDS:
Franklin Multi-Income Trust Massachusetts Business
Trust
Franklin Principal Maturity Trust Massachusetts Business
Trust
Franklin Universal Trust Massachusetts Business
Trust
- ------------------------------------------------------------------------------------------------------------
</TABLE>
TERMINAL LINK AGREEMENT
AGREEMENT made as of February 16, 1996 between The Bank of New York as custodian
(the "Custodian") and each Investment Company listed on Exhibit A, for itself
and for each of Series listed on Exhibit A (each, a "Fund").
WHEREAS, the parties have entered into a Master Custody Agreement dated
as of February 16, 1996;
WHEREAS, the parties desire to provide for the electronic transmission
of instructions from each Fund to the Custodian, as and to the extent permitted
by the Master Custody Agreement; and
WHEREAS, the Board of Directors, Trustees or Managing General Partners,
as applicable, of each Investment Company have previously authorized each
Investment Company to enter into the Master Custody Agreement;
NOW, THEREFORE, in consideration for the mutual promises set forth, the parties
agree as follows:
A. Except as otherwise provided herein, all terms shall have the same meaning as
in the Master Custody Agreement.
B. The term "Certificate" shall mean any Proper Instruction by a Fund to the
Custodian communicated by the Terminal Link.
C . The term "Officer" shall mean an Authorized Person as defined in section 5
of the Master Custody Agreement.
D. The term "Terminal Link" shall mean an electronic data transmission link
between a Fund, Franklin Templeton Investor Services, Inc. acting as agent for
the Fund ("FTISI"), and the Custodian requiring in connection with each use of
the Terminal Link by or on behalf of the Fund use of an authorization code
provided by the Custodian and at least two access codes established by the Fund.
Each Fund represents that FTISI will maintain a transmission line to the
Custodian and has been selected by the Fund to receive electronic data
transmissions from the Custodian or the Fund and forward the same to the Fund or
the Custodian, respectively.
E. Terminal Link
1. The Terminal Link shall be utilized by a Fund only for the purpose of the
Fund providing Certificates to the Custodian with respect to transactions
involving Securities or for the transfer of money to be applied to the payment
of dividends, distributions or redemptions of Fund Shares, and shall be utilized
by the Custodian only for the purpose of providing notices to the Fund. Such use
shall commence only after a Fund shall have established access codes and
safekeeping procedures to safeguard and protect the confidentiality and
availability of such access codes, and shall have reviewed the safekeeping
procedures established by FTISI to assure that transmissions inputted by the
Fund, and only such transmissions, are forwarded by FTISI to the Custodian
without any alteration or omission. Each use of the Terminal Link by a Fund
shall constitute a representation and warranty that the Terminal Link is being
used only for the purposes permitted hereby, that at least two Officers have
each utilized an access code, that such safekeeping procedures have been
established by the Fund, that FTISI has safekeeping procedures reviewed by the
Fund to assure that all transmissions inputted by the Fund, and only such
transmissions, are forwarded by FTISI to the Custodian without any alteration or
omission by FTISI, and that such use does not, to the Fund's knowledge,
contravene the Investment Company Act of 1940, as amended, or the rules or
regulations thereunder.
2. Each Fund shall obtain and maintain at its own cost and expense all equipment
and services, including, but not limited to communications services, necessary
for it to utilize the Terminal Link, and the Custodian shall not be responsible
for the reliability or availability of any such equipment or services.
3. Each Fund acknowledges that any data bases made available as part of, or
through the Terminal Link and any proprietary data, software, processes,
information and documentation (other than which are or become part of the public
domain or are legally required to be made available to the public)
(collectively, the "Information"), are the exclusive and confidential property
of the Custodian. Each Fund shall, and shall cause others to which it discloses
the Information, including without limitation FTISI, to keep the Information
confidential, by using the same care and discretion it uses with respect to its
own confidential property and trade secrets, and shall neither make nor permit
any disclosure without the express prior written consent of the Custodian.
4. Upon termination of this Agreement for any reason, the Fund shall return to
the Custodian any and all copies of the Information which are in the Fund's
possession or under its control, or which the Fund distributed to third parties,
including without limitation FTISI. The provisions of this Article shall not
affect the copyright status of any of the Information which may be copyrighted
and shall apply to all information whether or not copyrighted.
5. The Custodian reserves the right to modify the Terminal Link from time to
time without notice to the Funds or FTISI, except that the Custodian shall give
the Funds notice not less than 75 days in advance of any modification which
would materially adversely affect the Funds' operation. The Funds agree that
neither the Funds nor FTISI shall modify or attempt to modify the Terminal Link
without the Custodian's prior written consent. Each Fund acknowledges that any
software or procedures provided the Fund or FTISI as part of the Terminal Link
are the property of the Custodian and, accordingly, agrees that any
modifications to the Terminal Link, whether by the Fund, FTISI or the Custodian
and whether with or without the Custodian's consent, shall become the property
of the Custodian.
6. The Custodian, the Funds, FTISI and any manufacturers and suppliers utilized
by the Custodian, the Funds or FTISI in connection with the Terminal Link, make
no warranties or representations to any other party, express or implied, in fact
or in law, including but not limited to warranties of merchantability and
fitness for a particular purpose.
7. Each Fund will cause its officers and employees to treat the authorization
codes and the access codes applicable to Terminal Link with extreme care, and
irrevocably authorizes the Custodian to act in accordance with and rely on
Certificates received by it through the Terminal Link. Each Fund acknowledges
that it is its responsibility to assure that only its officers and authorized
persons of FTISI use the Terminal Link on its behalf, and that the Custodian
shall not be responsible nor liable for any action taken in good faith in
reliance upon a Certificate, nor for any alteration, omission, or failure to
promptly forward by FTISI.
8. (a) Except as otherwise specifically provided in Section 8(b) of this
Article, the Custodian shall have no liability for any losses, damages,
injuries, claims, costs or expenses arising out of or in connection with any
failure, malfunction or other problem relating to the Terminal Link except for
money damages suffered as the result of the negligence of the Custodian,
provided however, that the Custodian shall have no liability under this Section
8 if the Fund fails to comply with the provisions of section 10.
(b) The Custodian's liability for its negligence in executing or failing
to act in accordance with a Certificate received through Terminal Link shall be
only with respect to a transfer of funds or assets which is not made in
accordance with such Certificate, and shall be subject to Section 11 of this
Article and contingent upon the Fund complying with the provisions of Section 10
of this Article, and shall be limited to the extent of the Fund's damages,
without reference to any special conditions or circumstances.
9. Without limiting the generality of the foregoing, in no event shall the
Custodian or any manufacturer or supplier of its computer equipment, software or
services relating to the Terminal Link be responsible for any special, indirect,
incidental or consequential damages which a Fund or FTISI may incur or
experience by reason of any malfunction of such equipment or software, even if
the Custodian or any manufacturer or supplier has been advised of the
possibility of such damages, nor with respect to the use of the Terminal Link
shall the Custodian or any such manufacturer or supplier be liable for acts of
God, or with respect to the following to the extent beyond such person's
reasonable control: machine or computer breakdown or malfunction, interruption
or malfunction of communication facilities, labor difficulties or any other
similar or dissimilar cause.
10. Each Fund shall notify the Custodian of any errors, omissions or
interruptions in, or delay or unavailability of, the Terminal Link as promptly
as practicable, and in any event within 24 hours after the earliest of (i)
discovery thereof, or (ii) the business day on which discovery should have
occurred through the exercise of reasonable care. The Custodian shall promptly
advise the Fund or FTISI whenever the Custodian learns of any errors, omissions
or interruption in, or delay or unavailability of, the Terminal Link.
11. The Custodian shall acknowledge to each affected Fund or to FTISI, by use of
the Terminal Link, receipt of each Certificate the Custodian receives through
the Terminal Link, and in the absence of such acknowledgment the Custodian shall
not be liable for any failure to act in accordance with such Certificate and the
Funds may not claim that such Certificate was received by the Custodian. Such
acknowledgment, which may occur after the Custodian has acted upon such
Certificate, shall be given on the same day on which such Certificate is
received.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed
by their respective officers, thereunto duly authorized and their respective
seals to be hereto affixed as of the day and year first above written.
THE BANK OF NEW YORK
By: ______________________
Title: ______________________
THE INVESTMENT COMPANIES LISTED ON EXHIBIT A
By: ______________________
Harmon E. Burns
Title: Vice President
By: ______________________
Deborah R. Garzek
Title: Vice President & Secretary
<TABLE>
<CAPTION>
THE BANK OF NEW YORK
MASTER CUSTODY AGREEMENT
EXHIBIT A
The following is a list of the Investment Companies and their respective Series
for which the Custodian shall serve under the Master Custody Agreement dated as
of February 16, 1996.
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
<S> <C> <C>
Adjustable Rate Securities Portfolios Delaware Business Trust U.S. Government Adjustable Rate Mortgage Portfolio
Adjustable Rate Securities Portfolio
AGE High Income Fund, Inc. Colorado Corporation
Franklin California Tax-Free Income Maryland Corporation
Fund, Inc.
Franklin California Tax-Free Trust Massachusetts Business Franklin California Insured Tax-Free Income Fund
Trust Franklin California Tax-Exempt Money Fund
Franklin California Intermediate-Term Tax-Free
Income Fund
Franklin Custodian Funds, Inc. Maryland Corporation Growth Series
Utilities Series
Dynatech Series
Income Series
U.S. Government Securities Series
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
Franklin Equity Fund California Corporation
Franklin Federal Money Fund California Corporation
Franklin Federal Tax- Free Income Fund California Corporation
Franklin Gold Fund California Corporation
Franklin Government Securities Trust Massachusetts Business
Trust
Franklin Templeton International Trust Delaware Business Trust Templeton Pacific Growth Fund
Franklin International Equity Fund
Franklin Investors Securities Trust Massachusetts Business Franklin Global Government Income Fund
Trust Franklin Short-Intermediate U.S. Gov't Securities Fund
Franklin Convertible Securities Fund
Franklin Adjustable U.S. Government Securities Fund
Franklin Equity Income Fund
Franklin Adjustable Rate Securities Fund
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
Franklin Managed Trust Massachusetts Business Franklin Corporate Qualified Dividend Fund
Trust Franklin Rising Dividends Fund
Franklin Investment Grade Income Fund
Franklin Institutional Rising Dividends Fund
Franklin Money Fund California Corporation
Franklin Municipal Securities Trust Delaware Business Trust Franklin Hawaii Municipal Bond Fund
Franklin California High Yield Municipal Fund
Franklin Washington Municipal Bond Fund
Franklin Tennessee Municipal Bond Fund
Franklin Arkansas Municipal Bond Fund
Franklin New York Tax-Free Income Fund, New York Corporation
Inc.
Franklin New York Tax-Free Trust Massachusetts Business Franklin New York Tax-Exempt Money Fund
Trust Franklin New York Intermediate-Term Tax-Free
Income Fund
Franklin New York Insured Tax-Free Income Fund
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
Franklin Tax-Advantaged International Bond California Limited
Fund Partnership
Franklin Tax-Advantaged U.S. Government California Limited
Securities Fund Partnership
Franklin Tax-Advantaged High Yield California Limited
Securities Fund. Partnership
Franklin Premier Return Fund California Corporation
Franklin Real Estate Securities Trust Delaware Business Trust Franklin Real Estate Securities Fund
Franklin Strategic Mortgage Portfolio Delaware Business Trust
Franklin Strategic Series Delaware Business Trust Franklin California Growth Fund
Franklin Strategic Income Fund
Franklin MidCap Growth Fund
Franklin Institutional MidCap Growth Fund
Franklin Global Utilities Fund
Franklin Small Cap Growth Fund
Franklin Global Health Care Fund
Franklin Natural Resources Fund
Franklin Tax-Exempt Money Fund California Corporation
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES---(IF APPLICABLE)
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
Franklin Tax-Free Trust Massachusetts Business Franklin Massachusetts Insured Tax-Free Income Fund
Trust Franklin Michigan Insured Tax-Free Income Fund
Franklin Minnesota Insured Tax-Free Income Fund
Franklin Insured Tax-Free Income Fund
Franklin Ohio Insured Tax-Free Income Fund
Franklin Puerto Rico Tax-Free Income Fund
Franklin Arizona Tax-Free Income Fund
Franklin Colorado Tax-Free Income Fund
Franklin Georgia Tax-Free Income Fund
Franklin Pennsylvania Tax-Free Income Fund
Franklin High Yield Tax-Free Income Fund
Franklin Missouri Tax-Free Income Fund
Franklin Oregon Tax-Free Income Fund
Franklin Texas Tax-Free Income Fund
Franklin Virginia Tax-Free Income Fund
Franklin Alabama Tax-Free Income Fund
Franklin Florida Tax-Free Income Fund
Franklin Connecticut Tax-Free Income Fund
Franklin Indiana Tax-Free Income Fund
Franklin Louisiana Tax-Free Income Fund
Franklin Maryland Tax-Free Income Fund
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
Franklin Tax-Free Trust Massachusetts Business Franklin North Carolina Tax-Free Income Fund
(cont.) Trust Franklin New Jersey Tax-Free Income Fund
Franklin Kentucky Tax-Free Income Fund
Franklin Federal Intermediate-Term Tax-Free Income Fund
Franklin Arizona Insured Tax-Free Income Fund
Franklin Florida Insured Tax-Free Income fund
Franklin Templeton Global Trust Massachusetts Business Franklin Templeton German Government Bond Fund
Trust Franklin Templeton Global Currency Fund
Franklin Templeton Hard Currency Fund
Franklin Templeton High Income Currency Fund
Franklin Templeton Money Fund Trust Delaware Business Trust Franklin Templeton Money Fund II
Franklin Value Investors Trust Massachusetts Business Franklin Balance Sheet Investment Fund
Trust Franklin MicroCap Value Fund
Franklin Value Fund
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
Franklin Valuemark Funds Massachusetts Business Money Market Fund
Trust Growth and Income Fund
Precious Metals Fund
Real Estate Securities Fund
Utility Equity Fund
High Income Fund
Templeton Global Income
Securities Fund Investment
Grade Intermediate Bond
Fund Income Securities
Fund U.S. Government
Securities Fund Zero
Coupon Fund -2000 Zero
Coupon Fund -2005 Zero Coupon
Fund -2010 Adjustable U.S. Government
Fund Rising Dividends Fund
Templeton Pacific Growth Fund
Templeton International Equity
Fund Templeton Developing
Markets Equity Fund Templeton
Global Growth Fund Global
Asset Allocation Fund Small
Cap Fund
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
Institutional Fiduciary Trust Massachusetts Business Money Market Portfolio
Trust Franklin Late Day Money Market Portfolio
Franklin U.S. Government Securities Money Market
Portfolio
Franklin U.S. Treasury Money Market Portfolio
Franklin Institutional Adjustable U.S. Government
Securities Fund
Franklin Institutional Adjustable Rate Securities Fund
Franklin U.S. Government Agency Money Market Fund
Franklin Cash Reserves Fund
MidCap Growth Portfolio Delaware Business Trust
The Money Market Portfolios Delaware Business Trust The Money Market Portfolio
The U.S. Government Securities Money Market Portfolio
CLOSED END FUNDS:
Franklin Multi-Income Trust Massachusetts Business
Trust
Franklin Principal Maturity Trust Massachusetts Business
Trust
Franklin Universal Trust Massachusetts Business
Trust
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
</TABLE>
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. 22
to the Registration Statement of FRANKLIN TAX-FREE TRUST on Form N-1A [File No.
2-94222] of our report dated April 4, 1995 on our audit of the financial
statements and financial highlights of FRANKLIN TAX-FREE 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
March 14, 1996
CLASS II DISTRIBUTION PLAN
I. Investment Company: FRANKLIN TAX-FREE TRUST
II. Fund and Class: FRANKLIN ALABAMA TAX-FREE INCOME
FUND - CLASS II FRANKLIN ARIZONA TAX-FREE INCOME
FUND - CLASS II FRANKLIN COLORADO TAX-FREE INCOME
FUND - CLASS II FRANKLIN CONNECTICUT TAX-FREE
INCOME FUND - CLASS II FRANKLIN FLORIDA TAX-FREE
INCOME FUND - CLASS II FRANKLIN GEORGIA TAX-FREE
INCOME FUND - CLASS II FRANKLIN HIGH YIELD
TAX-FREE INCOME FUND - CLASS II FRANKLIN INSURED
TAX-FREE INCOME FUND - CLASS II FRANKLIN LOUISIANA
TAX-FREE INCOME FUND - CLASS II FRANKLIN MARYLAND
TAX-FREE INCOME FUND - CLASS II FRANKLIN
MASSACHUSETTS INSURED TAX-FREE INCOME FUND - CLASS
II FRANKLIN MICHIGAN INSURED TAX-FREE INCOME FUND
- CLASS II FRANKLIN MINNESOTA INSURED TAX-FREE
INCOME FUND - CLASS II FRANKLIN MISSOURI TAX-FREE
INCOME FUND - CLASS II FRANKLIN NEW JERSEY
TAX-FREE INCOME FUND - CLASS II FRANKLIN NORTH
CAROLINA TAX-FREE INCOME FUND - CLASS II FRANKLIN
OHIO INSURED TAX-FREE INCOME FUND - CLASS II
FRANKLIN OREGON TAX-FREE INCOME FUND - CLASS II
FRANKLIN PENNSYLVANIA TAX-FREE INCOME FUND - CLASS
II
FRANKLIN PUERTO RICO TAX-FREE INCOME FUND -
CLASS II
FRANKLIN TEXAS TAX-FREE INCOME FUND - CLASS II
FRANKLIN VIRGINIA TAX-FREE INCOME FUND - CLASS II
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: March 30, 1995
Investment Company
By: /s/ Deborah R. Gatzek
Franklin/Templeton Distributors, Inc.
By: /s/ Gregory E. Johnson
