As filed with the Securities and Exchange Commission on June 26, 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. 23 (X)
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 24 (X)
FRANKLIN TAX-FREE TRUST
(Exact Name of Registrant as Specified in Charter)
777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (415) 312-2000
Harmon E. Burns, 777 Mariners Island Blvd., San Mateo, CA 94404
(Name and Address of Agent for Service of Process)
Approximate Date of Proposed Public Offering:
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[X] on July 1, 1996 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(i)
[ ] on (date) pursuant to paragraph (a)(ii)
[ ] on (date) pursuant to paragraph (a)(ii) of rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective
date for a previously filed post-effective amendment.
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 22, 1996.
FRANKLIN TAX-FREE TRUST
CROSS REFERENCE SHEET
FORM N-1A
Part A: Information Required in Prospectus
(Franklin Arizona Insured Tax-Free Income Fund,
Franklin Florida Insured Tax-Free Income Fund,
Franklin Insured Tax-Free Income Fund,
Franklin Massachusetts Insured Tax-Free Income Fund,
Franklin Michigan Insured Tax-Free Income Fund,
Franklin Minnesota Insured Tax-Free Income Fund and
Franklin Ohio Insured Tax-Free Income Fund)
N-1A Location in
Item No. Item Registration Statement
1. Cover Page Cover Page
2. Synopsis Expense Summary
3. Condensed Financial "Financial Highlights;
Information "How Does the Fund
Measure Performance?"
4. General Description of "How Is the Trust Organized?";
Registrant "How Does the Fund Invest Its
Assets?"; "What Are the Fund's
Potential Risks?"
5. Management of the Fund "Who Manages the Fund?"
5A. Management's Discussion Contained in Registrant's Annual Report
of Fund Performance to Shareholders
6. Capital Stock and Other "How Is the Trust Organized?";
Securities "Services to Help You Manage Your
Account"; "What Distributions Might I
Receive From the Fund?"; "How Taxation
Affects You and the Fund";
7. Purchase of Securities "How Do I Buy Shares?"; "May I Exchange
Being Offered Shares for Shares of Another Fund";
"Transaction Procedures and Special
Requirements"; "Services to Help You
Manage Your Account"; "Who Manages the
Fund?"; "Useful Terms and Definitions"
8. Redemption or Repurchase "May I Exchange Shares for Shares of
Another Fund?"; "How Do I Sell
Shares?"; "Transaction Procedures and
Special Requirements"; "Services to Help
You Manage Your Account"
9. Pending Legal Proceedings Not Applicable
CROSS REFERENCE SHEET
FORM N-1A
Part A: Information Required in Prospectus
(Franklin Alabama Tax-Free Income Fund,
Franklin Florida Tax-Free Income Fund,
Franklin Georgia Tax-Free Income Fund,
Franklin Kentucky Tax-Free Income Fund,
Franklin Louisiana Tax-Free Income Fund,
Franklin Maryland Tax-Free Income Fund,
Franklin Missouri Tax-Free Income Fund,
Franklin North Carolina Tax-Free Income Fund,
Franklin Texas Tax-Free Income Fund and
Franklin Virginia Tax-Free Income Fund)
N-1A Location in
Item No. Item Registration Statement
1. Cover Page Cover Page
2. Synopsis Expense Summary
3. Condensed Financial "Financial Highlights;
Information "How Does the Fund
Measure Performance?"
4. General Description of "How Is the Trust Organized?";
Registrant "How Does the Fund Invest Its
Assets?"; "What Are the Fund's
Potential Risks?"
5. Management of the Fund "Who Manages the Fund?"
5A. Management's Discussion Contained in Registrant's Annual Report
of Fund Performance to Shareholders
6. Capital Stock and Other "How Is the Trust Organized?";
Securities "Services to Help You Manage Your
Account"; "What Distributions Might I
Receive From the Fund?"; "How Taxation
Affects You and the Fund";
7. Purchase of Securities "How Do I Buy Shares?"; "May I Exchange
Being Offered Shares for Shares of Another Fund";
"Transaction Procedures and Special
Requirements"; "Services to Help You
Manage Your Account"; "Who Manages the
Fund?"; "Useful Terms and Definitions"
8. Redemption or Repurchase "May I Exchange Shares for Shares of
Another Fund?"; "How Do I Sell
Shares?"; "Transaction Procedures and
Special Requirements"; "Services to Help
You Manage Your Account"
9. Pending Legal Proceedings Not Applicable
FRANKLIN TAX-FREE TRUST
CROSS REFERENCE SHEET
FORM N-1A
Part A: Information Required in Prospectus
(Franklin Arizona Tax-Free Income Fund,
Franklin Colorado Tax-Free Income Fund,
Franklin Connecticut Tax-Free Income Fund,
Franklin Indiana Tax-Free Income Fund,
Franklin New Jersey Tax-Free Income Fund,
Franklin Oregon Tax-Free Income Fund,
Franklin Pennsylvania Tax-Free Income Fund,
Franklin Puerto Rico Tax-Free Income Fund and
Franklin High Yield Tax-Free Income Fund)
N-1A Location in
Item No. Item Registration Statement
1. Cover Page Cover Page
2. Synopsis Expense Summary
3. Condensed Financial "Financial Highlights;
Information "How Does the Fund
Measure Performance?"
4. General Description of "How Is the Trust Organized?";
Registrant "How Does the Fund Invest Its
Assets?"; "What Are the Fund's
Potential Risks?"
5. Management of the Fund "Who Manages the Fund?"
5A. Management's Discussion Contained in Registrant's Annual Report
of Fund Performance to Shareholders
6. Capital Stock and Other "How Is the Trust Organized?";
Securities "Services to Help You Manage Your
Account"; "What Distributions Might I
Receive From the Fund?"; "How Taxation
Affects You and the Fund";
7. Purchase of Securities "How Do I Buy Shares?"; "May I Exchange
Being Offered Shares for Shares of Another Fund";
"Transaction Procedures and Special
Requirements"; "Services to Help You
Manage Your Account"; "Who Manages the
Fund?"; "Useful Terms and Definitions"
8. Redemption or Repurchase "May I Exchange Shares for Shares of
Another Fund?"; "How Do I Sell
Shares?"; "Transaction Procedures and
Special Requirements"; "Services to Help
You Manage Your Account"
9. Pending Legal Proceedings Not Applicable
FRANKLIN TAX-FREE TRUST
CROSS REFERENCE SHEET
FORM N-1A
Part A: Information Required in Prospectus
(Franklin Federal Intermediate-Term Tax-Free Income Fund)
N-1A Location in
Item No. Item Registration Statement
1. Cover Page Cover Page
2. Synopsis Expense Summary
3. Condensed Financial "Financial Highlights;
Information "How Does the Fund
Measure Performance?"
4. General Description of "How Is the Trust Organized?";
Registrant "How Does the Fund Invest Its
Assets?"; "What Are the Fund's
Potential Risks?"
5. Management of the Fund "Who Manages the Fund?"
5A. Management's Discussion Contained in Registrant's Annual Report
of Fund Performance to Shareholders
6. Capital Stock and Other "How Is the Trust Organized?";
Securities "Services to Help You Manage Your
Account"; "What Distributions Might I
Receive From the Fund?"; "How Taxation
Affects You and the Fund";
7. Purchase of Securities "How Do I Buy Shares?"; "May I Exchange
Being Offered Shares for Shares of Another Fund";
"Transaction Procedures and Special
Requirements"; "Services to Help You
Manage Your Account"; "Who Manages the
Fund?"; "Useful Terms and Definitions"
8. Redemption or Repurchase "May I Exchange Shares for Shares of
Another Fund?"; "How Do I Sell
Shares?"; "Transaction Procedures and
Special Requirements"; "Services to Help
You Manage Your Account"
9. Pending Legal Proceedings Not Applicable
FRANKLIN TAX-FREE TRUST
CROSS REFERENCE SHEET
FORM N-1A
Part B: Information Required in
Statement of Additional Information
(Franklin Arizona Insured Tax-Free Income Fund,
Franklin Florida Insured Tax-Free Income Fund,
Franklin Insured Tax-Free Income Fund,
Franklin Massachusetts Insured Tax-Free Income Fund,
Franklin Michigan Insured Tax-Free Income Fund,
Franklin Minnesota Insured Tax-Free Income Fund and
Franklin Ohio Insured Tax-Free Income Fund)
N-1A Location in
Item No. Item Registration Statement
10. Cover Page Cover Page
11. Table of Contents Contents
12. General Information and Not Applicable
History
13. Investment Objectives and "How Does the Fund Invest Its
Policies Assets?"; "Investment Restrictions";
14. Management of the Registrant "Officers and Trustees"; "Investment
Advisory and Other Services"
15. Control Persons and "Officers and Trustees"; "Investment
Principal Holders of Advisory and Other Services";
Securities "Miscellaneous Information"
16. Investment Advisory and "Investment Advisory and Other
Other Services Services"; "The Fund's Underwriter"
17. Brokerage Allocation and "How Does the Fund Buy Securities
Other Practices for Its Portfolio?"
18. Capital Stock and Other See Prospectus "How Is the Trust
Securities Organized?"
19. Purchase, Redemption and "How Do I Buy, Sell and Exchange
Pricing of Securities Being Shares?"; How Are Fund Shares
Offered Valued?"; "Financial Statements"
20. Tax Status "Additional Information on
Distributions and Taxes"
21. Underwriters "The Fund's Underwriter"
22. Calculation of Performance "How Does the Fund Measure
Data Performance?"
23. Financial Statements Financial Statements
FRANKLIN TAX-FREE TRUST
CROSS REFERENCE SHEET
FORM N-1A
Part B: Information Required in
Statement of Additional Information
(Franklin Alabama Tax-Free Income Fund,
Franklin Florida Tax-Free Income Fund,
Franklin Georgia Tax-Free Income Fund,
Franklin Kentucky Tax-Free Income Fund,
Franklin Louisiana Tax-Free Income Fund,
Franklin Maryland Tax-Free Income Fund,
Franklin Missouri Tax-Free Income Fund,
Franklin North Carolina Tax-Free Income Fund,
Franklin Texas Tax-Free Income Fund and
Franklin Virginia Tax-Free Income Fund)
N-1A Location in
Item No. Item Registration Statement
10. Cover Page Cover Page
11. Table of Contents Contents
12. General Information and Not Applicable
History
13. Investment Objectives and "How Does the Fund Invest Its
Policies Assets?"; "Investment Restrictions";
14. Management of the Registrant "Officers and Trustees"; "Investment
Advisory and Other Services"
15. Control Persons and "Officers and Trustees"; "Investment
Principal Holders of Advisory and Other Services";
Securities "Miscellaneous Information"
16. Investment Advisory and "Investment Advisory and Other
Other Services Services"; "The Fund's Underwriter"
17. Brokerage Allocation and "How Does the Fund Buy Securities
Other Practices for Its Portfolio?"
18. Capital Stock and Other See Prospectus "How Is the Trust
Securities Organized?"
19. Purchase, Redemption and "How Do I Buy, Sell and Exchange
Pricing of Securities Being Shares?"; How Are Fund Shares
Offered Valued?"; "Financial Statements"
20. Tax Status "Additional Information on
Distributions and Taxes"
21. Underwriters "The Fund's Underwriter"
22. Calculation of Performance "How Does the Fund Measure
Data Performance?"
23. Financial Statements Financial Statements
CROSS REFERENCE SHEET
FORM N-1A
Part B: Information Required in
Statement of Additional Information
(Franklin Arizona Tax-Free Income Fund,
Franklin Colorado Tax-Free Income Fund,
Franklin Connecticut Tax-Free Income Fund,
Franklin Indiana Tax-Free Income Fund,
Franklin New Jersey Tax-Free Income Fund,
Franklin Oregon Tax-Free Income Fund,
Franklin Pennsylvania Tax-Free Income Fund,
Franklin Puerto Rico Tax-Free Income Fund and
Franklin High Yield Tax-Free Income Fund)
N-1A Location in
Item No. Item Registration Statement
10. Cover Page Cover Page
11. Table of Contents Contents
12. General Information and Not Applicable
History
13. Investment Objectives and "How Does the Fund Invest Its
Policies Assets?"; "Investment Restrictions";
14. Management of the Registrant "Officers and Trustees"; "Investment
Advisory and Other Services"
15. Control Persons and "Officers and Trustees"; "Investment
Principal Holders of Advisory and Other Services";
Securities "Miscellaneous Information"
16. Investment Advisory and "Investment Advisory and Other
Other Services Services"; "The Fund's Underwriter"
17. Brokerage Allocation and "How Does the Fund Buy Securities
Other Practices for Its Portfolio?"
18. Capital Stock and Other See Prospectus "How Is the Trust
Securities Organized?"
19. Purchase, Redemption and "How Do I Buy, Sell and Exchange
Pricing of Securities Being Shares?"; How Are Fund Shares
Offered Valued?"; "Financial Statements"
20. Tax Status "Additional Information on
Distributions and Taxes"
21. Underwriters "The Fund's Underwriter"
22. Calculation of Performance "How Does the Fund Measure
Data Performance?"
23. Financial Statements Financial Statements
FRANKLIN TAX-FREE TRUST
CROSS REFERENCE SHEET
FORM N-1A
Part B: Information Required in
Statement of Additional Information
(Franklin Federal Intermediate-Term Tax-Free Income Fund)
N-1A Location in
Item No. Item Registration Statement
10. Cover Page Cover Page
11. Table of Contents Contents
12. General Information and Not Applicable
History
13. Investment Objectives and "How Does the Fund Invest Its
Policies Assets?"; "Investment Restrictions";
14. Management of the Registrant "Officers and Trustees"; "Investment
Advisory and Other Services"
15. Control Persons and "Officers and Trustees"; "Investment
Principal Holders of Advisory and Other Services";
Securities "Miscellaneous Information"
16. Investment Advisory and "Investment Advisory and Other
Other Services Services"; "The Fund's Underwriter"
17. Brokerage Allocation and "How Does the Fund Buy Securities
Other Practices for Its Portfolio?"
18. Capital Stock and Other See Prospectus "How Is the Trust
Securities Organized?"
19. Purchase, Redemption and "How Do I Buy, Sell and Exchange
Pricing of Securities Being Shares?"; How Are Fund Shares
Offered Valued?"; "Financial Statements"
20. Tax Status "Additional Information on
Distributions and Taxes"
21. Underwriters "The Fund's Underwriter"
22. Calculation of Performance "How Does the Fund Measure
Data Performance?"
23. Financial Statements Financial Statements
PROSPECTUS & APPLICATION
Franklin
Tax-Free
Trust
July 1, 1996
INVESTMENT STRATEGY
TAX-FREE INCOME
Franklin Arizona Insured Tax-Free Income Fund - Class I
Franklin Florida Insured Tax-Free Income Fund - Class I
Franklin Insured Tax-Free Income Fund - Class I & Class II
Franklin Massachusetts Insured Tax-Free Income Fund -
Class I & Class II
Franklin Michigan Insured Tax-Free Income Fund - Class I & Class II
Franklin Minnesota Insured Tax-Free Income Fund - Class I & Class II
Franklin Ohio Insured Tax-Free Income Fund - Class I & Class II
This prospectus contains information you should know before investing in the
Fund. Please keep it for future reference.
The Fund's SAI, dated July 1, 1996, as may be amended from time to time,
includes more information about the Fund's procedures and policies. It has been
filed with the SEC and is incorporated by reference into this prospectus. For a
free copy or a larger print version of this prospectus, call 1-800/DIAL BEN or
write the Fund at the address shown.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SEC OR ANY STATE SECURITIES COMMISSION NOR HAS THE SEC 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 DISTRIBUTORS.
This prospectus describes the seven series of Franklin Tax-Free Trust (the
"Trust") listed above, five of which currently offer two classes of shares.
Each Fund may, separately or collectively, be referred to as the "Fund" or
"Funds," or individually by the state or policy in its name.
Franklin
Tax-Free
Trust
July 1, 1996
When reading this prospectus,
you will see terms that are
capitalized. This means the term
is explained in our glossary section.
Table of Contents
About the Fund
Expense Summary............................. 2
Financial Highlights........................ 4
How Does the Fund Invest Its Assets?........ 10
What Are the Fund's Potential Risks?........ 19
Who Manages the Fund?....................... 20
How Does the Fund Measure Performance?...... 23
How Is the Trust Organized?................. 24
About Your Account
How Do I Buy Shares?........................ 25
May I Exchange Shares for Shares of Another Fund? 30
How Do I Sell Shares?....................... 33
Transaction Procedures and Special Requirements 35
Services to Help You Manage Your Account.... 39
What Distributions Might I Receive From the Fund? 42
How Taxation Affects You and the Fund....... 43
Glossary
Useful Terms and Definitions................ 46
Appendices
State Tax Treatment......................... 48
Special Factors Affecting Each Fund......... 52
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN
About the Fund
Expense Summary
This table is designed to help you understand the costs of investing in the
Fund. It is based on the historical expenses of each class for the fiscal year
ended February 29, 1996. The Class II expenses are annualized. Your actual
expenses may vary.
Shareholder Transaction Expenses+
<TABLE>
<CAPTION>
Arizona Florida Insured Massachusetts Michigan Minnesota Ohio
Fund Fund Fund Fund Fund Fund Fund
Class I Class I Class I Class I Class I Class I Class I
<S> <C> <C> <C> <C> <C> <C> <C>
Maximum Sales Charge Imposed
on Purchases (as a percentage
of offering price) 4.25% 4.25% 4.25% 4.25% 4.25% 4.25% 4.25%
Deferred Sales Charge+++ NONE NONE NONE NONE NONE NONE NONE
Exchange Fee (per transaction)* NONE NONE $5.00 NONE NONE NONE NONE
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees 0.63%* 0.63%* 0.47% 0.54% 0.48% 0.50% 0.49%
Rule 12b-1 Fees** 0.09% 0.09% 0.07%+ 0.08% 0.07% 0.07% 0.07%
Other Expenses 0.14%* 0.10%* 0.06% 0.07% 0.07% 0.09% 0.08%
Total Fund Operating Expenses 0.86% 0.82% 0.60% 0.69% 0.62% 0.66% 0.64%
Shareholder Transaction Expenses +
Insured Massachusetts Michigan Minnesota Ohio
Fund Fund Fund Fund Fund
Class II Class II Class II Class II Class II
<S> <C> <C> <C> <C> <C>
Maximum Sales Charge Imposed
on Purchases (as a percentage
of offering price)++ 1.00% 1.00% 1.00% 1.00% 1.00%
Deferred Sales Charge+++ 1.00% 1.00% 1.00% 1.00% 1.00%
Exchange Fee (per transaction)* $5.00 NONE NONE NONE NONE
Annual Fund Operating Expenses (as a percentage of average net assets)
Management Fees 0.47% 0.54% 0.48% 0.50% 0.49%
Rule 12b-1 Fees** 0.65% 0.65% 0.65% 0.65% 0.65%
Other Expenses 0.06% 0.07% 0.07% 0.09% 0.08%
Total Fund Operating Expenses 1.18% 1.26% 1.20% 1.24% 1.22%
</TABLE>
+Many transactions may be processed through your Securities Dealer. Your dealer
may charge a fee for this service.
++Although Class II has a lower front-end sales charge than Class I, its Rule
12b-1 fees are higher. Over time you pay more for Class II shares. Please see
"How Do I Buy Shares? - Deciding Which Class to Buy."
+++A Contingent Deferred Sales Charge of 1% may apply to Class I purchases of $1
million or more if you sell the shares within one year and any Class II purchase
if you sell the shares within 18 months. There is no front-end sales charge if
you buy $1 million or more in Class I shares. See "How Do I Sell Shares? -
Contingent Deferred Sales Charge" for details.
*Advisers has agreed in advance to limit all or a portion of its management
fees, and to make certain payments to reduce expenses of the Arizona and Florida
Funds. With this reduction, management fees represented 0% and 0.16% of the
average net assets of the respective Funds. Total operating expenses represented
0.16% and 0.35% of the average net assets of the Arizona and Florida Funds,
respectively.
**The Class II fees are annualized. These fees may not exceed 0.10% per year for
Class I shares, except Arizona and Florida Fund with a maximum of 0.15%, and
0.65% for Class II shares. The combination of front-end sales charges and Rule
12b-1 fees could cause long-term shareholders to pay more than the economic
equivalent of the maximum front-end sales charge permitted under the NASD's
rules.
Example
Assume the annual return for each class is 5% and operating expenses are as
described above. For each $1,000 investment, you would pay the following
projected expenses if you sold your shares after the number of years shown.
NAME OF FUND ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
Arizona Fund Class I $51 $69 $88 $144
Florida Fund Class I 51 68 86 140
Insured Fund Class I 48 61 75 114
Insured Fund Class II 32 47 74 152
Massachusetts Fund Class I 49 64 79 125
Massachusetts Fund Class II 33 50 78 161
Michigan Fund Class I 49 62 76 117
Michigan Fund Class II 32 48 75 154
Minnesota Fund Class I 49 63 78 121
Minnesota Fund Class II 32 49 77 158
Ohio Fund Class I 49 62 77 119
Ohio Fund Class II 32 48 76 156
*Assumes a Contingent Deferred Sales Charge will not apply.
For the same Class II investment, you would pay the following projected expenses
if you did not sell your shares at the end of the first year. Your projected
expenses for the remaining periods would be the same as above.
NAME OF FUND ONE YEAR
Insured Fund Class II $22
Massachusetts Fund Class II 23
Michigan Fund Class II 22
Minnesota Fund Class II 23
Ohio Fund Class II 22
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. The
Fund pays its operating expenses. These expenses are reflected in the Net Asset
Value or dividends of each class and are not directly charged to your account.
Financial Highlights
This table summarizes the Fund's financial history. The information has been
audited by Coopers & Lybrand L.L.P., the Fund's independent auditors. Their
audit report covering each of the most recent five years appears in the
financial statements in the Trust's Annual Report to Shareholders for the fiscal
year ended February 29, 1996.
<TABLE>
<CAPTION>
Arizona Fund: Class I Shares
Year Ended Feb. 29 1996 1995 19941
Per Share Operating Performance
<S> <C> <C> <C>
Net asset value at beginning of period $ 9.80 $10.28 $10.00
Net investment income .55 .55 .34
Net realized & unrealized gain (loss) on securities .565 (.485) .265
Total from investment operations 1.115 .065 .605
Distributions from net investment income (.555) (.545) (.325)
Distributions from capital gains -- -- --
Total distribution (.555) (.545) (.325)
Net asset value at end of period 10.36 9.80 10.28
Total return*** 11.64% .94% 6.04%
Ratios/Supplemental Data
Net assets at end of period (in 000's) $38,199 $20,794 $12,895
Ratio of expenses to average net assets ** .16% .10% .03%*
Ratio of net investment income to average net assets 5.51% 5.80% 4.85%*
Portfolio turnover rate 4.12% 44.61% 62.88%
Florida Fund: Class I Shares
Year Ended Feb. 29 1996 1995 19941
Per Share Operating Performance
<S> <C> <C> <C>
Net asset value at beginning of period $ 9.53 $10.07 $10.00
Net investment income .53 .52 .34
Net realized & unrealized gain (loss) on securities .491 (.531) .060
Total from investment operations 1.021 (.011) .400
Distributions from net investment income (.531) (.529) (.330)
Distributions from capital gains -- -- --
Total distribution (.531) (.529) (.330)
Net asset value at end of period 10.02 9.53 10.07
Total return*** 10.95% .21% 3.97%
Ratios/Supplemental Data
Net assets at end of period (in 000's) $69,583 $46,847 $32,150
Ratio of expenses to average net assets ** .35% .35% --
Ratio of net investment income to average net assets 5.37% 5.61% 4.97%*
Portfolio turnover rate 24.36% 43.71% 28.72%
</TABLE>
<TABLE>
<CAPTION>
Insured Fund: Class I Shares
Year Ended Feb. 29 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
Per Share Operating Performance
Net asset value at
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
beginning of period $11.97 $12.45 $12.43 $11.68 $11.41 $11.26 $11.08 $11.12 $12.02 $11.61
Net investment income .71 .71 .73 .74 .74 .78 .78 .78 .79 .80
Net realized & unrealized
gain (loss) on securities .302 (.481) .020 .751 .298 .156 .204 .032 (.837) .541
Total from investment
operations 1.012 .229 .750 1.491 1.038 .936 .984 .812 (.047) 1.341
Distributions from net
investment income (.712) (.709) (.730) (.741) (.768) (.786) (.804) (.852) (.852) (.852)
Distributions from
capital gains -- -- -- -- -- -- -- -- (.001) (.079)
Total distribution (.712) (.709) (.730) (.741) (.768) (.786) (.804) (.852) (.853) (.931)
Net asset value
at end of period 12.27 11.97 12.45 12.43 11.68 11.41 11.26 11.08 11.12 12.02
Total return*** 8.66% 2.03% 5.93% 12.93% 9.29% 8.38% 8.81% 7.38% (.17)% 11.84%
Ratios/Supplemental Data
Net assets at end of
period (in 000's) $1,705,038 $1,683,234 $1,802,548 $1,539,186 $1,130,592 $850,089 $711,300 $551,436 $316,606 $182,994
Ratio of expenses to
average net assets** .60% .59% .52% .53% .53% .53% .54% .58% .62% .72%
Ratio of net investment
income to average net assets 5.81% 6.00% 5.79% 6.22% 6.55% 6.95% 6.92% 7.01% 7.03% 6.14%
Portfolio turnover rate 13.52% 14.42% 6.85% 7.95% 6.35% 9.76% 11.96% 12.79% 5.65% 18.93%
</TABLE>
<TABLE>
<CAPTION>
Insured Fund: Class II Shares
Year Ended Feb. 29 19962
Per Share Operating Performance
<S> <C>
Net asset value at beginning of period $11.98
Net investment income .54
Net realized & unrealized gain (loss) on securities .322
Total from investment operations .862
Distributions from net investment income (.532)
Distributions from capital gains --
Total distribution (.532)
Net asset value at end of period 12.31
Total return*** 7.32%
Ratios/Supplemental Data
Net assets at end of period (in 000's) $8,152
Ratio of expenses to average net assets** 1.18%*
Ratio of net investment income to average net assets 5.21%*
Portfolio turnover rate 13.52%
</TABLE>
<TABLE>
<CAPTION>
Massachusetts Fund: Class l Shares
Year Ended Feb. 29 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
Per Share Operating Performance
Net asset value at
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
beginning of period $11.34 $11.81 $11.73 $11.03 $10.76 $10.72 $10.59 $10.61 $11.40 $11.25
Net investment income .66 .66 .67 .69 .68 .72 .72 .71 .71 .74
Net realized & unrealized
gain (loss) on securities .313 (.468) .092 .685 .307 .040 .118 (.017) (.725) .226
Total from investment
operations .973 .192 .762 1.375 .987 .760 .838 .693 (.015) .966
Distributions from net
investment income (.663) (.662) (.682) (.675) (.717) (.720) (.708) (.713) (.775) (.816)
Distributions from
capital gains -- -- -- -- -- -- -- -- -- --
Total distribution (.663) (.662) (.682) (.675) (.717) (.720) (.708) (.713) (.775) (.816)
Net asset value
at end of period 11.65 11.34 11.81 11.73 11.03 10.76 10.72 10.59 10.61 11.40
Total return*** 8.80% 1.83% 6.39% 12.61% 9.34% 7.10% 7.82% 6.56% .07% 8.71%
Ratios/Supplemental Data
Net assets at end
of period (in 000's) $301,529 $288,331 $307,013 $278,510 $218,336 $152,622 $123,906 $109,851 $102,764 $73,285
Ratio of expenses to
average net assets** .69% .67% .60% .64% .67% .70% .72% .75% .80% .75%
Ratio of net investment
income to average net assets 5.67% 5.89% 5.69% 6.09% 6.40% 6.72% 6.65% 6.81% 6.71% 5.90%
Portfolio turnover rate 10.29% 16.90% 13.82% 9.65% 7.49% 11.47% 14.14% 22.97% 12.50% 3.34%
</TABLE>
<TABLE>
<CAPTION>
Massachusetts Fund: Class Il Shares
Year Ended Feb. 29 19962
Per Share Operating Performance
<S> <C>
Net asset value at beginning of period $11.36
Net Investment income .50
Net realized & unrealized gain (loss) on securities .323
Total from investment operations .823
Distributions from net investment income (.493)
Distributions from capital gains --
Total distribution (.493)
Net asset value at end of period 11.69
Total return*** 7.36%
Ratios/Supplemental Data
Net assets at end of period (in 000's) $2,759
Ratio of expenses to average net assets** 1.26%*
Ratio of net investment income to average net assets 5.06%*
Portfolio turnover rate 10.29%
</TABLE>
<TABLE>
<CAPTION>
Michigan Fund: Class I Shares
Year Ended Feb. 29 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
Per Share Operating Performance
Net asset value at
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
beginning of period $11.76 $12.24 $12.18 $11.41 $11.19 $11.06 $10.89 $10.89 $11.67 $11.25
Net investment income .68 .69 .70 .71 .71 .75 .75 .74 .75 .76
Net realized & unrealized
gain (loss) on securities .337 (.484) .066 .766 .254 .124 .152 .032 (.735) .488
Total from investment
operations 1.017 .206 .766 1.476 .964 .874 .902 .772 .015 1.248
Distributions from net
investment income (.687)3 (.686) (.706) (.706) (.744) (.744) (.732) (.772) (.795) (.828)
Distributions from
capital gains -- -- -- -- -- -- -- -- -- --
Total distribution (.687) (.686) (.706) (.706) (.744) (.744) (.732) (.772) (.795) (.828)
Net asset value
at end of period $12.09 $11.76 $12.24 $12.18 $11.41 $11.19 $11.06 $10.89 $10.89 $11.67
Total return*** 8.86% 1.87% 6.18% 13.23% 8.78% 7.93% 8.21% 7.15% .33% 11.28%
Ratios/Supplemental Data
Net assets at end
of period (in 000's) $1,115,454 $1,037,717 $1,055,452 $882,361 $665,914 $515,313 $427,818 $370,238 $291,806 $234,890
Ratio of expenses to
average net assets** .62% .61% .54% .58% .59% .61% .63% .67% .72% .78%
Ratio of net investment
income to average net assets 5.65% 5.87% 5.66% 6.09% 6.45% 6.72% 6.72% 6.86% 6.85% 6.13%
Portfolio turnover rate 9.38% 9.12% 3.21% 2.04% 10.80% 4.17% 7.93% 9.83% 10.16% 4.80%
</TABLE>
<TABLE>
<CAPTION>
Michigan Fund: Class II Shares
Year Ended Feb. 29 19962
Per Share Operating Performance
<S> <C>
Net asset value at beginning of period $11.77
Net investment income .51
Net realized & unrealized gain (loss) on securities .369
Total from investment operations .879
Distributions from net investment income (.509)
Distributions from capital gains --
Total distribution (.509)
Net asset value at end of period $12.14
Total return*** 7.58%
Ratios/Supplemental Data
Net assets at end of period (in 000's) $6,683
Ratio of expenses to average net assets** 1.20%*
Ratio of net investment income to average net assets 5.03%*
Portfolio turnover rate 9.38%
</TABLE>
<TABLE>
<CAPTION>
Minnesota Fund: Class I Shares
Year Ended Feb. 29 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
Per Share Operating Performance
Net asset value at
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
beginning of period $11.88 $12.33 $12.35 $11.68 $11.44 $11.40 $11.24 $11.26 $12.02 $11.64
Net investment income .67 .69 .70 .73 .73 .76 .77 .76 .75 .79
Net realized & unrealized
gain (loss) on securities .265 (.451) (.014) .667 .275 .072 .182 .012 (.718) .437
Total from investment
operations .935 .239 .686 1.397 1.005 .832 .952 .772 .032 1.227
Distributions from net
investment income (.675) (.685) (.706) (.727) (.765) (.792) (.792) (.792) (.792) (.847)
Distributions from
capital gains -- (.004) -- -- -- -- -- -- -- --
Total distribution (.675) (.689) (.706) (.727) (.765) (.792) (.792) (.792) (.792) (.847)
Net asset value
at end of period $12.14 $11.88 $12.33 $12.35 $11.68 $11.44 $11.40 $11.24 $11.26 $12.02
Total return*** 8.06% 2.12% 5.42% 12.23% 8.95% 7.29% 8.39% 6.90% .48% 10.72%
Ratios/Supplemental Data
Net assets at end
of period (in 000's) $492,139 $479,934 $499,619 $445,767 $357,279 $284,779 $235,058 $183,867 $155,509 $119,877
Ratio of expenses to
average net assets** .66% .66% .60% .63% .65% .67% .70% .75% .76% .78%
Ratio of net investment
income to average net assets 5.58% 5.81% 5.67% 6.12% 6.43% 6.62% 6.68% 6.80% 6.68% 5.87%
Portfolio turnover rate 17.72% 17.59% 13.42% 5.58% 3.14% 9.12% 4.55% 15.19% 19.11% 12.38%
</TABLE>
<TABLE>
<CAPTION>
Minnesota Fund: Class II Shares
Year Ended Feb. 29 19962
Per Share Operating Performance
<S> <C>
Net asset value at beginning of period $11.89
Net investment income .500
Net realized & unrealized gain (loss) on securities .281
Total from investment operations .781
Distributions from net investment income (.501)
Distributions from capital gains --
Total distribution (.501)
Net asset value at end of period $12.17
Total return*** 6.67%
Ratios/Supplemental Data
Net assets at end of period (in 000's) $1,152
Ratio of expenses to average net assets** 1.24%*
Ratio of net investment income to average net assets 4.94%*
Portfolio turnover rate 17.72%
</TABLE>
<TABLE>
<CAPTION>
Ohio Fund: Class I Shares
Year Ended Feb. 29 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
Per Share Operating Performance
Net asset value at
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
beginning of period $11.90 $12.40 $12.34 $11.55 $11.33 $11.17 $11.02 $10.93 $11.69 $11.31
Net investment income .68 .69 .70 .72 .71 .75 .75 .74 .74 .77
Net realized & unrealized
gain (loss) on securities .327 (.499) .066 .776 .275 .172 .141 .082 (.765) .452
Total from investment
operations 1.007 .191 .766 1.496 .985 .922 .891 .822 (.025) 1.222
Distributions from net
investment income (.687)3 (.691) (.706) (.706) (.765) (.762) (.741) (.732) (.732) (.842)
Distributions from
capital gains -- -- -- -- -- -- -- -- (.003) --
Total distribution (.687) (.691) (.706) (.706) (.765) (.762) (.741) (.732) (.735) (.842)
Net asset value at
end of period $12.22 $11.90 $12.40 $12.34 $11.55 $11.33 $11.17 $11.02 $10.93 $11.69
Total return*** 8.66% 1.74% 6.08% 13.26% 8.86% 8.28% 8.00% 7.58% (.01)% 11.01%
Ratios/Supplemental Data
Net assets at end of
period (in 000's) $685,783 $652,545 $686,398 $564,758 $409,044 $273,119 $224,722 $203,230 $193,702 $192,647
Ratio of expenses to
average net assets** .64% .63% .56% .59% .62% .65% .65% .71% .75% .80%
Ratio of net investment
income to average net assets 5.58% 5.83% 5.59% 6.05% 6.36% 6.67% 6.71% 6.80% 6.80% 5.61%
Portfolio turnover rate 11.47% 11.76% 7.29% 2.87% 1.16% 4.44% 10.80% 32.48% 15.54% 4.96%
</TABLE>
<TABLE>
<CAPTION>
Ohio Fund: Class II Shares
Year Ended Feb. 29 19962
Per Share Operating Performance
<S> <C>
Net asset value at beginning of period $11.90
Net investment income .520
Net realized & unrealized gain (loss) on securities .351
Total from investment operations .871
Distributions from net investment income (.511)
Distributions from capital gains --
Total distribution (.511)
Net asset value at end of period $12.26
Total return*** 7.43%
Ratios/Supplemental Data
Net assets at end of period (in 000's) $6,085
Ratio of expenses to average net assets** 1.22%*
Ratio of net investment income to average net assets 4.99%*
Portfolio turnover rate 11.47%
</TABLE>
1For the period April 30, 1993 (effective date) to February 28, 1994.
2For the period May 1, 1995 (effective date) to February 29, 1996.
3Includes distributions in excess of net investment income in the amount of
$.001.
*Annualized.
**For the periods indicated, Advisers agreed in advance to limit its management
fees and to make payment of certain operating expenses of the Fund. Had such
action not been taken, the ratio of operating expenses to average net assets
would have been as follows:
Ratio of Expenses
to Average Net Assets
Arizona Fund
19941 0.83%*
1995 0.96
1996 0.86
Florida Fund
19941 0.83*
1995 0.88
1996 0.82
Ratio of Expenses
to Average Net Assets
Massachusetts Fund
1989 0.79%
Minnesota Fund
1989 0.76
***Total return measures the change in value of an investment over the periods
indicated. It is not annualized, except where indicated. It does not include the
maximum front-end sales charge or the contingent deferred sales charge and
assumes reinvestment of dividends and capital gains, if any, at Net Asset Value.
Prior to May 1, 1994, dividends were reinvested at the maximum offering price,
with the exception of Arizona and Florida Funds.
How Does the Fund Invest Its Assets?
THE FUND'S INVESTMENT OBJECTIVE
Each Fund seeks to provide investors with as high a level of income exempt from
federal income taxes as is consistent with prudent investing, while seeking
preservation of shareholders' capital. Each State Fund also seeks to provide a
maximum level of income that is exempt from the personal income taxes, if any,
for resident shareholders of the named state. The state of Florida currently
does not impose a state personal income tax. Each Fund's investment objective is
a fundamental policy and may not be changed without shareholder approval. Of
course, there is no assurance that the Fund's objective will be achieved.
The Insured Fund will invest primarily in securities issued by states,
territories and possessions of the U.S. and the District of Columbia and their
political subdivisions, agencies and instrumentalities, the interest on which is
exempt from regular federal income taxes. Each State Fund will invest primarily
in municipal securities issued by its respective state and that state's
municipalities, political subdivisions and public authorities, the interest on
which is exempt from regular federal income taxes and the personal income taxes,
if any, of its respective state.
The Insured Fund will attempt to invest 100% and, as a matter of fundamental
policy, will invest at least 80% of its net assets in securities that pay
interest exempt from federal income taxes, including the alternative minimum
tax. Each State Fund attempts to invest 100% and, as a matter of fundamental
policy, will invest at least 80% of its net assets in securities that pay
interest exempt from federal income taxes and from the personal income taxes, if
any, of its respective state. It is possible, although not anticipated, that up
to 20% of the Fund's net assets could be in taxable obligations.
At least 65% of each State Fund's total assets will be invested in municipal
securities and obligations issued by or on behalf of its respective state, its
local governments, municipalities, authorities, agencies and political
subdivisions. It is possible, although not anticipated, that up to 35% of a
Fund's total assets may be in qualifying municipal securities and obligations of
a state or territory other than its respective state.
If a state requires the Fund to consist of a specified amount of obligations of
that state or the U.S. government, its agencies, instrumentalities, commissions,
possessions or territories that are exempt from taxation under the laws of that
state in order for any portion of the distributions from that Fund to be exempt
from income taxation, the Fund will attempt to invest at least the minimum
amount required by the state in those securities. See "How Taxation Affects You
and the Fund" for additional information.
At least 65% of each Fund's total assets will be invested in insured municipal
securities. The Funds are permitted to invest up to 35% of the Fund's total
assets in municipal securities secured by an escrow account. At the time
insurance is obtained, the insurer evaluates the security using quality
standards that are independently determined by the insurer. Normally insured
municipal securities carry one of the top three ratings by Standard & Poor's
Corporation ("S&P"), Moody's Investors Service ("Moody's") or Fitch Investors
Service ("Fitch") (triple A, double A and single A). An insurer may also insure
municipal securities that are unrated or have lower ratings but that meet its
quality standards based on its own internal research and analysis. (See
"Insurance.") In the event the rating of an issue held in the Fund's portfolio
is lowered by the rating services, such change will be considered by the Fund in
its evaluation of the overall investment merits of that security, but such
change will not necessarily result in an automatic sale of the security. Each
Fund is permitted to invest up to 35% of its total assets in municipal
securities secured by an escrow or trust account consisting of U.S. government
obligations, without obtaining insurance.
Pending investment in longer-term municipal securities, each Fund also may
invest up to 35% of its total assets in short-term, tax-exempt instruments,
without obtaining insurance, if these instruments carry the highest rating by
Moody's, S&P or Fitch. For a description of these ratings, please see
"Description of Municipal Securities Ratings" in the SAI.
Under normal market conditions, each Fund will invest its assets as described
above. For temporary defensive purposes, however, each Fund may invest up to
100% of its net assets in obligations that pay interest that may be subject to
federal income tax, including the alternative minimum tax.
Also for temporary defensive purposes each Fund may invest up to 100% of its net
assets in (i) municipal securities and obligations of state and local
governments other than its respective state (for State Funds), (ii) commercial
paper rated at least A-1 by S&P, P-1 by Moody's or F-1 by Fitch, or (iii)
obligations issued or guaranteed by the full faith and credit of the U.S.
government.
TYPES OF SECURITIES THE FUND MAY INVEST IN
The term "municipal securities," as used in this prospectus, means obligations
issued by or on behalf of any state, territory or possession 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 is generally
rendered to the issuer by the issuer's bond counsel at the time of issuance of
the security.
Municipal securities are used to raise money for various public purposes, such
as constructing public facilities and making loans to public institutions.
Certain types of municipal securities are issued to provide funding for
privately operated facilities.
Funds have no restrictions on the maturities of municipal securities in which
they may invest. Each Fund will seek to invest in municipal securities with
maturities that, in Advisers' judgment, will provide a high level of current
income consistent with prudent investing. Advisers will also consider current
market conditions and the cost of the insurance obtainable on the securities.
It is possible that any Fund from time to time will invest more than 25% of its
assets in a particular segment of the municipal securities market, including,
but not limited to, hospital revenue bonds, housing agency bonds, tax-exempt
industrial development revenue bonds, transportation bonds, or pollution control
revenue bonds. In these 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 and municipal securities markets, the
size of a particular offering, the maturity of the obligation, and the credit
rating of the issuer. Generally, municipal securities with longer maturities
produce higher current yields than municipal securities with shorter maturities.
Prices of longer term securities, however, typically fluctuate more than those
of short term securities due to changes in interest rates, tax laws and other
general market conditions. 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. Although the cost of insurance to a
Fund reduces the Fund's yield, one of the objectives of such insurance is to
obtain a higher yield than would be available if all securities in the Fund's
portfolio were rated triple A or its equivalent without the benefit of any
insurance.
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 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 may subject you
to, or increase your liability under, the federal and state alternative minimum
tax. In addition, all distributions derived from interest exempt from regular
federal income tax may subject corporate shareholders to, or increase their
liability under, the federal alternative minimum tax, because these
distributions are included in the corporation's adjusted current earnings. In
states with a corporate franchise tax, distributions of a Fund may also be fully
taxable to corporate shareholders under their state franchise tax systems.
Consistent with each Fund's investment objective, the Fund may acquire private
activity bonds if, in Advisers' opinion, these bonds represent the most
attractive investment opportunity then available to a Fund. For the fiscal year
ended February 29, 1996, the Funds' portfolios derived the following percentages
of their income from bonds, the interest on which constitutes a preference item
subject to the federal alternative minimum tax for certain investors:
FUND PERCENTAGE
Arizona Fund 2.84%
Florida Fund 6.92%
Insured Fund 9.08%
Massachusetts Fund 3.67%
Michigan Fund 4.79%
Minnesota Fund 4.30%
Ohio Fund 7.04%
Floating and Variable Rate Obligations. Each Fund may buy floating rate and
variable rate obligations. These obligations bear interest at rates that are not
fixed, but that vary with changes in prevailing market rates on predesignated
dates. The Fund may also invest in variable or floating rate demand notes
("VRDNs"), which carry a demand feature that permits the Fund to tender the
obligation back to the issuer or a third party at par value plus accrued
interest prior to maturity, according to the terms of the obligation.
Frequently, VRDNs are secured by letters of credit or other credit support
arrangements. Although it is not a put option in the usual sense, such a demand
feature is sometimes known as a "put." Except for the Arizona and Florida Funds,
with respect to 75% of the total value of the Fund's assets, no more than 5% of
such value may be in securities underlying "puts" from the same institution,
except that the Fund may invest up to 10% of its asset value in unconditional
"puts" (exercisable even in the event of a default in the payment of principal
or interest on the underlying security) and other securities issued by the same
institution. The Fund will limit its purchase of municipal securities that are
floating rate and variable rate obligations to those meeting the quality
standards set forth in this prospectus.
When-Issued and Delayed Delivery Transactions. Each Fund may buy and sell
municipal securities on a "when-issued" and "delayed delivery" basis. The price
is subject to market fluctuation, and the value at delivery may be more or less
than the purchase price. Although the Fund will generally buy municipal
securities on a when-issued basis with the intention of acquiring the
securities, it may sell the securities before the settlement date if it is
deemed advisable. When a Fund is the buyer in such a transaction, it will
maintain, in a segregated account with its custodian bank, cash or high-grade
marketable securities having an aggregate value equal to the amount of its
purchase commitments until payment is made. To the extent a Fund engages in
when-issued and delayed delivery transactions, it will do so for the purpose of
acquiring securities for the Fund's portfolio consistent with its investment
objective and policies and not for the purpose of investment leverage.
Callable Bonds. Each Fund may buy and hold callable municipal bonds that contain
a provision in the indenture permitting the issuer to redeem the bonds prior to
their maturity dates at a specified price. This price typically reflects a
premium over the bonds' original issue price. These bonds generally have call
protection (that is, a period of time when the bonds may not be called) that
usually lasts for 5 to 10 years, after which time these 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 the
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 the bonds were redeemed.
Certificates of Participation. Each 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 that 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 buy the
property. Once these lease payments are completed, the municipality gains
ownership of the property for a nominal sum. This lease format is generally not
subject to constitutional limitations on the issuance of state debt, and COPs
may enable a governmental issuer to increase government liabilities beyond
constitutional debt limits.
A feature that 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 Fund
believes that this risk is mitigated by its policy of investing only in insured
COPs. While there is no limit as to the amount of assets which each Fund may
invest in COPs, as of February 29, 1996, the following Funds held more than five
percent of the total face amount of the securities in their portfolios in COPs
and other municipal leases: Arizona Fund, 8.51%; and Florida Fund, 8.84%.
OTHER INVESTMENT POLICIES OF THE FUNDS
Borrowing. Each Fund may borrow from banks and pledge up to 5% of its total
assets for temporary or emergency purposes. Although the Funds do not currently
intend to do so, consistent with procedures approved by the Board, each Fund may
lend its portfolio securities to qualified securities dealers or other
institutional investors, if the loans do not exceed 10% of the value of the
Fund's total assets at the time of the most recent loan.
Illiquid Investments. Each Fund may not invest more than 10% of its net assets,
at the time of purchase, in illiquid securities. Illiquid securities are
generally securities that cannot be sold within seven days in the normal course
of business at approximately the amount at which the Fund has valued them.
Other Policies and Restrictions. Each Fund has a number of additional investment
restrictions that limit its activities to some extent. Some of these
restrictions may only be changed with shareholder approval. For a list of these
restrictions and more information about the Fund's investment policies, please
see "How Does the Fund Invest Its Assets?" and "Investment Restrictions" in the
SAI.
INSURANCE
Except as indicated, each insured municipal security in a Fund's portfolio will
be covered by either a "New Issue Insurance Policy," a "Portfolio Insurance
Policy" or a "Secondary Insurance Policy" issued by a qualified municipal bond
insurer.
These policies are intended to insure that the scheduled amount of principal and
interest on each municipal security is paid when due. The insurance of principal
refers to the face or par value of each security and is not affected by the
price paid by a Fund for the security or its market value. Each insured
municipal security is secured by an insurance policy from any one of several
qualified insurance companies, which allows Advisers to diversify among credit
enhancements. Each Fund will acquire municipal securities secured by an
insurance policy only where the claims paying ability of the insurer is rated
triple A or the equivalent by S&P, Moody's or Fitch.
New Issue Insurance Policy. New Issue Insurance Policies, if any, are obtained
by the issuers of the municipal securities and all premiums for these securities
are paid in advance by these issuers. These policies are non-cancelable and will
continue in force so long as the municipal securities are outstanding and the
respective insurers remain in business. Since New Issue Insurance Policies
remain in effect as long as the securities are outstanding, the insurance may
affect the resale value of securities in the Fund's portfolio. While New Issue
Insurance Policies may be considered to represent an element of the market value
of insured municipal securities, the exact effect, if any, of this insurance
cannot be estimated. As stated earlier, each Fund will acquire securities
subject to New Issue Insurance Policies only where the claims paying ability of
the insurer thereof is rated triple A or the equivalent by S&P, Moody's or
Fitch.
In determining whether to insure any municipal security, the insurer has applied
its own standards, which are not necessarily the same as the criteria used in
regard to the selection of securities by Advisers. A contract to buy an insured
municipal security is only entered into if there is either permanent insurance
in place or an irrevocable commitment to insure the municipal security by a
qualified insurer.
Portfolio Insurance Policy. The Portfolio Insurance Policy obtained by each Fund
from a qualified municipal bond insurer is effective only so long as the Fund is
in existence, the insurer is still in business and meeting its obligations, and
the municipal securities described in the policy continue to be held by the
Fund. In the event of a sale of any municipal security by the Fund or payment
thereof before maturity, the Portfolio Insurance Policy terminates as to that
municipal security.
The Portfolio Insurance Policy obtained by each Fund may be canceled for failure
to pay the premium. Nonpayment of premiums on this policy will also permit the
insurer to take action against the Fund to recover premium payments due. The
insurer cannot cancel coverage already in force with respect to municipal
securities owned by the Fund and covered by the Portfolio Insurance Policy,
however, except for nonpayment of premiums.
Premium rates for each issue of securities covered by the Portfolio Insurance
Policy may not be changed regardless of the issuer's ability or willingness to
pay. The insurance premiums are payable monthly by each Fund and are adjusted
for purchases and sales of covered securities during the month. In the event
that a portfolio holding that has been covered by a Portfolio Insurance Policy
is pre-refunded and irrevocably secured by a U.S. government security, the
insurance is no longer required. Any security for which insurance is canceled,
other than as provided herein, will be sold by the Fund as promptly thereafter
as possible.
The premium on each Fund's Portfolio Insurance Policy is an expense item
included in the Fund's average annual expenses. The average annual premium rate
for the Portfolio Insurance Policy is determined by dividing the amount of the
Fund's annual Portfolio Insurance Policy premium by the face amount of the
insured bonds in its investment portfolio covered by that policy. Because
premiums are paid from a Fund's assets, they reduce the current yield on the
portfolio. When a Fund buys a Secondary Insurance Policy (discussed below), the
single premium is added to the cost basis of the municipal security and is not
considered an expense item of the Fund.
Secondary Insurance Policy. Each Fund may at any time buy from the provider of a
Portfolio Insurance Policy a permanent Secondary Insurance Policy on any
municipal security so insured and held by the Fund. The coverage and obligation
of the Fund to pay monthly premiums under a Portfolio Insurance Policy ceases
when a Secondary Insurance Policy is purchased on such security.
By buying a Secondary Insurance Policy and paying the premium, the Fund obtains
similar insurance against nonpayment of scheduled principal and interest for the
remaining term of the security. This insurance coverage is noncancellable and
continues in force as long as the securities so insured are outstanding. One of
the reasons to acquire this policy is to enable the Fund to sell the portfolio
security to a third party as a triple A rated or equivalent insured security at
a market price higher than what otherwise might be obtainable if the security
was sold without the insurance coverage. This rating is not automatic, however,
and must specifically be requested from Moody's, S&P or Fitch for each bond.
Such a policy is likely to be purchased if, in the opinion of Advisers, the
market value or net proceeds of a sale by the Fund may exceed the current value
of the security (without insurance) plus the cost of the policy. Any difference
between the excess of a security's market value as a triple A-rated or
equivalent security over its market value without such rating, including the
single premium cost, inures to the Fund in determining the net capital gain or
loss realized by the Fund upon the sale of the portfolio security. Each Fund may
buy insurance under a Secondary Insurance Policy in lieu of a Portfolio
Insurance Policy at any time, regardless of the effect of market value on the
underlying municipal security, if Advisers believes such insurance would best
serve the Fund's interests in meeting its objective and policies.
Since under the original agreement to obtain a temporary insurance policy each
Fund has the right to buy a permanent Secondary Insurance Policy even if the
security is currently in default as to any payments by the issuer, the Fund has
the opportunity to sell the security rather than hold it in its portfolio in
order to continue in force the applicable Portfolio Insurance Policy, as
discussed below.
Because coverage under the Portfolio Insurance Policy ends upon the sale of a
security from a Fund's portfolio, this insurance does not affect the resale
value of the securities. Therefore, a Fund may retain any municipal securities
insured under a Portfolio Insurance Policy that are in default or in significant
risk of default, and place a value on the insurance that will be equal to the
difference between the market value of the defaulted securities and the market
value of similar securities that are not in default. (See "How Are Fund Shares
Valued?") While a defaulted municipal security is held in a Fund's portfolio,
the Fund continues to pay the insurance premium on it, but also collects
interest payments from the insurer and retains the right to collect the full
amount of principal from the insurer when the security comes due.
Municipal Securities Backed By Escrow or Trust Accounts. Each Fund may also own,
without insurance coverage, municipal securities for which an escrow or trust
account has been established pursuant to the documents creating the municipal
security. The escrow or trust account must contain sufficient securities backed
by the U.S. government's full faith and credit pledge to secure the payment of
principal and interest on such bonds.
Municipal Bond Insurers. A "qualified municipal bond insurer" refers to
companies whose charter limits their risk assumption to insurance of financial
obligations only. This precludes assumption of other types of risk, such as
life, medical, fire and casualty, auto and home insurance. The bond insurance
industry is a regulated industry. All bond insurers must be licensed in each
state in order to write financial guaranties in that jurisdiction. Regulations
vary from state to state. Most regulators, however, require minimum standards of
solvency and limitations on leverage and investment of assets. New York State,
which is one of the most active regulators, requires a minimum capital base of
$72.5 million for a new primary bond insurer. Regulators also place restrictions
on the amount an insurer can guarantee in relation to the insurer's capital
base. Neither the Fund nor Advisers makes any representations as to the ability
of any insurance company to meet its obligation to the Fund if called upon to do
so.
Currently, there are no bonds in the Funds' portfolios on which an insurer is
paying the principal or interest otherwise payable by the issuer of the bond.
The SAI contains more information on municipal bond insurers.
What Are the Fund's Potential Risks?
The value of your shares will increase as the value of the securities owned by
the Fund increases and will decrease as the value of the Fund's investments
decrease. In this way, you participate in any change in the value of the
securities owned by the Fund. In addition to the factors that affect the value
of any particular security that the Fund owns, the value of Fund shares may also
change with movements in the bond market as a whole.
Credit and Market Risk. Credit risk is a function of the ability of an issuer of
a municipal security to make 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. The insurance does
not guarantee the market value of the municipal securities and, except as
indicated in this prospectus, has no effect on the Net Asset Value, redemption
price, or dividends paid by the Fund.
Interest Rate Risk. Changes in interest rates will affect the value of the
Fund's portfolio and its share price. Rising interest rates, which often occur
during times of inflation or a growing economy, are likely to have a negative
effect on the value of the Fund's shares. Interest rates have increased and
decreased in the past. These changes are unpredictable and may happen again in
the future.
Since each State Fund generally will invest primarily in the securities of its
respective state, there are certain specific factors and considerations
concerning each state that may affect the credit and market risk of the
municipal securities that the Fund buys. These factors are described in the
Appendices to this prospectus and in the SAI.
Diversification Risk. The Insured Fund is diversified nationally and, as a
matter of policy, this Fund will not invest more than 25% of its total assets in
the municipal securities of any one state or territory. In addition, with
respect to 75% of each Fund's net assets, except the Arizona and Florida Funds,
the Fund will not, as a fundamental policy, buy a security if, as a result of
the investment, more than 5% of its assets would be in the securities of any
single issuer (with the exception of obligations of the U.S. government). For
this purpose, each political subdivision, agency, or instrumentality and each
multi-state agency of which a state is a member, and each public authority that
issues private activity bonds on behalf of a private entity, will be regarded as
a separate issuer for determining the diversification of the Fund's portfolio. A
bond for which the payment of principal and interest is secured by an escrow
account of securities backed by the full faith and credit of the U.S. government
("defeased"), as described in the SAI, will not generally be treated as an
obligation of the original municipality for purposes of determining
diversification.
Non-Diversification Risk. The Arizona and Florida Funds are non-diversified
under the federal securities laws. As non-diversified Funds, there are no
restrictions under the 1940 Act on the percentage of assets that may be invested
at any time in the securities of any one issuer. To the extent 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 were more broadly diversified. The Arizona and
Florida Funds intend, however, to comply with the diversification and other
requirements of the Code applicable to "regulated investment companies" so that
they will not be subject to federal income tax, and distributions to
shareholders will be free from regular federal income tax to the extent they are
derived from interest on municipal securities. For this reason the Arizona and
Florida Funds have adopted an investment restriction, which may not be changed
without shareholder approval, prohibiting them from buying 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 its total assets would be invested in the securities of
a single issuer, with the exception of obligations of the U.S. government.
Who Manages the Fund?
The Board. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations. The
Board also monitors the Fund to ensure no material conflicts exist between the
two classes of shares. While none is expected, the Board will act appropriately
to resolve any material conflict that may arise.
Investment Manager. Advisers is the investment manager of the Fund and other
funds with aggregate assets of over $80 billion, including $43 billion in the
municipal securities market. It is wholly-owned by Resources, a publicly owned
company engaged in the financial services industry through its subsidiaries.
Charles B. Johnson and Rupert H. Johnson, Jr. are the principal shareholders of
Resources.
Management Team. The team responsible for the day-to-day management of each
Fund's portfolio is:
Sheila Amoroso
Portfolio Manager of Advisers
Ms. Amoroso has been responsible for portfolio recommendations and decisions for
the Arizona Fund since its inception, and for the Massachusetts Fund, Michigan
Fund and Minnesota Fund since 1987. She holds a Bachelor of Science degree from
San Francisco State University. She joined Franklin in 1986. She is a member of
several securities industry-related committees and associations.
Don Duerson
Vice President of Advisers
Mr. Duerson has been responsible for portfolio recommendations and decisions for
the Arizona and Florida Funds since their inception, and for the Insured Fund,
Massachusetts Fund, Michigan Fund, Minnesota Fund and Ohio Fund since he joined
Advisers in 1986. He has a Bachelor of Science degree in business and public
administration from the University of Arizona. He has been in the securities
industry since 1956 and has been with Franklin since 1986. He is a member of
several industry-related committees and associations.
Andrew Jennings, Sr.
Vice President of Advisers
Mr. Jennings has been responsible for portfolio recommendations and decisions of
the Insured Fund since joining Advisers in 1990. He attended Villanova
University in Philadelphia and has been in the securities industry for over 35
years. Prior to joining Advisers, Mr. Jennings was First Vice President and
Manager of the Municipal Institutional Bond Department at Dean Witter Reynolds,
Inc. He is a member of several municipal securities industry-related committees
and associations.
Thomas Kenny
Senior Vice President of Advisers
Mr. Kenny has been responsible for portfolio recommendations and decisions of
all series of the Trust since August 1994. He is the Director of Franklin's
Municipal Bond Department. He holds a Master of Science degree in finance from
Golden Gate University and a Bachelor of Arts degree in business and economics
from the University of California at Santa Barbara. Mr. Kenny joined Franklin in
1986. He is a member of several municipal securities industry-related committees
and associations.
John Pomeroy
Portfolio Manager of Advisers
Mr. Pomeroy has been responsible for portfolio recommendations and decisions for
the Florida Fund since June 1995. He holds a Bachelor of Arts degree in business
administration from San Francisco State University. He joined Advisers in 1986.
He is a member of several securities industry-related committees and
associations.
Stella Wong
Portfolio Manager of Advisers
Ms. Wong has been responsible for portfolio recommendations and decisions for
the Ohio Fund since 1986. She holds a Master's degree in Financial Planning from
Golden Gate University and a Bachelor of Science degree in business
administration from San Francisco State University. She joined Advisers in 1986.
She is a member of several securities industry-related committees and
associations.
Services Provided by Advisers. Advisers manages the Fund's assets and makes its
investment decisions. Advisers also provides certain administrative services and
facilities for the Fund and performs similar services for other funds. Please
see "Investment Advisory and Other Services" and "Miscellaneous Information" in
the SAI for information on securities transactions and a summary of the Fund's
Code of Ethics.
Management Fees. During the fiscal year ended February 29, 1996, management fees
paid to Advisers and expenses borne by Class I and Class II shares, including
fees paid to Advisers (as a percentage of average monthly net assets) were as
follows:
TOTAL
MANAGEMENT OPERATING EXPENSES
FEES CLASS I CLASS II*
- --------------------------------------------------------------------------------
Arizona Insured Fund 0.00%** 0.16% n/a
Florida Insured Fund 0.16%** 0.35% n/a
Insured Fund 0.47% 0.60% 1.18%
Massachusetts Insured Fund 0.54% 0.69% 1.26%
Michigan Insured Fund 0.48% 0.62% 1.20%
Minnesota Insured Fund 0.50% 0.66% 1.24%
Ohio Insured Fund 0.49% 0.64% 1.22%
*Annualized.
**For the fiscal year ended February 29, 1996, Advisers agreed in advance to
waive its management fees and to make certain payments to reduce expenses of the
Arizona and Florida Funds. Management fees before fee waivers and expense
reductions represented 0.63% of the average net assets of each Fund. Total
operating expenses represented 0.86% and 0.82% of the average net assets of the
Arizona and Florida Funds, respectively. Advisers may end this arrangement at
any time upon notice to the Board.
Portfolio Transactions. Advisers tries to obtain the best execution on all
transactions. If Advisers believes more than one broker or dealer can provide
the best execution, it may consider research and related services and the sale
of Fund shares when selecting a broker or dealer. Please see "How Does the Fund
Buy Securities For Its Portfolio?" in the SAI for more information.
THE RULE 12B-1 PLANS
Each class has a distribution plan or "Rule 12b-1 plan" under which it may pay
or reimburse Distributors or others for activities primarily intended to sell
shares of the class. These expenses may include, among others, printing
prospectuses and reports used for sales purposes, preparing and distributing
sales literature and advertisements, a prorated portion of Distributors'
overhead expenses, and distribution or service fees paid to Securities Dealers
or others who have executed a servicing agreement with the Fund, Distributors or
its affiliates.
Payments by the Fund under the Class I plan may not exceed 0.10% per year of
Class I's average daily net assets, except Arizona and Florida Fund with a
maximum of 0.15% per year. All distribution expenses over this amount will be
borne by those who have incurred them.
Under the Class II plan, the Fund may pay Distributors up to 0.50% per year of
Class II's average daily net assets to pay Distributors or others for providing
distribution and related services and bearing certain Class II expenses. All
distribution expenses over this amount will be borne by those who have incurred
them. During the first year after a purchase of Class II shares, Distributors
may keep this portion of the Rule 12b-1 fees associated with the Class II
purchase.
The Fund may also pay a servicing fee of up to 0.15% per year of Class II's
average daily net assets under the Class II plan. This fee may be used to pay
Securities Dealers or others for, among other things, helping to establish and
maintain customer accounts and records, helping with requests to buy and sell
shares, receiving and answering correspondence, monitoring dividend payments
from the Fund on behalf of customers, and similar servicing and account
maintenance activities.
The Rule 12b-1 fees charged to each class are based only on the fees
attributable to that particular class. For more information, please see "The
Fund's Underwriter" in the SAI.
How Does the Fund Measure Performance?
From time to time, each class of the Fund advertises its performance. The more
commonly used measures of performance are total return, current yield and
current distribution rate. Each class may also advertise its taxable-equivalent
yield and distribution rate. Performance figures usually assume that the maximum
sales charge is paid, but certain figures may not include the sales charge.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield for each
class shows the income per share earned by that class. The current distribution
rate shows the dividends or distributions paid to shareholders of a class. This
rate is usually computed by annualizing the dividends paid per share during a
certain period and dividing that amount by the current Offering Price of the
class. Unlike current yield, the current distribution rate may include income
distributions from sources other than dividends and interest. The
taxable-equivalent yield and distribution rate show the before-tax yield or
distribution rate that would have to be earned from a taxable investment to
equal the yield or distribution rate of the class, assuming one or more tax
rates.
The investment results of each class will vary. Performance figures are always
based on past performance and do not indicate future results. For a more
detailed description of how the Fund calculates its performance figures, please
see "How Does the Fund Measure Performance?" in the SAI. The Trust's Annual
Report to Shareholders also includes performance information.
How Is the Trust Organized?
Except for the Arizona and Florida Funds, the Funds are diversified series of
the Trust, an open-end management investment company, commonly called a mutual
fund. The Arizona and Florida Funds are nondiversified series. The Trust was
organized as a Massachusetts business trust in September 1984 and registered
with the SEC under the 1940 Act. The Trust began offering two classes of shares
on May 1, 1995. All shares purchased before that time are considered Class I
shares. Additional classes of shares may be offered in the future.
Shares of each class represent proportionate interests in the assets of the Fund
and have the same voting and other rights and preferences as the other class of
the Fund for matters that affect the Fund as a whole. For matters that only
affect one class, however, only shareholders of that class may vote. Each class
will vote separately on matters (1) affecting only that class, (2) expressly
required to be voted on separately by state business trust law, or (3) required
to be voted on separately by the 1940 Act. 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. In the future,
additional series may be offered.
The Trust has noncumulative voting rights. This gives holders of more than 50%
of the shares voting the ability to elect all of the members of the Board. If
this happens, holders of the remaining shares voting will not be able to elect
anyone to the Board.
The Trust does not intend to hold annual shareholder meetings. It may hold a
special meeting of a series, however, for matters requiring shareholder approval
under the 1940 Act. A meeting may also be called by the Board in its discretion
or by shareholders holding at least 10% of the outstanding shares. The 1940 Act
requires that we help you communicate with other shareholders in connection with
electing or removing members of the Board.
About Your Account
How Do I Buy Shares?
OPENING YOUR ACCOUNT
To open your account, contact your investment representative or complete and
sign the enclosed shareholder application and return it to the Fund with your
check. Please indicate which class of shares you want to buy. If you do not
specify a class, your purchase will be automatically invested in Class I shares.
MINIMUM
INVESTMENTS*
To Open Your Account $100
To Add to Your Account $ 25
*We may refuse any order to buy shares. Currently, the Funds, with the exception
of the Insured Fund, do not allow investments by Market Timers.
DECIDING WHICH CLASS TO BUY
You should consider a number of factors when deciding which class of shares to
buy. If you plan to buy $1 million or more in a single payment or you qualify to
buy Class I shares without a sales charge, you may not buy Class II shares.
Generally, you should consider buying Class I shares if:
o you expect to invest in the Fund over the long term;
o you qualify to buy Class I shares at a reduced sales charge; or
o you plan to buy $1 million or more over time.
You should consider Class II shares if:
o you expect to invest less than $100,000 in the Franklin Templeton Funds;
and
o you plan to sell a substantial number of your shares within approximately
six years or less of your investment.
Class I shares are generally more attractive for long-term investors because of
Class II's higher Rule 12b-1 fees. These may accumulate over time to outweigh
the lower Class II front-end sales charge and result in lower income dividends
for Class II shareholders. If you qualify to buy Class I shares at a reduced
sales charge based upon the size of your purchase or through our Letter of
Intent or cumulative quantity discount programs, but plan to hold your shares
less than approximately six years, you should evaluate whether it is more
economical for you to buy Class I or Class II shares.
For purchases of $1 million or more, it is considered more beneficial for you to
buy Class I shares since there is no front-end sales charge, even though these
purchases may be subject to a Contingent Deferred Sales Charge. Any purchase of
$1 million or more is therefore automatically invested in Class I shares. You
may accumulate more than $1 million in Class II shares through purchases over
time, but if you plan to do this, you should determine whether it would be more
beneficial for you to buy Class I shares through a Letter of Intent.
Please consider all of these factors before deciding which class of shares to
buy. There are no conversion features attached to either class of shares.
PURCHASE PRICE OF FUND SHARES
For Class I shares, the sales charge you pay depends on the dollar amount you
invest, as shown in the table below. The sales charge for Class II shares is 1%
and, unlike Class I, does not vary based on the size of your purchase.
TOTAL SALES CHARGE AMOUNT PAID
AS A PERCENTAGE OF TO DEALER AS A
AMOUNT OF PURCHASE OFFERING NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE PRICE INVESTED OFFERING PRICE
- --------------------------------------------------------------------------------
CLASS I
Under $100,000 4.25% 4.44% 4.00%
$100,000 but less than $250,000 3.50% 3.63% 3.25%
$250,000 but less than $500,000 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000 2.15% 2.20% 2.00%
$1,000,000 or more* None None None
CLASS II
Under $1,000,000* 1.00% 1.01% 1.00%
*A Contingent Deferred Sales Charge of 1% may apply to Class I purchases of $1
million or more and any Class II purchase. Please see "How Do I Sell Shares? -
Contingent Deferred Sales Charge." Securities Dealers should also see "Other
Payments to Securities Dealers" below for a discussion of payments Distributors
may make out of its own resources for certain purchases. Purchases of Class II
shares are limited to purchases below $1 million. Please see "Deciding Which
Class to Buy."
SALES CHARGE REDUCTIONS AND WAIVERS
- -If you qualify to buy shares under one of the sales charge reduction or waiver
categories described below, please include a written statement with each
purchase order explaining which privilege applies. If you don't include this
statement, we cannot guarantee that you will receive the sales charge reduction
or waiver.
Cumulative Quantity Discounts - Class I Only. To determine if you may pay a
reduced sales charge, you may add to the amount of your current Class I purchase
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. If you are
the sole owner of a company, you may also add any company accounts, including
retirement plan accounts.
Letter of Intent - Class I Only. You may buy Class I 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 Class I shares.
By completing the Letter of Intent section of the shareholder application, you
acknowledge and agree to the following:
o You authorize Distributors to reserve 5% of your total intended purchase in
Class I shares registered in your name until you fulfill your Letter.
o You give Distributors a security interest in the reserved shares and
appoint Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the Letter.
o Although you may exchange your shares, you may not sell reserved shares
until you complete the Letter or pay the higher sales charge.
Your periodic statements will include the reserved shares in the total shares
you own. We will pay or reinvest dividend and capital gain distributions on the
reserved shares as you direct.
If you would like more information about the Letter of Intent privilege, please
see "How Do I Buy, Sell and Exchange Shares? - Letter of Intent" in the SAI or
call Shareholder Services.
Group Purchases - Class I Only. If you are a member of a qualified group, you
may buy Class I shares at the reduced sales charge that applies to the group as
a whole. The sales charge is based on the combined dollar value of the group
members' existing investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include sales and other Franklin Templeton Fund materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
o Meets other uniform criteria that allow Distributors to achieve cost
savings in distributing shares.
Sales Charge Waivers. The Fund's sales charges (front-end and contingent
deferred) will not apply if you are buying Class I shares with money from the
following sources or Class II shares with money from the sources in waiver
categories 1 or 3.
- -For waiver categories 1 or 2 below: (i) the distributions or payments must be
reinvested within 365 days of their payment date, and (ii) Class II
distributions may be reinvested in either Class I or Class II shares. Class I
distributions may only be reinvested in Class I shares.
1. Dividend and capital gain distributions from any Franklin Templeton Fund or a
REIT sponsored or advised by Franklin Properties, Inc.
2. Annuity payments received under either an annuity option or from death
benefit proceeds, only if the annuity contract offers as an investment option
the Franklin Valuemark Funds, Templeton Variable Annuity Fund, the Templeton
Variable Products Series Fund, or the Franklin Government Securities Trust. You
should contact your tax advisor for information on any tax consequences that may
apply.
3. Redemptions from any Franklin Templeton Fund if you:
o Originally paid a sales charge on the shares,
o Reinvest the money within 365 days of the redemption date, and
o Reinvest the money in the same class of shares.
An exchange is not a redemption for this privilege. The Contingent Deferred
Sales Charge will not be waived if the shares reinvested were subject to a
Contingent Deferred Sales Charge when sold. We will credit your account for any
Contingent Deferred Sales Charge paid, but a new Contingency Period will begin.
If you immediately placed your redemption proceeds in a Franklin Bank CD, you
may reinvest them as described above. The proceeds must be reinvested within 365
days from the date the CD matures, including any rollover.
4. Redemptions from other mutual funds
If you sold shares of a fund that is not a Franklin Templeton Fund within the
past 60 days, you may invest the proceeds without any sales charge if (a) the
investment objectives were similar to the Fund's, and (b) your shares in that
fund were subject to any front-end or contingent deferred sales charges at the
time of purchase. You must provide a copy of the statement showing your
redemption.
The Fund's sales charges will also not apply to Class I purchases by:
5. Trust companies and bank trust departments agreeing to invest at least $1
million in Franklin Templeton Funds over a 13 month period of assets held in a
fiduciary, agency, advisory, custodial or similar capacity and over which the
trust companies and bank trust departments or other plan fiduciaries or
participants, in the case of certain retirement plans, have full or shared
investment discretion. We will accept orders for these accounts by mail
accompanied by a check or by telephone or other means of electronic data
transfer directly from the bank or trust company, with payment by federal funds
received by the close of business on the next business day following the order.
6. An Eligible Governmental Authority. Please consult your legal and investment
advisors to determine if an investment in the Fund is suitable for you and the
effect, if any, of payments by the Fund on arbitrage rebate calculations.
7. Broker-dealers who have entered into a supplemental agreement with
Distributors for clients who are participating in comprehensive fee programs.
These programs, sometimes known as wrap fee programs, are sponsored by the
broker-dealer and either advised by the broker-dealer or by another registered
investment advisor affiliated with that broker.
8. Registered Securities Dealers and their affiliates, for their investment
accounts only
9. Current employees of Securities Dealers and their affiliates and their family
members, as allowed by the internal policies of their employer
10. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family members,
consistent with our then-current policies
11. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
12. Accounts managed by the Franklin Templeton Group
13. Certain unit investment trusts and their holders reinvesting distributions
from the trusts
OTHER PAYMENTS TO SECURITIES DEALERS
The payments below apply to Securities Dealers who initiate and are responsible
for Class II purchases and certain Class I purchases made without a sales
charge. A Securities Dealer may only receive one of the following payments for
each qualifying purchase. The payments described below are paid by Distributors
or one of its affiliates, at its own expense, and not by the Fund or its
shareholders.
1. Securities Dealers may receive up to 1% of the purchase price for Class II
purchases. During the first year after the purchase, Distributors may keep a
part of the Rule 12b-1 fees associated with that purchase.
2. Securities Dealers will receive up to 0.75% of the purchase price for Class I
purchases of $1 million or more.
3. Securities Dealers may receive up to 1% of the purchase price for Class I
purchases made under waiver category 5 above.
4. Securities Dealers may receive up to 0.25% of the purchase price for Class I
purchases by an Eligible Governmental Authority.
Please see "How Do I Buy, Sell and Exchange Shares - Other Payments to
Securities Dealers" in the SAI for any breakpoints that may apply.
Securities Dealers may receive additional compensation from Distributors or an
affiliated company in connection with selling shares of the Franklin Templeton
Funds. Compensation may include financial assistance for conferences,
shareholder services, automation, sales or training programs, or promotional
activities. Registered representatives and their families may be paid for travel
expenses, including lodging, in connection with business meetings or seminars.
In some cases, this compensation may only be available to Securities Dealers
whose representatives have sold or are expected to sell significant amounts of
shares. 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 NASD.
May I Exchange Shares for Shares of Another Fund?
We offer a wide variety of funds. If you would like, you can move money from
your Fund account to an existing or new account in another Franklin Templeton
Fund (an "exchange"). Because it is technically a sale and a purchase of shares,
an exchange is a taxable transaction.
If you own Class I shares, you may exchange into any of our money funds except
Franklin Templeton Money Fund II ("Money Fund II"). Money Fund II is the only
money fund exchange option available to Class II shareholders. Unlike our other
money funds, shares of Money Fund II may not be purchased directly and no drafts
(checks) may be written on Money Fund II accounts.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund and its rules and
requirements for exchanges. For example, some Franklin Templeton Funds do not
accept exchanges and others may have different investment minimums. Some
Franklin Templeton Funds do not offer Class II shares.
METHOD STEPS TO FOLLOW
By Mail 1. Send us written instructions signed by all account
owners
2. Include any outstanding share certificates for the
shares you're exchanging
By Phone Call Shareholder Services or TeleFACTS(R)
-If you do not want the ability to exchange by
phone, please let us know.
Through Your Dealer Call your investment representative
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
WILL SALES CHARGES APPLY TO MY EXCHANGE?
You generally will not pay a front-end sales charge on exchanges. If you have
held your shares less than six months, however, you will pay the percentage
difference between the sales charge you previously paid and the applicable sales
charge of the new fund. If you have never paid a sales charge on your shares
because they have always been held in a money fund, you will pay the Fund's
applicable sales charge no matter how long you have held your shares. These
charges may not apply if you qualify to buy shares without a sales charge.
We will not impose a Contingent Deferred Sales Charge when you exchange shares.
Any shares subject to a Contingent Deferred Sales Charge at the time of
exchange, however, will remain so in the new fund. See the discussion on
Contingent Deferred Sales Charges below and under "How Do I Sell Shares?"
Contingent Deferred Sales Charge - Class I. For accounts with Class I shares
subject to a Contingent Deferred Sales Charge, shares are exchanged into the new
fund in the order they were purchased. If you exchange Class I shares into one
of our money funds, the time your shares are held in that fund will not count
towards the completion of any Contingency Period.
Contingent Deferred Sales Charge - Class II. For accounts with Class II shares
subject to a Contingent Deferred Sales Charge, shares are exchanged into the new
fund proportionately based on the amount of shares subject to a Contingent
Deferred Sales Charge and the length of time the shares have been held. For
example, suppose you own $1,000 in shares that have never been subject to a
CDSC, such as shares from the reinvestment of dividends and capital gains ("free
shares"), $2,000 in shares that are no longer subject to a CDSC because you have
held them for longer than 18 months ("matured shares"), and $3,000 in shares
that are still subject to a CDSC ("CDSC liable shares"). If you exchange $3,000
into a new fund, $500 will be exchanged from free shares, $1,000 from matured
shares, and $1,500 from CDSC liable shares.
Likewise, CDSC liable shares purchased at different times will be exchanged into
a new fund proportionately. For example, assume you purchased $1,000 in shares 3
months ago, 6 months ago, and 9 months ago. If you exchange $1,500 into a new
fund, $500 will be exchanged from shares purchased at each of these three
different times.
While Class II shares are exchanged proportionately, they are redeemed in the
order purchased. In some cases, this means exchanged shares may be CDSC liable
even though they would not be subject to a Contingent Deferred Sales Charge if
they were sold. We believe the proportional method of exchanging Class II shares
more closely reflects the expectations of Class II shareholders if shares are
sold during the Contingency Period. The tax consequences of a sale or exchange
are determined by the Code and not by the method used by the Fund to transfer
shares.
If you exchange your Class II shares for shares of Money Fund II, the time your
shares are held in that fund will count towards the completion of any
Contingency Period.
EXCHANGE RESTRICTIONS
Please be aware that the following restrictions apply to exchanges:
o You may only exchange shares within the same class.
o The accounts must be identically registered. You may exchange shares from a
Fund account requiring two or more signatures into an identically
registered money fund account requiring only one signature for all
transactions. Please notify us in writing if you do not want this option to
be available on your account(s). Additional procedures may apply. Please
see "Transaction Procedures and Special Requirements."
o The new fund must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Your exchange may be restricted or refused if you: (i) request an exchange
out of the Insured Fund within two weeks of an earlier exchange request,
(ii) exchange shares out of the Insured Fund more than twice in a calendar
quarter, or (iii) exchange shares equal to at least $5 million, or more
than 1% of the Insured Fund's net assets. Shares under common ownership or
control are combined for these limits. If you exchange shares in this
manner, we will consider you a Market Timer. Each exchange by a Market
Timer, if accepted, will be charged $5.00. Some of our funds do not allow
investments by Market Timers. Currently, only the Insured Fund allows
investments by Market Timers.
Because excessive trading can hurt Fund performance and shareholders, we may
refuse exchange purchases if (i) we believe the Fund would be harmed or unable
to invest effectively, or (ii) the Fund receives or anticipates simultaneous
orders that may significantly affect the Fund.
How Do I Sell Shares?
You may sell (redeem) your shares at any time.
METHOD STEPS TO FOLLOW
By Mail 1. Send us written instructions signed by all account
owners
2. Include any outstanding share certificates for the
shares you are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may need
to send additional documents. Accounts under court
jurisdiction may have additional requirements.
By Phone Call Shareholder Services
(Only available if you Telephone requests will be accepted:
have completed and sent o If the request is $50,000 or less. Institutional
to us the telephone re- accounts may exceed $50,000 by completing a separate
demption agreement in- agreement. Call Institutional Services to receive a
cluded with this copy.
prospectus)
o If there are no share certificates issued for the
shares you want to sell or you have already returned
them to the Fund
METHOD STEPS TO FOLLOW
By Phone o Unless the address on your account was changed by
phone within the last 30 days
Through Your Dealer Call your investment representative.
We will send your redemption check within seven days after we receive your
request in proper form. We will make the check payable to all registered owners
on the account and send it to the address of record. We are not able to receive
or pay out cash in the form of currency.
If you sell shares you just purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
CONTINGENT DEFERRED SALES CHARGE
A Contingent Deferred Sales Charge may apply to Class I purchases of $1 million
or more if you sell all or a portion of the shares within one year and any Class
II purchase if you sell the shares within 18 months. The charge is 1% of the
value of the shares sold or the Net Asset Value at the time of purchase,
whichever is less. Distributors keeps the charge to recover payments made to
Securities Dealers.
We will first redeem shares not subject to the charge in the following order:
1) A calculated number of shares equal to the capital appreciation on shares
held less than the Contingency Period,
2) Shares purchased with reinvested dividends and capital gain distributions,
and
3) Shares held longer than the Contingency Period.
We then redeem shares subject to the charge in the order they were purchased.
Unless otherwise specified, when you request a dollar amount, we will redeem
additional shares to cover any Contingent Deferred Sales Charge. For requests to
sell a certain number of shares, we will deduct the amount of the Contingent
Deferred Sales Charge, if any, from the sale proceeds.
Waivers. We waive the Contingent Deferred Sales Charge for:
o Exchanges
o Account fees
o Sales of shares purchased pursuant to a sales charge waiver
o Redemptions by the Fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before February 1,
1995
o Redemptions through a systematic withdrawal plan set up after February 1,
1995, up to 1% a month of an account's Net Asset Value (3% quarterly, 6%
semiannually or 12% annually). For example, if you maintain an annual
balance of $1 million in Class I shares, you can withdraw up to $120,000
annually through a systematic withdrawal plan free of charge. Likewise, if
you maintain an annual balance of $10,000 in Class II shares, $1,200 may be
withdrawn annually free of charge.
Transaction Procedures and Special Requirements
HOW AND WHEN SHARES ARE PRICED
The Fund is open for business each day the Exchange is open. We determine the
Net Asset Value per share of each class as of the scheduled close of the
Exchange, generally 1:00 p.m. Pacific time. You can find the prior day's closing
Net Asset Value and Offering Price for each class in many newspapers.
The Net Asset Value of all outstanding shares of each class is calculated on a
pro rata basis. It is based on each class' proportionate participation in the
Fund, determined by the value of the shares of each class. Each class, however,
bears the Rule 12b-1 fees payable under its Rule 12b-1 plan. To calculate Net
Asset Value per share of each class, the assets of each class are valued and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of shares of the class outstanding. The Fund's assets are
valued as described under "How Are Fund Shares Valued?" in the SAI.
THE PRICE WE USE WHEN YOU BUY OR SELL SHARES
You buy shares at the Offering Price of the class you wish to purchase, unless
you qualify to buy shares at a reduced sales charge or with no sales charge. The
Offering Price of each class is based on the Net Asset Value per share of the
class and includes the maximum sales charge. We calculate it to two decimal
places using standard rounding criteria. You sell shares at Net Asset Value.
We will use the Net Asset Value next calculated after we receive your
transaction request in proper form. If you buy or sell shares through your
Securities Dealer, however, we will use the Net Asset Value next calculated
after we receive the request from your dealer.
PROPER FORM
An order to buy shares is in proper form when we receive your signed shareholder
application and check. Written requests to sell or exchange shares are in proper
form when we receive written instructions signed by all registered owners, with
a signature guarantee if necessary. We must also receive any outstanding share
certificates for those shares.
WRITTEN INSTRUCTIONS
Written instructions must be signed by all registered owners. To avoid any delay
in processing your transaction, they should include:
o Your name,
o The Fund's name,
o The class of shares,
o A description of the request,
o For exchanges, the name of the fund you're exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the evening
if preferred.
SIGNATURE GUARANTEES
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered owners,
3) The proceeds are not being sent to the address of record, preauthorized bank
account, or preauthorized brokerage firm account,
4) We receive instructions from someone other than the registered owners,
5) We believe a signature guarantee would protect us against potential claims
based on the instructions received.
A signature guarantee verifies the authenticity of your signature and may be
obtained from certain banks, brokers or other eligible guarantors. You should
verify that the institution is an eligible guarantor prior to signing. A
notarized signature is not sufficient.
SHARE CERTIFICATES
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate is
lost, stolen or destroyed, you may have to pay an insurance premium of up to 2%
of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form. In this case, you should send the certificate and assignment
form in separate envelopes.
TELEPHONE TRANSACTIONS
You may initiate many transactions by phone. Please refer to the sections of
this prospectus that discuss the transaction you would like to make or call
Shareholder Services.
We may only be liable for losses resulting from unauthorized transactions if we
do not follow reasonable procedures designed to verify the identity of the
caller. When you call, we will request personal or other information, and may
also record calls. For your protection, we may delay a transaction or not
implement one if we are not reasonably satisfied that telephone instructions are
genuine. If this occurs, we will not be liable for any loss.
If our lines are busy or you are otherwise unable to reach us by phone, you may
wish to ask your investment representative for assistance or send written
instructions to us, as described elsewhere in this prospectus. If you are unable
to execute a transaction by telephone, we will not be liable for any loss.
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, you need to tell us how you want your shares
registered. How you register your account will affect your ownership rights and
ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
Joint Ownership. If you open an account with two or more owners, we register the
account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of survivorship"
is shown as "Jt Ten" on your account statement. For any account with two or more
owners, all owners must sign instructions to process transactions and changes to
the account. Even if the law in your state says otherwise, you will not be able
to change owners on the account unless all owners agree in writing. If you would
like another person or owner to sign for you, please send us a current power of
attorney.
Gifts and Transfers to Minors. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this form
of registration, a minor may not be named as an account owner.
Trusts. If you register your account as a trust, you should have a valid written
trust document to avoid future disputes or possible court action over who owns
the account.
Required Documents. For corporate, partnership and trust accounts, please send
us the following documents when you open your account. This will help avoid
delays in processing your transactions while we verify who may sign on the
account.
TYPE OF ACCOUNT DOCUMENTS REQUIRED
Corporation Corporate Resolution
Partnership 1. The pages from the partnership agreement that
identify the general partners, or
2. A certification for a partnership agreement
Trust 1. The pages from the trust document that identify the
trustees, or
2. A certification for trust
Street or Nominee Accounts. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the shares
to the street or nominee name account of another Securities Dealer. Both dealers
must have an agreement with Distributors or we will not process the transfer.
Contact your Securities Dealer to initiate the transfer. We will process the
transfer after we receive authorization in proper form from your delivering
Securities Dealer. Accounts may be transferred electronically through the NSCC.
For accounts registered in street or nominee name, we may take instructions
directly from the Securities Dealer or your nominee.
Electronic Instructions. If there is a Securities Dealer or other representative
of record on your account, you authorize the use and execution of electronic
instructions. We can accept electronic instructions directly from your dealer or
representative without further inquiry. Electronic instructions may be processed
through the services of the NSCC, which currently include the NSCC's
"Networking," "Fund/SERV," and "ACATS" systems, or through Franklin/Templeton's
PCTrades II(TM) System.
TAX IDENTIFICATION NUMBER
We must have your correct Social Security or tax identification number on a
signed shareholder application or applicable tax form. Federal law requires us
to withhold 31% of your taxable distributions and sale proceeds if (i) you have
not furnished a certified correct taxpayer identification number, (ii) you have
not certified that withholding does not apply, (iii) the IRS or a Securities
Dealer notifies the Fund that the number you gave us is incorrect, or (iv) you
are subject to backup withholding.
We may refuse to open an account if you fail to provide the required tax
identification number and certifications. We may also close your account if the
IRS notifies us that your tax identification number is incorrect. If you
complete an "awaiting TIN" certification, we must receive a correct tax
identification number within 60 days of your initial purchase to keep your
account open.
KEEPING YOUR ACCOUNT OPEN
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $50. We will only do this
if the value of your account fell below this amount because you voluntarily sold
your shares and your account has been inactive (except for the reinvestment of
distributions) for at least six months. Before we close your account, we will
notify you and give you 30 days to increase the value of your account to $100.
Services to Help You Manage Your Account
AUTOMATIC INVESTMENT PLAN
Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can 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
included with this prospectus or contact your investment representative. 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
discontinue the program at any time by notifying Investor Services by mail or
phone.
AUTOMATIC PAYROLL DEDUCTION
You may have money transferred from your paycheck to the Fund to buy additional
shares. Your investments will continue automatically until you instruct the Fund
and your employer to discontinue the plan. To process your investment, we must
receive both the check and payroll deduction information in required form. Due
to different procedures used by employers to handle payroll deductions, there
may be a delay between the time of the payroll deduction and the time we receive
the money.
SYSTEMATIC WITHDRAWAL PLAN
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or annual
basis. The value of your account must be at least $5,000 and the minimum payment
amount for each withdrawal must be at least $50.
If you would like to establish a systematic withdrawal plan, please complete the
systematic withdrawal plan section of the shareholder application included with
this prospectus and indicate how you would like to receive your payments. You
may choose to direct your payments to buy the same class of shares of another
Franklin Templeton Fund or have the money sent directly to you, to another
person, or to a checking account. If you choose to have the money sent to a
checking account, please see "Electronic Fund Transfers" below.
You will generally receive your payment by the fifth business day of the month
in which a payment is scheduled. When you sell your shares under a systematic
withdrawal plan, it is a taxable transaction.
Because of the front-end sales charge, you may not want to set up a systematic
withdrawal plan if you plan to buy shares on a regular basis. Shares sold under
the plan may also be subject to a Contingent Deferred Sales Charge. Please see
"Contingent Deferred Sales Charge" under "How Do I Sell Shares?"
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us in writing at
least seven business days before the end of the month preceding a scheduled
payment. Please see "How Do I Buy, Sell and Exchange Shares? - Systematic
Withdrawal Plan" in the SAI for more information.
ELECTRONIC FUND TRANSFERS
You may choose to have dividend and capital gain distributions from the Fund or
payments under a systematic withdrawal plan sent directly to a checking account.
If the checking account is with a bank that is a member of the Automated
Clearing House, the payments may be made automatically by electronic funds
transfer. If you choose this option, please allow at least fifteen days for
initial processing. We will send any payments made during that time to the
address of record on your account.
TELEFACTS(R)
From a touch-tone phone, you may call our TeleFACTS system (day or night) at
1-800/247-1753 to:
o obtain information about your account;
o obtain price and performance information about any Franklin Templeton Fund;
o exchange shares between identically registered Franklin accounts; and
o request duplicate statements and deposit slips.
You will need the code number for each class to use TeleFACTS. The code numbers
for Class I and Class II are as follows:
FUND
CODE* FUND NAME
- -----------------------------------------
177 ARIZONA FUND, CLASS I
178 FLORIDA FUND, CLASS I
121 INSURED FUND, CLASS I
221 INSURED FUND, CLASS II
118 MASSACHUSETTS FUND, CLASS I
218 MASSACHUSETTS FUND, CLASS II
119 MICHIGAN FUND, CLASS I
219 MICHIGAN FUND, CLASS II
120 MINNESOTA FUND, CLASS I
220 MINNESOTA FUND, CLASS II
122 OHIO FUND, CLASS I
222 OHIO FUND, CLASS II
STATEMENTS AND REPORTS TO SHAREHOLDERS
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your
account, including additional purchases and dividend reinvestments. Please
verify the accuracy of your statements when you receive them.
o Financial reports of the Fund will be sent every six months. To reduce Fund
expenses, we attempt to identify related shareholders within a household
and send only one copy of a report. Call Fund Information if you would like
an additional free copy of the Fund's financial reports or an interim
quarterly report.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. For further information, call Institutional
Services.
AVAILABILITY OF THESE SERVICES
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, the Fund may not be able to offer these services directly to
you. Please contact your investment representative.
WHAT IF I HAVE QUESTIONS ABOUT MY ACCOUNT?
If you have any questions about your account, you may write to Investor Services
at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California 94403-7777.
The Fund, Distributors and Advisers are also located at this address. You may
also contact us by phone at one of the numbers listed below.
HOURS OF OPERATION (PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with high
quality service. You will hear a regular beeping tone if your call is being
recorded.
What Distributions Might I Receive from the Fund?
The Fund declares dividends from its net investment income daily and pays them
monthly on or about the last day of the month. The daily allocation of net
investment income begins on the day after we receive your money or settlement of
a wire order trade and continues to accrue through the day we receive your
request to sell your shares or the settlement of a wire order trade.
Capital gains, if any, may be distributed twice a year, usually once in December
and once after the end of the Fund's fiscal year.
Dividends and capital gains are calculated and distributed the same way for each
class. The amount of any income dividends per share will differ, however,
generally due to the difference in the Rule 12b-1 fees of each class.
Dividend payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. The Fund does not pay "interest" or guarantee any
fixed rate of return on an investment in its shares.
DISTRIBUTION OPTIONS
You may receive your distributions from the Fund in any of these ways:
1. Buy additional shares of the Fund - You may buy additional shares of the same
class 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. If you own Class II shares, you may also reinvest
your distributions in Class I shares of the Fund. This is a convenient way to
accumulate additional shares and maintain or increase your earnings base.
2. Buy shares of other Franklin Templeton Funds - You may direct your
distributions to buy the same class of shares of another Franklin Templeton Fund
(without a sales charge or imposition of a Contingent Deferred Sales Charge). If
you own Class II shares, you may also direct your distributions to buy Class I
shares of another Franklin Templeton Fund. Many shareholders find this a
convenient way to diversify their investments.
3. Receive distributions in cash - You may receive dividends, or both dividend
and capital gain distributions in cash. If you have the money sent to another
person or to a checking account, you may need a signature guarantee. If you send
the money to a checking account, please see "Electronic Fund Transfers" under
"Services to Help You Manage Your Account."
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 you do not select an option, we will
automatically reinvest dividend and capital gain distributions in the same class
of the Fund. You may change your distribution option at any time by notifying us
by mail or phone. Please allow at least seven days prior to the reinvestment
date for us 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 more information on tax matters
relating to the Fund and its shareholders, see "Additional Information on
Distributions and Taxes" in the SAI.
Each Fund is treated as a separate entity for federal income tax purposes. The
Fund intends to continue to qualify as a regulated investment company under
Subchapter M of the Code. By distributing all of its income and meeting certain
other requirements relating to the sources of its income and diversification of
its assets, the Fund will not be liable for federal income or excise taxes.
By meeting certain requirements of the Code, the Fund 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 your state of residence or such state's political subdivisions, from interest
on direct obligations of the federal government, or from interest on obligations
of Puerto Rico, the U.S. Virgin Islands or Guam, they may be exempt from
personal income tax, if any, in such state. More information on the state
taxation of interest from federal and municipal obligations is included under
the "Appendices - State Tax Treatment."
To the extent dividends paid by the Fund 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 buy 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 the 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 to you 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 you
received them 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 Fund shares and whether you receive the
distributions in cash or in additional shares.
Redemptions and exchanges of Fund shares are taxable events on which you may
realize a gain or loss. Any loss incurred on a 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 the 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, including the
portion of the dividends on an average basis which constitutes taxable income or
interest income that is a tax preference item under the federal alternative
minimum tax. If you have not held Fund shares 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 includible in the tax base for determining the
extent to which any social security or railroad retirement benefits you receive
will be subject to regular federal income tax. You are required to disclose the
receipt of tax-exempt interest on your federal income tax returns.
Interest on indebtedness incurred by you (directly or indirectly) to purchase or
carry Fund 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 advisor 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. The Appendices to this prospectus discuss the
tax treatment of the Funds with respect to distributions from each respective
Fund to shareholders in such states. Generally, individual shareholders of the
Funds are afforded tax-exempt treatment at the state level for distributions
derived from municipal securities of their state of residency.
Pursuant to federal law, interest received directly from U.S. government
obligations and from obligations of the U.S. territories is generally exempt
from taxation by all states and their municipal subdivisions. Each state's
treatment of dividends paid from the interest earned on direct federal and U.S.
territorial obligations is discussed under "Appendices - State Tax Treatment."
You should consult your tax advisor 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.
Glossary
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
CD - Certificate of deposit
Class I and Class II - The Fund offers two classes of shares, designated "Class
I" and "Class II." The two classes have proportionate interests in the Fund's
portfolio. They differ, however, primarily in their sales charge structures and
Rule 12b-1 plans.
Code - Internal Revenue Code of 1986, as amended
Contingency Period - For Class I shares, the 12 month period during which a
Contingent Deferred Sales Charge may apply. For Class II shares, the contingency
period is 18 months. Regardless of when during the month you purchased shares,
they will age one month on the last day of that month and each following month.
Contingent Deferred Sales Charge (CDSC) - A sales charge of 1% that may apply if
you sell your shares within the Contingency Period.
Distributors - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Trustees."
Eligible Governmental Authority - Any state or local government or any
instrumentality, department, authority or agency thereof that has determined the
Fund is a legally permissible investment and that can only buy shares of the
Fund without paying sales charges.
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., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
Letter - Letter of Intent
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.
NASD - National Association of Securities Dealers, Inc.
Net Asset Value (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NSCC - National Securities Clearing Corporation
Offering Price - The public offering price is based on the Net Asset Value per
share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 4.25% for Class I and 1% for Class II.
REIT - Real Estate Investment Trust
Resources - Franklin Resources, Inc.
SAI - Statement of Additional Information
SEC - U.S. Securities and Exchange Commission
Securities Dealer - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the 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
We/Our/Us - Unless the context indicates a different meaning, these terms refer
to the Fund and/or Investor Services, Distributors, or another wholly owned
subsidiary of Resources.
Appendices
State Tax Treatment
The following information on the state income tax treatment of dividends from
the Funds is based upon correspondence and sources believed to be reliable.
Except where otherwise noted, the information pertains to individual state
income taxation only. You may be subject to local taxes on your dividends or the
value of your shares. Corporations, trusts, estates and other entities may be
subject to other taxes and should consult with their tax advisors or their state
department of revenue. For some investors, a portion of the dividend income may
be subject to the federal and/or state alternative minimum tax.
ARIZONA
Section 43-1021(4) of the Arizona Income Tax Code states that interest on
obligations of the state of Arizona or its political subdivisions is exempt from
personal and corporate income tax. Sections 43-1022(6) and 43-1122(6) provide
similar tax-exempt treatment for interest on obligations of the U.S. or its
territories (including Puerto Rico, Guam and the Virgin Islands). Pursuant to
State Income Tax Ruling Number 84-10-5, Arizona does not tax dividend income
from regulated investment companies, such as the Arizona Fund, to the extent
that such income is derived from such exempt obligations. Dividends paid from
interest earned on indirect U.S. government obligations (GNMAs, FNMAs, etc.),
repurchase agreements collateralized by U.S. government obligations or
obligations from other states and their political subdivisions are fully
taxable. To the extent that such taxable investments are made by the Fund for
temporary or defensive purposes, the distributions will be taxable on a pro rata
basis.
Any distributions of net short-term and net long-term capital gain earned by the
Fund are included in each shareholder's Arizona taxable income as dividend
income and long-term capital gain respectively, and are taxed at ordinary income
tax rates.
FLORIDA
Florida does not have a personal income tax but does have an intangible personal
property tax for residents. According to Florida Statute Section 199.185 and
Technical Assistance Advisement 90 (C)2-003, issued by the Florida Department of
Revenue on August 8, 1990 (as subsequently revised), shares in regulated
investment companies organized as business trusts, such as the Florida Fund,
will not be subject to Florida's intangible property tax to the extent that the
Fund is invested in obligations of the U.S. government, its agencies,
instrumentalities and territories (including Puerto Rico, Guam and the Virgin
Islands) at the close of business on the last business day of the calendar year.
If the Fund invests all of the remaining portion of its net asset value in
exempt obligations of the state of Florida or its municipalities or political
subdivisions on such date, then that remaining portion of the net asset value of
the Fund (and corresponding value of Fund shares) will also be exempt from
Florida's intangibles tax. According to Florida Technical Assistance Advisement
94(c)2-025, if the Fund invests, such as for temporary or defensive purposes,
any of the remaining portion of its portfolio in any asset which is taxable
under Florida's intangible tax law, including investments in indirect federal
obligations (GNMAs FNMAs, etc.), in repurchase agreements collateralized by U.S.
government securities or in obligations of any other states, then only the
portion of net asset value which is made up of direct obligations of the U.S.
government, or territories and possessions of the U.S. government, may be
removed from the net asset value; the remaining net asset value of the Fund is
subject to tax.
MASSACHUSETTS
Chapter 62, Section 2, of the Massachusetts General Laws states that dividends
received from a regulated investment company, such as the Massachusetts Fund,
are exempt from state personal income tax to the extent that such dividends are
attributable to interest on obligations of the U.S. government or its
territories (including Puerto Rico, Guam and the Virgin Islands). Dividends
received from the Fund, which are either exempt-interest dividends or capital
gain dividends, to the extent that the interest or gains are attributable to
obligations of the Commonwealth of Massachusetts, or any political subdivision,
agency or instrumentality within the commonwealth, are also exempt from state
personal income tax. Dividends paid from interest earned on indirect U.S.
government obligations (GNMAs, FNMAs, etc.), repurchase agreements
collateralized by U.S. government obligations, or other obligations from other
states and their political subdivisions are fully taxable. To the extent that
such taxable investments are made by the Fund for temporary or defensive
purposes, the distributions will be taxable on a pro rata basis.
Any distributions of net short-term and net long-term capital gains earned by
the Fund which are derived from taxable obligations are taken into account by a
Massachusetts resident in determining the amount of capital gain net income
subject to tax, and are taxed at ordinary income rates.
In determining the Massachusetts excise tax on corporations subject to state
taxation, distributions from the Fund will generally be included in a corporate
shareholder's net income, and in the case of intangible property corporations,
shares of the Fund will be included in the computation of net worth.
MICHIGAN
Section 206.30(1) of the Michigan Compiled Laws generally provides that taxable
income, for purposes of the Michigan individual income tax, is determined by
reference to federal adjusted gross income, with certain modifications. Interest
and dividends derived from obligations or securities of states other than
Michigan (less related expenses) must be added back in determining Michigan
taxable income. Interest and dividends derived from obligations or securities of
Michigan (and its political subdivisions) are exempt and are not, therefore,
added back in determining Michigan taxable income. Further, income derived from
obligations of the U.S. government that the state is prohibited by law from
subjecting to a net income tax is subtracted in determining Michigan taxable
income. This includes direct obligations of the U.S. government, its agencies,
instrumentalities, or possessions (including Puerto Rico, Guam and the Virgin
Islands). Revenue Administrative Bulletin 1986-3, states that a regulated
investment company, such as the Michigan Fund, which invests in tax-free
municipal obligations of the state of Michigan and its political and
governmental subdivisions is permitted to pass-through the exemption of such
interest to its shareholders to the extent that such interest qualifies as an
exempt-interest dividend of a regulated investment company. The exempt nature of
interest from obligations of the U.S. and its territories and possessions may
also be passed-through to shareholders. Dividends paid from interest earned on
indirect U.S. government obligations (GNMAs, FNMAs, etc.), 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 will generally be included in each shareholder's Michigan taxable
income as dividend income and long-term capital gain respectively, and taxed at
ordinary income tax rates.
Section 205.133(f) of the Michigan Compiled Laws exempts from the intangible
personal property tax obligations of the state of Michigan and its political
subdivisions and obligations of the U.S. and its possessions, agencies and
instrumentalities. Pursuant to Revenue Administrative Bulletin 1986-3, an owner
of a share of a regulated investment company, such as the Michigan Fund, will be
considered the owner of a pro-rata share of the assets of such regulated
investment company. It further provides that yield (for intangibles tax
purposes) is determined with respect to shares of the Michigan Fund by excluding
from gross dividends or interest the pro rata share of the interest or dividends
received from such exempt obligations held by the Fund. According to the
instructions to the 1995 Michigan Form c-6606, capital gains from a regulated
investment company that are reinvested in additional shares of the Fund are
exempt from intangibles taxes, whereas capital gains distributed in cash are
taxable.
You should consult your tax advisor with respect to the applicability of other
state and local intangible property or income taxes to your shares in the Fund
and to distribution and redemption proceeds received from the Fund.
MINNESOTA
Section 290.01 of the Code of Minnesota states that individual shareholders will
generally not be subject to state income taxation on the exempt-interest
dividends distributed by a regulated investment company, such as the Minnesota
Fund, provided that at least 95% of the exempt-interest dividends are derived
from obligations of the state of Minnesota, or its political or governmental
subdivisions. However, such dividends are taken into account in computing the
state's alternative minimum tax to the extent they are derived from Minnesota
private activity bonds. Minnesota Rule 8002.0300 generally states that dividends
paid by the Fund, to the extent attributable to interest derived from
obligations of the U.S. government, its authorities, commissions,
instrumentalities or territories (including Puerto Rico, Guam and the Virgin
Islands), will also be exempt from Minnesota's personal income tax. As a matter
of policy, the Fund will continue to earn at least 95% of its income from
interest on Minnesota obligations and invest less than 5% of its assets in
direct U.S. government, Puerto Rico or other obligations to ensure that the Fund
continues to qualify to pay exempt-interest dividends on income from Minnesota
obligations. Dividends paid from interest earned on indirect U.S. government
obligations (GNMAs, FNMAs, etc.), repurchase agreements collateralized by U.S.
government obligations, or other obligations from other states and their
political subdivisions are fully taxable. To the extent that such taxable
investments are made by the Fund for temporary or defensive purposes, the
distributions will be taxable on a pro rata basis.
Any distributions of net short-term and net long-term capital gains earned by
the Fund are included in each shareholder's Minnesota taxable income as dividend
income and long-term capital gain respectively, and are taxed at ordinary income
tax rates.
OHIO
Section 5747.01(a) of the Ohio Revised Code states generally that interest on
obligations of the state of Ohio and its subdivisions and authorities and of the
U.S. and its territories and possessions (to the extent included in federal
adjusted gross income but exempt from state income taxes under U.S. laws) is
exempt from Ohio state personal income tax. Distributions of such income by
regulated investment companies, such as the Ohio Insured Fund, will also be
exempt from the Ohio personal income tax and the Ohio corporation franchise tax
computed on the net income basis. Shares of the Ohio Fund will, however, be
included in a shareholder's tax base for purposes of computing the Ohio
corporation franchise tax on the net worth basis. Dividends paid from interest
earned on indirect U.S. government obligations (GNMAs, FNMAs, etc.), repurchase
agreements collateralized by U.S. government obligations, or other obligations
from other states and their political subdivisions are fully taxable. To the
extent that such taxable investments are made by the Fund for temporary or
defensive purposes, the distributions will be taxable on a pro rata basis.
You will not be required to include in income for Ohio personal income tax
purposes your allocable share of insurance proceeds received by the Fund on any
default of interest of Ohio obligations, which the Fund distributes to
shareholders and clearly identifies as directly attributable to insurance on
defaulted interest earned on Ohio obligations, if and to the extent that such
proceeds would not be subject to such taxes if paid in the normal course by the
issuer of such defaulted obligations and further provided that such proceeds are
not taxable under federal law.
Any distributions of net short-term and net long-term capital gains earned by
the Fund are included in each shareholder's Ohio taxable income as dividend
income and long-term capital gain respectively, and are taxed at ordinary income
tax rates.
Special Factors Affecting Each State Fund
Some of the economic factors that may affect each State Fund are summarized
below. The information is based primarily on information from municipal credit
reports, public documents relating to the securities offerings of state issuers
and historically reliable sources. This information has not been independently
verified by the Trust, nor is it intended to be comprehensive. More information
about each state is included in the SAI.
ARIZONA
Although Arizona's population growth slowed in the 1990s, as compared to the
1980s, its population has continued to increase and its growth in employment
still exceeds the national average. Employment in Arizona continues to shift
from agriculture and mining towards manufacturing (11%), trade (24%), services
(28%) and government (17.6%). The shift away from farming, which uses about 80%
of the state's water, will likely result in more water for municipal uses.
Affordable housing and competitive wage rates are expected to continue
attracting business to the state.
Gross state debt levels remain moderate, but tax cuts in the 1980s have made it
more difficult for the state to balance its budget. Income and property tax cuts
in fiscal 1996 and 1997 have created additional budget concerns, especially if
the economy slows down. State financial operations, however, are expected to
remain sound.
FLORIDA
Employment and population have experienced steady growth in Florida since 1991,
and Florida's economic recovery has been among the strongest in the region.
Florida's service sector, which includes health and business services, accounts
for more than one third of its total employment. Growth in trade and
construction also remain strong, and tourism and agriculture are still important
components of Florida's economy. Florida's population growth has placed more
demands on education, corrections, and other government services, but so far
Florida has been able to meet these challenges.
In November 1994, Florida voters limited the amount of taxes and other revenues
that can be raised by the state in any fiscal year unless a two-thirds vote of
each house agrees to increase the revenue cap. Because the cap exempts revenue
pledged to bonds, revenue needed to pay Medicaid, and proceeds from the state
lottery, however, it appears to allow the state to raise sufficient revenue for
its needs. For fiscal 1997, the state is projected to be under the cap by $738
million.
MASSACHUSETTS
Massachusetts' economic recovery began in 1992 following a deep regional
recession. Growth in the services, trade, finance, insurance and real estate,
and construction sectors led to positive employment growth in 1995. The state's
economic growth is expected to lag behind the rest of the nation through the
year 2000, however, due to restructuring in the computer, defense and health
care sectors. Although strong employment gains are expected in areas of the
service sector such as high technology and management consulting, federal
spending cuts in health care are expected to reduce employment growth in
hospitals and other health-related fields. Still, industrial output is expected
to grow steadily due to strong productivity gains in high technology. 1994 per
capita personal income remains high, fourth highest among the fifty states.
Massachusetts has a high debt burden but it also has high income and wealth
levels and a stable financial position. The recent increases in federal taxes on
wealthier households, limitations on Medicare and Medicaid spending, and
decreased defense spending impacted Massachusetts more significantly than many
other states because of its citizens' high income levels and its large share of
health services and defense industries.
MICHIGAN
While Michigan's economy is traditionally based on heavy manufacturing, growth
in the services and trade sectors over the last decade has led to a more
diversified economy. Michigan's economy is still closely linked to the
manufacturing industry. However, in 1991, about 23% of total jobs in Michigan
were in the manufacturing sector versus 17% nationally. The state's economy
continues to rely on national economic trends, especially the demand for durable
goods.
A weakened demand for capital goods, a slowdown in private investment, and
weakness in the market for automobile and transportation goods resulted in poor
economic performance and considerable job losses for Michigan during the
recession. Since the recession, however, the state economy has shown a very
strong recovery. Employment growth in the service sector has led to an
unemployment rate below the national average for the first time in almost 20
years, and more employment growth is expected in the service-related industries.
While the decline in jobs in automobile (from 10.8% of total jobs in 1979 to
6.9% in 1989) and other durable goods manufacturing has been offset by job
growth in other areas, per capita income dropped from 108% of the U.S. figure in
1977 to 99% in 1994.
MINNESOTA
Minnesota's economic structure is well diversified among trade (23%) services
(27%) and durable and nondurable manufacturing (16%). As a result, the recent
recession was less severe in Minnesota than the nation as a whole. During the
1980s, in contrast to many other states, Minnesota's manufacturing sector grew,
largely due to gains in durable manufacturing. Computer manufacturing represents
33% of the durable goods sector. The durable manufacturing sector showed
positive gains in the 1980s, but it was adversely affected by contractions in
the mainframe computer industry.
Employment growth in Minnesota lags the nation, due in part to job losses in
mining and agriculture, as well as slow growth in the trade and service sectors.
Unemployment levels have remained well below the national average for 1995,
however, and per capita income is now slightly above the national average.
OHIO
Over the past ten years, employment and earnings in Ohio have grown steadily and
become more diversified. Although manufacturing still provides 21% of the
employment in the state, employment growth in the services and trade sectors has
created a more stable economy. Statewide employment was up 3% from 1990-1995,
and employment gains in 1994 and 1995 were enough to offset recession years'
losses. Although manufacturing is expected to slow in 1996, growth in the
services, trade and construction industries should continue to produce strong
economic growth.
The rate of personal income growth, however, has declined as lower-paying
service jobs have replaced those lost in manufacturing, with income levels
currently slightly below the national average. Personal income has grown 3.9%
and 3.1% in 1994 and 1995, respectively.
Instructions and Important Notice
Substitute W-9 Instructions Information
General. Backup withholding is not an additional tax. Rather, the tax liability
of persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained from the IRS.
Obtaining A Number. If you do not have a Social Security Number Taxpayer
Identification Number or you do not know your SSN TIN, you must obtain Form SS-5
or Form SS-4 from your local Social Security or IRS office and apply for one. If
you have checked the "Awaiting TIN" box and signed the certification,
withholding will apply to payments relating to your account unless you provide a
certified TIN within 60 days.
What SSN/TIN to Give. Please refer to the following guidelines:
<TABLE>
<CAPTION>
ACCOUNT TYPE GIVE SSN OF ACCOUNT TYPE GIVE EMPLOYER ID # OF
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
oIndividual Individual oTrust, Estate, or Trust, Estate, or
Pension Plan Trust Pension Plan Trust
oJoint Individual Owner who will be oCorporation, Partnership, Corporation,
paying tax or first- or other organization Partnership, or
named individual other organization
oUnif. Gift/ Minor oBroker nominee Broker nominee
Transfer to Minor
oSole Proprietor Owner of business
oLegal Guardian Ward, Minor, or
Incompetent
</TABLE>
Exempt Recipients. Please provide your TIN and check the "Exempt Recipient" box
if you are an exempt recipient. Exempt recipients include:
A corporation
A financial institution
An organization exempt from tax
under section 501(a), or an individual
retirement plan
A registered dealer in securities or
commodities registered in the U.S.
or a U.S. possession
A real estate investment trust
A common trust fund operated by
a bank under section 584(a)
An exempt charitable remainder trust
or a non-exempt trust described in
section 4947(a)(1)
An entity registered at all times under
the Investment Company Act of 1940
IRS Penalties. If you do not supply us with your SSN/TIN, you will be subject to
an IRS $50 penalty unless your failure is due to reasonable cause and not
willful neglect. If you fail to report certain income on your federal income tax
return, you will be treated as negligent and subject to an IRS 20% penalty on
any underpayment of tax attributable to such negligence, unless there was
reasonable cause for the resulting underpayment and you acted in good faith. If
you falsify information on this form or make any other false statement resulting
in no backup withholding on an account which should be subject to backup
withholding, you may be subject to an IRS $500 penalty and certain criminal
penalties including fines and imprisonment.
20.21/150 (07/96)
Substitute W-8 Instructions Information
Exempt Foreign Person. Check the "Exempt Foreign Person" box if you qualify as a
non-resident alien or foreign entity that is not subject to certain U.S.
information return reporting or to backup withholding rules. Dividends paid to
your account may be subject to withholding of up to 30%. You are an "Exempt
Foreign Person" if you are not (1) a citizen or resident of the U.S., or (2) a
U.S. corporation, partnership, estate, or trust. In the case of an individual,
an "Exempt Foreign Person" is one who has been physically present in the U.S.
for less than 31 days during the current calendar year. An individual who is
physically present in the U.S. for at least 31 days during the current calendar
year will still be treated as an "Exempt Foreign Person," provided that the
total number of days physically present in the current calendar year and the two
preceding calendar years does not exceed 183 days (counting all of the days in
the current calendar year, only one-third of the days in the first preceding
calendar year and only one-sixth of the days in the second preceding calendar
year). In addition, lawful permanent residents or green card holders may not be
treated as "Exempt Foreign Persons." If you are an individual or an entity, you
must not now be, or at this time expect to be, engaged in a U.S. trade or
business with respect to which any gain derived from transactions effected by
the Fund/Payer during the calendar year is effectively connected to the U.S. (or
your transactions are exempt from U.S. taxes under a tax treaty).
Permanent Address. The Shareholder Application must contain your permanent
address if you are an "Exempt Foreign Person." If you are an individual, provide
your permanent address. If you are a partnership or corporation, provide the
address of your principal office. If you are an estate or trust, provide the
address of your permanent residence or the principal office of any fiduciary.
Notice of Change in Status. If you become a U.S. citizen or resident after you
have provided certification of your foreign status, or if you cease to be an
"Exempt Foreign Person," you must notify the Fund/Payer within 30 days of your
change in status. Reporting will then begin on the account(s) listed, and backup
withholding may also begin unless you certify to the Fund/Payer that (1) the tax
payer identification number you have given is correct, and (2) the Internal
Revenue Service has not notified you that you are subject to backup withholding
because you failed to report certain interest or dividend income. You may use
Form W-9, "Payer's Request for Taxpayer Identification Number and
Certification," to make these certifications. If an account is no longer active,
you do not have to notify a Fund/Payer or broker of your change in status unless
you also have another account with the same Fund/Payer that is still active. If
you receive interest from more than one Fund/Payer or have dealings with more
than one broker or barter exchange, file a certificate with each. If you have
more than one account with the same Fund/Payer, the Fund/Payer may require you
to file a separate certificate for each account.
When to File. File these certifications with the Fund before a payment is made
to you, unless you have already done this in either of the two preceding
calendar years.
How Often You Must File. This certificate generally remains in effect for three
calendar years. A Fund/Payer or broker, however, may require that a new
certificate be filed each time a payment is made. On joint accounts for which
each joint owner is a foreign person, each must provide a certification of
foreign status.
20.21/150 (07/96)
Franklin Funds
Automatic Investment Plan
777 Mariners Island Blvd., P.O. Box 7777, San Mateo, CA 94403-7777
The Franklin Automatic Investment Plan gives you the convenience of
automatically investing in a Fund on a monthly basis. Shares are purchased at
the applicable offering price, as indicated in the Prospectus, next calculated
after receipt of funds from your bank. There is no additional charge for this
service by the Fund or Franklin/Templeton Investor Services, Inc.
Your monthly investments will be made by electronic funds transfer (EFT) from
your checking account if your bank is a member of an Automated Clearing House
(ACH). Otherwise, they will be made by checks prepared by our bank. Your
signature below is the authorizing signature for each transfer or check. This
service is subject to the rules for the bank account, ACH and the Fund. Franklin
may correct any transfer error by a debit or credit to your bank account and/or
Fund account.
You may sign up for the Automatic Investment Plan at the time you open a new
account or any time after you have established an account at Franklin. If the
Automatic Investment Plan is initiated at the time you open your account, the
Fund's minimum initial investment amount is reduced and the account may be
opened with an investment of $25 or more. Existing account holders may choose
any amount, starting with the $25 minimum subsequent amount, for investment in
their Fund account from their bank account. All you need to do is complete the
application below and attach a voided, unsigned check which shows your bank
account number in magnetic coding. Please allow up to six weeks for the Plan to
begin.
Changing or Discontinuing the Plan
When Franklin/Templeton Investor Services, Inc. is advised by you to stop your
Automatic Investment Plan, no investments will be processed until written notice
is received to initiate the Plan again. Franklin will need ten days written or
verbal notice to stop an Automatic Investment Plan prior to an upcoming pay
date. Ten days written notice is required if you are changing bank information
other than the dollar amount. If a check or transfer is returned to Franklin for
any reason, including stop payment, insufficient funds or account closed, your
Automatic Investment Plan will be discontinued. Franklin may also change or
terminate the service by written notice to you.
Exchanges
If you exchange shares from one Franklin fund to another, the Automatic
Investment Plan does not transfer to the new account, but Franklin will
automatically send you a Plan application. Or, you may notify us by telephone if
the Plan is to be transferred and credited to a fund other than that listed on
the original application.
Retirement Accounts
When using the Automatic Investment Plan for Franklin Templeton Trust Company
retirement accounts, all purchases will be credited as a contribution for the
year in which they are received. Please be sure to monitor the amount of money
credited to your retirement account to avoid making an excess contribution.
20.24/101 A (07/96)
Automatic Investment Plan Application:
Name(s)
Please print as shown on Franklin account registration.)
Address
Telephone
Bank's Name
Branch Address
Name(s) on Bank Account
Checking Account No.
Please attach a voided check.
[Franklin Use Only: ABA No. ]
Please invest my Automatic investments for $ per month in:
Franklin Fund Name
Franklin Fund Account No.
Preferred Monthly Date of Checking Account Debit:
1st bank business day on or after the: 5th n or 20th n
Signature(s) Date
All registered owners must sign.
If you have any questions, please call a Shareholder Services representative,
toll free, at 1-800/632-2301.
Automatic Investment Plan Revision - Complete only if you are revising existing
Automatic Investment Plan: (and complete section above)
Bank Change Amount Change $
(Attach new voided check) (Indicate new amount)
Other
Note: Please give Franklin ten days written notice to change bank information
other than the dollar amount.
Please Return this Form to:
Franklin/Templeton Investor Services, Inc., Attn: AUTOMATIC INVESTMENT PLAN
Dept.,
777 Mariners Island Blvd., P.O. Box 7777, San Mateo, CA 94403-7777.
20.24/101 A (07/96)
Franklin Templeton
Telephone Redemption Authorization Agreement
You may use Franklin Templeton's telephone redemption privilege to redeem
uncertificated Franklin Templeton Fund shares for up to $50,000 (or your
shareholder account balance, whichever is less) per day, per fund account in
accordance with the terms of the Funds' prospectus.
The telephone redemption privilege is available only to shareholders who
specifically request it. If you would like to add this redemption privilege to
the other telephone transaction privileges now automatically available to
Franklin Templeton Fund shareholders, please sign and return this authorization
to Franklin/Templeton Investor Services, Inc. ("Investor Services"), transfer
agent and shareholder servicing agent for the Franklin Templeton Funds.
Shareholder Authorization: I/We request the telephone redemption privilege under
the terms described below and in the prospectus for each investment company in
Franklin Templeton (a "Franklin Templeton Fund" or a "Fund"), now open or opened
at a later date, holding shares registered as follows:
Print name(s) as shown in registration (called "Shareholder")
Account number(s)
I/We authorize each Fund and Investor Services to honor and act upon telephone
requests, given as provided in this agreement, to redeem shares from any
Shareholder account.
Signature(s) of all registered owners and date
Printed name (and title/capacity, if applicable)
Verification Procedures: I/We understand and agree that: (1) each Fund and
Investor Services will employ reasonable procedures to confirm that redemption
instructions communicated by telephone are genuine and that if these
confirmation procedures are not followed, the Fund or Investor Services may be
liable for any losses due to unauthorized or fraudulent telephone instructions;
(2) the confirmation procedures will include the recording of telephone calls
requesting redemptions, 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 the
sending of confirmation statements to the address of record each time a
redemption is initiated by telephone; and (3) as long as the Fund and Investor
Services follow the confirmation procedures in acting on instructions
communicated by telephone which were reasonably believed to be genuine at the
time of receipt, neither they nor their parent or affiliates will be liable for
any loss, damages or expenses caused by an unauthorized or fraudulent redemption
request.
Jointly Owned/Co-Trustee Accounts: Each of us signing this agreement as either
joint owners or co-trustees authorize each Fund and Investor Services to honor
telephone redemption requests given by ANY ONE of the signers or our investment
representative of record, if any, ACTING ALONE.
20.21/140 (07/96)
Appointment of Attorney-in-Fact: In order to issue telephone redemption requests
acting alone, each of us individually makes the following appointment: I hereby
appoint the other joint owner(s)/co-trustee(s) as my agent(s)
(attorney[s]-in-fact) with full power and authority to individually act for me
in any lawful way with respect to the issuance of instructions to a Fund or
Investor Services in accordance with the telephone redemption privilege we have
requested by signing this agreement. This appointment shall not be affected by
my subsequent disability or incompetency and shall remain in effect until it is
revoked by either written notice from any one of us delivered to a Fund or
Investor Services by registered mail, return receipt requested, or by a Fund or
Investor Services upon receipt of any information that causes a Fund or Investor
Services to believe in good faith that there is or that there may be a dispute
among any of us with respect to the Franklin Templeton Fund account(s) covered
by this agreement. Each of us agrees to notify the Fund or Investor Services
immediately upon the death of any of the undersigned.
Corporate/Partnership/Trust/Retirement Accounts: The Shareholder and each of us
signing this agreement on behalf of the Shareholder represent and warrant to
each Franklin Templeton Fund and Investor Services that the Shareholder has the
authority to enter into this agreement and that each of us are duly authorized
to execute this agreement on behalf of the Shareholder. The Shareholder agrees
that its election of the telephone redemption privilege means that a Fund or
Investor Services may honor a telephone redemption request given by ANY
officer/partner/member/administrator or agent of Shareholder ACTING ALONE.
Restricted Accounts: Telephone redemptions and dividend option changes may not
be accepted on Franklin Templeton Trust Company retirement accounts.
Please Return this Form to:
Franklin/Templeton Investor Services, Inc.
Attn: D/P REVISIONS Dept.
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777.
PROSPECTUS & APPLICATION
Franklin
Tax-Free
Trust
JULY 1, 1996
Franklin Alabama Tax-Free Income Fund - Class I & Class II
Franklin Florida Tax-Free Income Fund - Class I & Class II
Franklin Georgia Tax-Free Income Fund - Class I & Class II
Franklin Kentucky Tax-Free Income Fund - Class I
Franklin Louisiana Tax-Free Income Fund - Class I & Class II
Franklin Maryland Tax-Free Income Fund - Class I & Class II
Franklin Missouri Tax-Free Income Fund - Class I & Class II
Franklin North Carolina Tax-Free Income Fund - Class I & Class II
Franklin Texas Tax-Free Income Fund - Class I & Class II
Franklin Virginia Tax-Free Income Income Fund - Class I & Class II
INVESTMENT STRATEGY
TAX-FREE INCOME
This prospectus contains information you should know before investing in the
Fund. Please keep it for future reference.
The Fund's SAI, dated July 1, 1996, as may be amended from time to time,
includes more information about the Fund's procedures and policies. It has been
filed with the SEC and is incorporated by reference into this prospectus. For a
free copy or a larger print version of this prospectus, call 1-800/DIAL BEN or
write the Fund at the address shown.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SEC OR ANY STATE SECURITIES COMMISSION NOR HAS THE SEC 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 DISTRIBUTORS.
This prospectus describes the ten series of Franklin Tax-Free Trust (the
"Trust") listed above. Nine of the series offer two classes of shares.
Each Fund may, separately or collectively, be referred to as the "Fund" or
"Funds," or individually by the state in its name.
Franklin
Tax-Free
Trust
July 1, 1996
When reading this prospectus, you will see terms that are capitalized. This
means the term is explained in our glossary section.
Table of Contents
About The Fund
Expense Summary 2
Financial Highlights 4
How Does the Fund Invest Its Assets? 14
What Are the Fund's Potential Risks? 19
Who Manages the Fund? 21
How Does the Fund Measure Performance? 24
How Is the Trust Organized? 25
About Your Account
How Do I Buy Shares? 26
May I Exchange Shares for Shares
of Another Fund? 31
How Do I Sell Shares? 33
Transaction Procedures and Special Requirements 35
Services to Help You Manage Your Account 40
What Distributions Might I Receive From the Fund? 43
How Taxation Affects You and the Fund 44
Glossary
Useful Terms and Definitions 46
Appendices
State Tax Treatment 48
Special Factors Affecting Each Fund 54
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN
About the Fund
Expense Summary
This table is designed to help you understand the costs of investing in the
Fund. It is based on the historical expenses of each class for the fiscal year
ended February 29, 1996. The Class II expenses are annualized. Your actual
expenses may vary.
Shareholder Transaction Expenses+
<TABLE>
<CAPTION>
North
Alabama Florida Georgia Kentucky Louisiana Maryland Missouri Carolina Texas Virginia
Fund Fund Fund Fund Fund Fund Fund Fund Fund Fund
Class I Class I Class I Class I Class I Class I Class I Class I Class I ClassI
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Maximum Sales Charge Imposed
on Purchases (as a percentage
of offering price) 4.25% 4.25% 4.25% 4.25% 4.25% 4.25% 4.25% 4.25% 4.25% 4.25%
Deferred Sales Charge+++ NONE NONE NONE NONE NONE NONE NONE NONE NONE NONE
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees 0.57% 0.47% 0.60% 0.63%* 0.62% 0.58% 0.55% 0.56% 0.60% 0.55%
Rule 12b-1 Fees** 0.08% 0.07% 0.08% 0.08% 0.08% 0.08% 0.09% 0.08% 0.07% 0.08%
Other expenses 0.07% 0.06% 0.09% 0.11% 0.08% 0.08% 0.07% 0.07% 0.09% 0.06%
Total Fund Operating Expenses 0.72% 0.60% 0.77% 0.82%* 0.78% 0.74% 0.71% 0.71% 0.76% 0.69%
Shareholder Transaction Expenses+
North
Alabama Florida Georgia Louisiana Maryland Missouri Carolina Texas Virginia
Fund Fund Fund Fund Fund Fund Fund Fund Fund
Class II Class II Class II Class II Class II Class II Class II Class II Class II
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)++ 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
Deferred Sales Charge+++ 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees 0.57% 0.47% 0.60% 0.62% 0.58% 0.55% 0.56% 0.60% 0.55%
Rule 12b-1 Fees** 0.65% 0.65% 0.65% 0.65% 0.65% 0.65% 0.65% 0.65% 0.65%
Other Expenses 0.07% 0.06% 0.09% 0.08% 0.08% 0.07% 0.07% 0.09% 0.06%
Total Fund Operating Expenses 1.29% 1.18% 1.34% 1.35% 1.31% 1.27% 1.28% 1.34% 1.26%
</TABLE>
+Many transactions may be processed through your Securities Dealer. Your dealer
may charge a fee for this service.
++Although Class II has a lower front-end sales charge than Class I, its Rule
12b-1 fees are higher. Over time you may pay more for Class II shares. Please
see "How Do I Buy Shares? - Deciding Which Class to Buy."
+++A Contingent Deferred Sales Charge of 1% may apply to Class I purchases of $1
million or more if you sell the shares within one year and any Class II purchase
if you sell the shares within 18 months. There is no front-end sales charge if
you buy $1 million or more in Class I shares. See "How Do I Sell Shares? -
Contingent Deferred Sales Charge" for details.
*Advisers has agreed in advance to limit its management fees for the Kentucky
Fund. With this reduction, management fees and total Fund operating expenses
were 0.14% and 0.33%, respectively.
**The Class II fees are annualized. These fees may not exceed 0.10% for Class I
shares and 0.65% for Class II shares. The combination of front-end sales charges
and Rule 12b-1 fees could cause long-term shareholders to pay more than the
economic equivalent of the maximum front-end sales charge permitted under the
NASD's rules.
Example
Assume the annual return for each class is 5% and operating expenses are as
described above. For each $1,000 investment, you would pay the following
projected expenses if you sold your shares after the number of years shown.
NAME OF FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
Alabama Fund, Class I $50* $65 $81 $128
Alabama Fund, Class II $33 $50 $80 $164
Florida Fund, Class I $48* $61 $75 $114
Florida Fund, Class II $32 $47 $74 $152
Georgia Fund, Class I $50* $66 $83 $134
Georgia Fund, Class II $33 $52 $83 $170
Kentucky Fund, Class I $51* $68 $86 $140
Louisiana Fund, Class I $50* $66 $84 $135
Louisiana Fund, Class II $34 $52 $83 $171
Maryland Fund, Class I $50* $65 $82 $130
Maryland Fund, Class II $33 $51 $81 $166
Missouri Fund, Class I $49* $64 $80 $127
Missouri Fund, Class II $33 $50 $79 $162
North Carolina Fund, Class I $49* $64 $80 $127
North Carolina Fund, Class II $33 $50 $80 $163
Texas Fund, Class I $50* $66 $83 $133
Texas Fund, Class II $33 $52 $83 $170
Virginia Fund, Class I $49* $64 $79 $125
Virginia Fund, Class II $33 $50 $78 $161
*Assumes a Contingent Deferred Sales Charge will not apply.
For the same Class II investment, you would pay the following projected expenses
if you did not sell your shares at the end of the first year. Your projected
expenses for the remaining periods would be the same as above.
NAME OF FUND 1 YEAR
Alabama Fund, Class II $23
Florida Fund, Class II $22
Georgia Fund, Class II $24
Louisiana Fund, Class II $24
Maryland Fund, Class II $23
Missouri Fund, Class II $23
North Carolina Fund, Class II $23
Texas Fund, Class II $24
Virginia Fund, Class II $23
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. The
Fund pays its operating expenses. These expenses are reflected in the Net Asset
Value or dividends of each class and are not directly charged to your account.
Financial Highlights
This table summarizes the Fund's financial history. The information has been
audited by Coopers & Lybrand L.L.P., the Fund's independent auditors. Their
audit report covering each of the most recent five years appears in the
financial statements in the Trust's Annual Report to Shareholders for the fiscal
year ended February 29, 1996.
Franklin Alabama Tax-Free Income Fund - Class I
<TABLE>
<CAPTION>
Period Ended Feb. 29 1996 1995 1994 1993 1992 1991 1990 1989 19881
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance
Net asset value at beginning of period $11.31 $11.80 $11.71 $11.00 $10.75 $10.74 $10.59 $10.54 $10.00
Net investment income 0.66 0.66 0.66 0.68 0.66 0.71 0.75 0.79 0.44
Net realized & unrealized gains (losses)
on securities 0.416 (0.500) 0.094 0.714 0.346 0.068 0.168 0.005 0.210
Total from investment operations 1.076 0.160 0.754 1.394 1.006 0.778 0.918 0.795 0.650
Distributions from net investment income(0.656) (0.650)(0.664) (0.684) (0.756) (0.768) (0.768) (0.723) (0.110)
Distributions from capital gains - - - - - - - (0.022) -
Total distributions (0.656) (0.650)(0.664) (0.684) (0.756) (0.768) (0.768) (0.745) (0.110)
Net asset value at end of period $11.73 $11.31 $11.80 $11.71 $11.00 $10.75 $10.74 $10.59 $10.54
Total return+ 9.74% 1.54% 6.35% 12.84% 9.51% 7.27% 8.61% 7.59% 11.26%*
Ratios/Supplemental Data
Net assets at end of
period (in 000's) $185,981 $170,051$178,414$144,480 $96,254 $50,182 $21,685 $6,079 $2,472
Ratio of expenses to average net assets***0.72% 0.72% 0.64% 0.68% 0.71% 0.70% 0.42% -% -%
Ratio of net income
to average net assets 5.69% 5.88% 5.62% 6.04% 6.21% 6.45% 6.69% 7.33% 5.64%*
Portfolio turnover rate 12.39% 19.85% 14.87% 11.27% 1.21% 28.36% 4.97% 12.70% 54.25%
Franklin Alabama Tax-Free Income Fund - Class II
Period Ended Feb. 29 19962
Per Share Operating Performance
Net asset value at beginning of period $11.36
Net investment income 0.49
Net realized & unrealized gains
(losses) on securities 0.405
Total from investment operations 0.895
Distributions from net investment income (0.485)
Distributions from capital gains -
Total distributions (0.485)
Net asset value at end of period $11.77
Total return+ 8.01%
Ratios/Supplemental Data
Net assets at end of period (in 000's) $1,662
Ratio of expenses to average net assets*** 1.29%*
Ratio of net income to average net assets 5.09%*
Portfolio turnover rate 12.39%
Franklin Florida Tax-Free Income Fund - Class I
Period Ended Feb. 29 1996 1995 1994 1993 1992 1991 1990 1989 19881
Per Share Operating Performance
Net asset value at beginning of period $11.35 $11.77 $11.68 $11.04 $10.75 $10.73 $10.59 $10.61 $10.00
Net investment income 0.69 0.69 0.70 0.71 0.71 0.73 0.73 0.81 0.46
Net realized & unrealized gains (losses)
on securities 0.338 (0.436) 0.086 0.647 0.348 0.091 0.226 (0.041) 0.333
Total from investment operations 1.028 0.254 0.786 1.357 1.058 0.821 0.956 0.769 0.793
Distributions from net investment income(0.688) (0.674) (0.696) (0.717) (0.768) (0.801) (0.816) (0.781) (0.183)
Distributions from capital gains - - - - - - - (0.008) -
Total distributions (0.688) (0.674) (0.696) (0.717) (0.768) (0.801) (0.816) (0.789) (0.183)
Net asset value at end of period $11.69 $11.35 $11.77 $11.68 $11.04 $10.75 $10.73 $10.59 $10.61
Total return+ 9.28% 2.36% 6.65% 12.45% 10.02% 7.69% 8.98% 7.28% 14.36%*
Ratios/Supplemental Data
Net assets at end of period (in 000's)$1,353,541$1,265,018$1,361,583$1,164,827$886,110 $605,720 $302,488 $33,752 $2,411
Ratio of expenses to average net assets***0.60% 0.59% 0.52% 0.54% 0.54% 0.57% 0.66% 0.24% -%
Ratio of net income to
average net assets 5.93% 6.16% 5.90% 6.30% 6.60% 6.76% 6.40% 6.42% 6.22%*
Portfolio turnover rate 11.78% 14.34% 11.99% 11.72% 16.69% 10.80% 8.50% 8.64% 40.02%
Franklin Florida Tax-Free Income Fund - Class II
Period Ended Feb. 29 19962
Per Share Operating Performance
Net asset value at
beginning of period $11.37
Net investment income 0.52
Net realized & unrealized
gain (loss) on securities 0.382
Total from investment operations 0.902
Distributions from net investment income (0.512)
Distributions from capital
gains Total distribution (0.512)
Net asset value at end of period $11.76
Total return+ 8.05%
Ratios/supplemental data
Net assets at end of period (in 000's) $7,644
Ratio of expenses to average net assets*** 1.18%*
Ratio of net investment
income to average net assets 5.33%*
Portfolio turnover rate 11.78%
Franklin Georgia Tax-Free Income Fund - Class I
Period Ended Feb. 29 1996 1995 1994 1993 1992 1991 1990 1989 19881
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance
Net asset value at beginning of period $11.54 $12.00 $11.85 $11.18 $10.94 $10.90 $10.59 $10.55 $10.00
Net investment income 0.66 0.66 0.66 0.68 0.65 0.72 0.79 0.80 0.44
Net realized & unrealized gains (losses)
on securities 0.343 (0.458) 0.154 0.658 0.349 0.098 0.264 (0.034) 0.230
Total from investment operations 1.003 0.202 0.814 1.338 0.999 0.818 1.054 0.766 0.670
Distributions from net investment income (0.663) (0.662) (0.664) (0.668) (0.759) (0.778) (0.744) (0.720) (0.120)
Distributions from capital gains - - - - - - - (0.006) -
Total distributions (0.663) (0.662) (0.664) (0.668) (0.759) (0.778) (0.744) (0.726) (0.120)
Net asset value at end of period $11.88 $11.54 $12.00 $11.85 $11.18 $10.94 $10.90 $10.59 $10.55
Total return+ 8.90% 1.87% 6.77% 12.09% 9.32% 7.53% 9.94% 7.32% 11.46%*
Ratios/Supplemental Data
Net assets at end of period (in 000's) $130,380 $116,771 $120,882 $91,017 $68,546 $32,011 $13,877 $5,640 $1,780
Ratio of expenses to average net assets***0.77% 0.76% 0.69% 0.71% 0.72% 0.56% 0.09% -% -%
Ratio of net income to
average net assets 5.58% 5.76% 5.48% 5.91% 6.11% 6.53% 7.07% 7.31% 5.98%*
Portfolio turnover rate 10.98% 36.17% 16.75% 17.10% 6.18% 1.20% 14.43% 12.23% 22.93%
Franklin Georgia Tax-Free Income Fund - Class II
Period Ended Feb. 29 19962
Per Share Operating Performance
Net asset value at
beginning of period $11.57
Net investment income 0.50
Net realized & unrealized
gains (losses) on securities 0.343
Total from investment operations 0.843
Distributions from net
investment income (0.493)
Distributions from capital
gains Total distributions (0.493)
Net asset value at end of period $11.92
Total return+ 7.40%
Ratios/Supplemental Data
Net assets at end of period
(in 000's) $1,335
Ratio of expenses to
average net assets*** 1.34%*
Ratio of net income to
average net assets 5.04%*
Portfolio turnover rate 10.98%
Franklin Kentucky Tax-Free Income Fund - Class I
Period Ended Feb. 29 1996 1995 1994 1993 19924
Per Share Operating Performance
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period $10.54 $11.18 $11.05 $10.30 $10.00
Net investment income 0.62 0.61 0.63 0.57 0.15
Net realized & unrealized gains (losses)
on securities 0.495 (0.625) 0.164 0.832 0.164
Total from investment operations 1.115 (0.015) 0.794 1.402 0.314
Distributions from net investment income (0.615) (0.625) (0.664) (0.652) (0.014)
Distributions from capital gains - - - - -
Total distributions (0.615) (0.625) (0.664) (0.652) (0.014)
Net asset value at end of period $11.04 $10.54 $11.18 $11.05 $10.30
Total return+ 10.73% 0.11% 7.07% 13.81% 8.37%*
Ratios/Supplemental Data
Net assets at end of period (in 000's) $38,991 $32,831 $28,057 $11,678 $3,032
Ratio of expenses to average net assets*** 0.333% 0.29% -% -% -%
Ratio of net income to average net assets 5.65% 5.94% 5.73% 6.11% 3.52%*
Portfolio turnover rate 31.89% 32.92% 13.22% 18.41% 53.90%
Franklin Louisiana Tax-Free Income Fund - Class I
Period Ended Feb. 29 1996 1995 1994 1993 1992 1991 1990 1989 19881
Per Share Operating Performance
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period $11.03 $11.56 $11.57 $10.90 $10.68 $10.58 $10.39 $10.41 $10.00
Net investment income 0.66 0.66 0.67 0.69 0.67 0.71 0.78 0.78 0.46
Net realized & unrealized gains (losses)
on securities 0.281 (0.549) (0.005) 0.668 0.326 0.182 0.202 (0.028) 0.136
Total from investment operations 0.941 0.111 0.665 1.358 0.996 0.892 0.982 0.752 0.596
Distributions from net investment income (0.651) (0.641) (0.675) (0.688) (0.776) (0.792) (0.792) (0.772) (0.186)
Distributions from capital gains - - - - - - - - -
Total distributions (0.651) (0.641) (0.675) (0.688) (0.776) (0.792) (0.792) (0.772) (0.186)
Net asset value at end of period $11.32 $11.03 $11.56 $11.57 $10.90 $10.68 $10.58 $10.39 $10.41
Total return+ 8.75% 1.14% 5.63% 12.61% 9.49% 8.50% 9.41% 7.27% 10.22%*
Ratios/Supplemental Data
Net assets at end of period (in 000's) $107,461 $104,980 $115,971 $95,368 $72,923 $35,862 $17,696 $4,257 $1,247
Ratio of expenses to average net assets*** 0.78% 0.75% 0.68% 0.70% 0.70% 0.56% 0.04% -% -%
Ratio of net income to
average net assets 5.89% 5.98% 5.70% 6.18% 6.33% 6.60% 7.10% 7.33% 6.21%*
Portfolio turnover rate 5.23% 32.28% 17.63% 23.37% 10.51% 0.76% 16.65% 5.91% 18.12%
Franklin Louisiana Tax-Free Income Fund - Class II
Period Ended Feb. 29 19962
Per Share Operating Performance
Net asset value at beginning of period $11.01
Net investment income 0.49
Net realized & unrealized gains
(losses) on securities 0.351
Total from investment operations 0.841
Distributions from net investment income (0.481)
Distributions from capital gains -
Total distributions (0.481)
Net asset value at end of period $11.37
Total return+ 7.76%
Ratios/Supplemental Data
Net assets at end of period (in 000's) $1,438
Ratio of expenses to average net assets*** 1.35%*
Ratio of net income to average net assets 5.27%*
Portfolio turnover rate 5.23%
Franklin Maryland Tax-Free Income Fund - Class I
Period Ended Feb. 29 1996 1995 1994 1993 1992 1991 1990 19893
Per Share Operating Performance
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period $10.92 $11.36 $11.27 $10.60 $10.37 $10.31 $10.07 $10.00
Net investment income 0.62 0.63 0.64 0.65 0.64 0.68 0.72 0.18
Net realized & unrealized gains (losses)
on securities 0.467 (0.453) 0.092 0.672 0.300 0.096 0.192 (0.054)
Total from investment operations 1.087 0.177 0.732 1.322 0.940 0.776 0.912 0.126
Distributions from net investment income (0.627) (0.617) (0.642) (0.652) (0.710) (0.716) (0.672) (0.056)
Distributions from capital gains - - - - - - - -
Total distributions (0.627) (0.617) (0.642) (0.652) (0.710) (0.716) (0.672) (0.056)
Net asset value at end of period $11.38 $10.92 $11.36 $11.27 $10.60 $10.37 $10.31 $10.07
Total return+ 10.18% 1.78% 6.40% 12.64% 9.21% 7.57% 9.01% 2.98%*
Ratios/Supplemental Data
Net assets at end of period (in 000's) $175,078 $153,145 $156,683$115,873 $71,538 $33,421 $14,004 $3,313
Ratio of expenses to average net assets*** 0.74% 0.73% 0.66% 0.71% 0.71% 0.54% 0.07% -%
Ratio of net income to average net assets 5.56% 5.86% 5.58% 6.00% 6.15% 6.50% 6.84% 4.26%*
Portfolio turnover rate 8.11% 20.30% 18.38% 14.73% 16.65% 12.14% 6.03% 11.78%
Franklin Maryland Tax-Free Income Fund - Class II
Period Ended Feb. 29 19962
Per Share Operating Performance
Net asset value at beginning of period $10.93
Net investment income 0.47
Net realized & unrealized gains (losses)
on securities 0.506
Total from investment operations 0.976
Distributions from net investment income (0.466)
Distributions from capital gains -
Total distributions (0.466)
Net asset value at end of period $11.44
Total return+ 9.06%
Ratios/Supplemental Data
Net assets at end of period (in 000's) $913
Ratio of expenses to average net assets*** 1.31%*
Ratio of net income to average net assets 4.95%*
Portfolio turnover rate 8.11%
Franklin Missouri Tax-Free Income Fund - Class I
Period Ended Feb. 29 1996 1995 1994 1993 1992 1991 1990 1989 19881
Per Share Operating Performance
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period $11.44 $11.94 $11.75 $11.07 $10.74 $10.64 $10.44 $10.35 $10.00
Net investment income 0.65 0.65 0.66 0.68 0.65 0.69 0.74 0.78 0.46
Net realized & unrealized gains (losses)
on securities 0.494 (0.501) 0.206 0.676 0.409 0.154 0.198 0.017 0.058
Total from investment operations 1.144 0.149 0.866 1.356 1.059 0.844 0.938 0.797 0.518
Distributions from net investment income (0.644) (0.649) (0.676) (0.676) (0.729) (0.744) (0.738) (0.707)
(0.168)
Distributions from capital gains - - - - - - - - -
Total distributions (0.644) (0.649) (0.676) (0.676) (0.729) (0.744) (0.738) (0.707) (0.168)
Net asset value at end of period $11.94 $11.44 $11.94 $11.75 $11.07 $10.74 $10.64 $10.44 $10.35
Total return+ 10.23% 1.44% 7.29% 12.40% 10.04% 7.96% 8.94% 7.74% 8.26%*
Ratios/Supplemental Data
Net assets at end of period (in 000's) $247,522 $227,442 $228,149 $164,122 $110,940 $55,560 $28,479 $7,996 $2,060
Ratio of expenses to average net assets*** 0.71% 0.70% 0.64% 0.67% 0.71% 0.72% 0.40% -% -%
Ratio of net income to
average net assets 5.58% 5.75% 5.55% 6.03% 6.21% 6.42% 6.66% 7.30% 6.27%*
Portfolio turnover rate 18.27% 19.84% 11.02% 10.28% 16.40% 40.08% 8.69% 7.15% 28.32%
Franklin Missouri Tax-Free Income Fund - Class II
Period Ended Feb. 29 19962
Per Share Operating Performance
Net asset value at beginning of period $11.47
Net investment income 0.48
Net realized & unrealized gains
(losses) on securities 0.497
Total from investment operations 0.977
Distributions from net investment income (0.477)
Distributions from capital gains -
Total distributions (0.477)
Net asset value at end of period $11.97
Total return+ 8.66%
Ratios/Supplemental Data
Net assets at end of period (in 000's) $1,325
Ratio of expenses to average net assets*** 1.27%*
Ratio of net income to average net assets 4.94%*
Portfolio turnover rate 18.27%
Franklin North Carolina Tax-Free Income Fund - Class I
Period Ended Feb. 29 1996 1995 1994 1993 1992 1991 1990 1989 19881
Per Share Operating Performance
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period $11.37 $11.92 $11.88 $11.12 $10.86 $10.79 $10.55 $10.46 $10.00
Net investment income 0.64 0.65 0.65 0.67 0.64 0.70 0.74 0.77 0.43
Net realized & unrealized gains (losses)
on securities 0.391 (0.550) 0.054 0.754 0.352 0.124 0.221 0.056 0.206
Total from investment operations 1.031 0.100 0.704 1.424 0.992 0.824 0.961 0.826 0.636
Distributions from net investment income(0.651)**(0.650)(0.664) (0.664) (0.732) (0.742) (0.720) (0.715) (0.176)
Distributions from capital gains - - - - - (0.012) (0.001) (0.021) -
Total distributions (0.651) (0.650)(0.664) (0.664) (0.732) (0.754) (0.721) (0.736) (0.176)
Net asset value at end of period $11.75 $11.37 $11.92 $11.88 $11.12 $10.86 $10.79 $10.55 $10.46
Total return+ 9.28% 1.06% 5.81% 12.97% 9.28% 7.66% 9.06% 7.98% 2.28%*
Ratios/Supplemental Data
Net assets at end of period (in 000's)$247,031 $216,263 $215,540 $156,517 $106,960 $50,328 $24,746 $10,346 $1,650
Ratio of expenses to average net assets***0.71% 0.70% 0.63% 0.67% 0.71% 0.74% 0.50% -% -%
Ratio of net income to
average net assets 5.52% 5.75% 5.44% 5.86% 6.03% 6.37% 6.68% 7.09% 5.89%*
Portfolio turnover rate 25.19% 25.05% 3.86% 8.48% 3.16% 7.99% 11.80% 12.35% 10.34%
Franklin North Carolina Tax-Free Income Fund - Class II
Period Ended Feb. 29 19962
Per Share Operating Performance
Net asset value at beginning of period $11.41
Net investment income 0.49
Net realized & unrealized gains
(losses) on securities 0.384
Total from investment operations 0.874
Distributions from net investment income (0.484)
Distributions from capital gains -
Total distributions (0.484)
Net asset value at end of period $11.80
Total return+ 7.77%
Ratios/Supplemental Data
Net assets at end of period (in 000's) $2,430
Ratio of expenses to average net assets*** 1.28%*
Ratio of net income to average net assets 4.90%*
Portfolio turnover rate 25.19%
Franklin Texas Tax-Free Income Fund - Class I
Period Ended Feb. 29 1996 1995 1994 1993 1992 1991 1990 1989 19881
Per Share Operating Performance
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period $11.25 $11.72 $11.69 $11.03 $10.77 $10.74 $10.59 $10.56 $10.00
Net investment income 0.67 0.68 0.69 0.69 0.67 0.73 0.84 0.78 0.50
Net realized & unrealized gains (losses)
on securities 0.335 (0.487) 0.032 0.661 0.370 0.104 0.114 0.044 0.255
Total from investment operations 1.005 0.193 0.722 1.351 1.040 0.834 0.954 0.824 0.755
Distributions from net investment income (0.675) (0.663) (0.692) (0.691) (0.780) (0.804) (0.804) (0.794) (0.195)
Distributions from capital gains - - - - - - - - -
Total distributions (0.675) (0.663) (0.692) (0.691) (0.780) (0.804) (0.804) (0.794) (0.195)
Net asset value at end of period $11.58 $11.25 $11.72 $11.69 $11.03 $10.77 $10.74 $10.59 $10.56
Total return+ 9.15% 1.80% 6.09% 12.41% 9.84% 7.81% 8.95% 7.88% 12.72%*
Ratios/Supplemental Data
Net assets at end of period (in 000's) $129,702 $130,684$148,684 $139,389 $123,722 $29,036 $6,094 $2,356 $1,141
Ratio of expenses to average net assets*** 0.76% 0.73% 0.65% 0.66% 0.70% 0.40% -% -% -%
Ratio of net income to
average net assets 5.86% 6.05% 5.85% 6.15% 6.14% 6.46% 7.26% 7.65% 6.61%*
Portfolio turnover rate 18.38% 6.36% 20.18% 12.33% 6.44% 0.55% 3.53% 6.95% 41.50%
Franklin Texas Tax-Free Income Fund - Class II
Period Ended Feb. 29 19962
Per Share Operating Performance
Net asset value at beginning of period $11.27
Net investment income 0.51
Net realized & unrealized gains (losses) on securities 0.403
Total from investment operations 0.913
Distributions from net investment income (0.503)
Distributions from capital gains -
Total distributions (0.503)
Net asset value at end of period $11.68
Total return+ 8.23%
Ratios/Supplemental Data
Net assets at end of period (in 000's) $79
Ratio of expenses to average net assets*** 1.34%*
Ratio of net income to average net assets 5.23%*
Portfolio turnover rate 18.38%
Franklin Virginia Tax-Free Income Fund - Class I
Period Ended Feb. 29 1996 1995 1994 1993 1992 1991 1990 1989 19881
Per Share Operating Performance
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period $11.33 $11.82 $11.69 $10.98 $10.70 $10.63 $10.43 $10.45 $10.00
Net investment income 0.66 0.66 0.67 0.67 0.66 0.69 0.73 0.77 0.44
Net realized & unrealized gains (losses)
on securities 0.381 (0.499) 0.136 0.704 0.362 0.136 0.226 (0.034) 0.199
Total from investment operations 1.041 0.161 0.806 1.374 1.022 0.826 0.956 0.736 0.639
Distributions from net investment income (0.651) (0.651) (0.676) (0.664) (0.742) (0.756) (0.756) (0.756) (0.189)
Distributions from capital gains - - - - - - - - -
Total distributions (0.651) (0.651) (0.676) (0.664) (0.742) (0.756) (0.756) (0.756) (0.189)
Net asset value at end of period $11.72 $11.33 $11.82 $11.69 $10.98 $10.70 $10.63 $10.43 $10.45
Total return+ 9.41% 1.56% 6.80% 12.67% 9.71% 7.82% 9.12% 7.09% 11.90%*
Ratios/Supplemental Data
Net assets at end of period (in 000's) $271,396 $255,965 $260,913 $211,171 $152,615 $82,662 $38,572 $13,885 $2,621
Ratio of expenses to average net assets*** 0.69% 0.69% 0.62% 0.65% 0.68% 0.72% 0.60% 0.16% -%
Ratio of net income to
average net assets 5.66% 5.86% 5.65% 5.98% 6.17% 6.38% 6.55% 6.89% 5.48%*
Portfolio turnover rate 12.96% 21.73% 6.86% 5.74% 4.33% 2.56% 1.06% 3.92% 65.51%
Franklin Virginia Tax-Free Income Fund - Class II
Period Ended Feb. 29 19962
Per Share Operating Performance
Net asset value at beginning of period $11.35
Net investment income 0.49
Net realized & unrealized gains
(losses) on securities 0.412
Total from investment operations 0.902
Distributions from net investment income (0.482)
Distributions from capital gains -
Total distributions (0.482)
Net asset value at end of period $11.77
Total return+ 8.07%
Ratios/Supplemental Data
Net assets at end of period (in 000's) $2,050
Ratio of expenses to average net assets*** 1.26%*
Ratio of net income to average net assets 5.06%*
Portfolio turnover rate 12.72%
</TABLE>
*Annualized.
**Includes distributions in excess of net investment income in the amount of
$0.001.
1For the period September 1, 1987 (effective date of registration) to February
29, 1988.
2For the period May 1, 1995 (effective date) to February 29, 1996.
3For the period October 3, 1988 (effective date of registration) to February 28,
1989.
4For the period September 10, 1991 (effective date of registration) to February
29, 1992.
+Total return measures the change in value of an investment over the periods
indicated. It is not annualized except where indicated. It does not include the
maximum front-end sales charge or the Contingent Deferred Sales Charge and
assumes reinvestment of dividends and capital gains, if any, at Net Asset Value.
Prior to May 1, 1994, dividends were reinvested at the maximum offering price.
***For the periods indicated below, Advisers agreed in advance to limit its
management fees and to make payment of certain operating expenses of the Fund.
Had such action not been taken, the ratio of operating expenses to average net
assets would have been as follows:
Ratio of
Expenses to
Average Net Assets
Franklin Alabama
Tax-Free Income Fund:
19881 0.86%*
1989 0.74
1990 0.72
1991 0.72
Franklin Florida
Tax-Free Income Fund:
19881 0.88*
1989 0.74
1990 0.66
Franklin Georgia
Tax-Free Income Fund:
19881 0.87*
1989 0.76
1990 0.74
1991 0.74
Ratio of
Expenses to
Average Net Assets
Franklin Kentucky
Tax-Free Income Fund:
19924 0.82%*
1993 0.81
1994 0.71
1995 0.81
1996 0.82
Franklin Louisiana
Tax-Free Income Fund:
19881 0.88*
1989 0.73
1990 0.70
1991 0.72
Franklin Maryland
Tax-Free Income Fund:
19893 0.65*
1990 0.73
1991 0.73
Ratio of
Expenses to
Average Net Assets
Franklin Missouri
Tax-Free Income Fund:
19881 0.87%*
1989 0.77
1990 0.72
Franklin North Carolina
Tax-Free Income Fund:
19881 0.87%*
1989 0.74
1990 0.71
Franklin Texas
Tax-Free Income Fund:
19881 0.89*
1989 0.76
1990 0.71
1991 0.75
Franklin Virginia
Tax-Free Income Fund:
19881 0.87*
1989 0.75
1990 0.72
How Does The Fund Invest Its Assets?
The Fund's Investment Objective
Each Fund seeks to maximize income exempt from federal income taxes and from the
personal income taxes, if any, for resident shareholders of the named state to
the extent consistent with prudent investing and the preservation of
shareholders' capital. Each Fund's investment objective is a fundamental policy
and may not be changed without shareholder approval. Of course, there is no
assurance that the Fund's objective will be achieved.
Each Fund will invest primarily in municipal securities issued by its respective
state and that state's municipalities, political subdivisions and public
authorities, the interest on which is exempt from regular federal income taxes
and the personal income taxes, if any, of its respective state.
Each Fund will attempt to invest 100% and, as a matter of fundamental policy,
will invest at least 80% of its net assets in securities that pay interest
exempt from federal income taxes, including the alternative minimum tax, and
from the personal income taxes, if any, of its respective state. It is possible,
although not anticipated, that up to 20% of the Fund's net assets could be in
taxable obligations.
At least 65% of each Fund's total assets will be invested in municipal
securities and obligations issued by or on behalf of its respective state, its
local governments, municipalities, authorities, agencies and political
subdivisions. It is possible, although not anticipated, that up to 35% of a
Fund's total assets may be in qualifying municipal securities and obligations of
a state or territory other than its respective state.
If a state requires the Fund to consist of a specified amount of obligations of
that state or the U.S. government, its agencies, instrumentalities, commissions,
possessions or territories that are exempt from taxation under the laws of that
state in order for any portion of the distributions from that Fund to be exempt
from income taxation, the Fund will attempt to invest at least the minimum
amount required by the state in those securities. See "How Taxation Affects You
and the Fund" for additional information.
Each Fund may invest, without percentage limitations, in securities having, at
the time of purchase, one of the four highest ratings of Moody's Investors
Service ("Moody's") (Aaa, Aa, A, Baa), Standard & Poor's Corporation ("S&P")
(AAA, AA, A, BBB), or Fitch Investors Service, Inc. ("Fitch") (AAA, AA, A, BBB),
or in securities that are unrated if, in the opinion of Advisers, such
securities are comparable in quality to those within the four highest ratings.
These are considered to be "investment grade" securities. Bonds rated in the
fourth highest ratings level are regarded as having an adequate capacity to pay
principal and interest but with greater vulnerability to adverse economic
conditions and some speculative characteristics. In the event the rating of an
issue held in the Fund's portfolio is lowered by the rating services, such
change will be considered by the Fund in its evaluation of the overall
investment merits of that security, but such change will not necessarily result
in an automatic sale of the security. A description of the ratings is contained
in the Appendices in the SAI.
Advisers considers the terms of an offering and various other factors when
determining whether securities are consistent with the Fund's investment
objective and policies and thereafter when determining the issuer's comparative
credit rating. When making these determinations, Advisers may (i) interview
representatives of the issuer at its offices, (ii) tour and inspect the physical
facilities of the issuer to evaluate the issuer and its operations, (iii)
perform analysis of the issuer's financial and credit position, including
comparisons of all appropriate ratios, and (iv) compare other similar securities
offerings to the issuer's proposed offering.
Under normal market conditions, each Fund will invest its assets as described
above. For temporary defensive purposes, however, each Fund may invest up to
100% of its net assets in obligations that pay interest that may be subject to
federal income tax, including the alternative minimum tax. Also for temporary
defensive purposes, each Fund may invest up to 100% of its net assets in (i)
municipal securities and obligations of state and local governments other than
its respective state, (ii) commercial paper rated at least A-1 by S&P, P-1 by
Moody's or F-1 by Fitch or (iii) obligations issued or guaranteed by the full
faith and credit of the U.S. government.
Types of Securities the Fund May Invest In
The term "municipal securities," as used in this prospectus, means obligations
issued by or on behalf of any state, territory or possession 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 is generally
rendered to the issuer by the issuer's bond counsel at the time of issuance of
the security.
Municipal securities are used to raise money for various public purposes, such
as constructing public facilities and making loans to public institutions.
Certain types of municipal securities are issued to provide funding for
privately operated facilities.
The Funds have no restrictions on the maturities of municipal securities in
which they may invest. Each Fund will seek to invest in municipal securities
with maturities that, in Advisers' judgment, will provide a high level of
current income consistent with prudent investing. Advisers will also consider
current market conditions.
It is possible that any Fund from time to time will invest more than 25% of its
assets in a particular segment of the municipal securities market, including,
but not limited to, hospital revenue bonds, housing agency bonds, tax-exempt
industrial development revenue bonds, transportation bonds, or pollution control
revenue bonds. In these 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 and municipal securities markets, the
size of a particular offering, the maturity of the obligation, and the credit
rating of the issuer. Generally, municipal securities with longer maturities
produce higher current yields than municipal securities with shorter maturities.
Prices of longer term securities, however, typically fluctuate more than those
of short term securities due to changes in interest rates, tax laws and other
general market conditions. 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 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 may subject you
to, or increase your liability under, the federal and state alternative minimum
tax. In addition, all distributions derived from interest exempt from regular
federal income tax may subject corporate shareholders to, or increase their
liability under, the federal alternative minimum tax, because these
distributions are included in the corporation's adjusted current earnings. In
states with a corporate franchise tax, distributions of a Fund may also be fully
taxable to corporate shareholders under their state franchise tax systems.
Consistent with each Fund's investment objective, each Fund may acquire private
activity bonds if, in Advisers' opinion, these bonds represent the most
attractive investment opportunity then available to a Fund. For the fiscal year
ended February 29, 1996, the Funds' portfolios derived the following percentages
of their income from bonds, the interest on which constitutes a preference item
subject to the federal alternative minimum tax for certain investors:
FUND PERCENTAGE
Alabama Fund 7.84%
Florida Fund 11.68%
Georgia Fund 6.99%
Kentucky Fund 12.41%
Louisiana Fund 12.08%
Maryland Fund 10.01%
Missouri Fund 7.92%
North Carolina Fund 8.92%
Texas Fund 16.18%
Virginia Fund 6.69%
Floating and Variable Rate Obligations. Each Fund may buy floating rate and
variable rate obligations. These obligations bear interest at rates that are not
fixed, but that vary with changes in prevailing market rates on predesignated
dates. The Fund may also invest in variable or floating rate demand notes
("VRDNs"), which carry a demand feature that permits the Fund to tender the
obligation back to the issuer or a third party at par value plus accrued
interest prior to maturity, according to the terms of the obligation.
Frequently, VRDNs are secured by letters of credit or other credit support
arrangements. Although it is not a put option in the usual sense, such a demand
feature is sometimes known as a "put." Except for the Maryland Fund, with
respect to 75% of the total value of each Fund's assets, no more than 5% of such
value may be in securities underlying "puts" from the same institution, except
that each Fund may invest up to 10% of its asset value in unconditional "puts"
(exercisable even in the event of a default in the payment of principal or
interest on the underlying security) and other securities issued by the same
institution. Each Fund will limit its purchase of municipal securities that are
floating rate and variable rate obligations to those meeting the quality
standards set forth in this prospectus.
When-Issued and Delayed Delivery Transactions. Each Fund may buy and sell
municipal securities on a "when-issued" and "delayed delivery" basis. The price
is subject to market fluctuation, and the value at delivery may be more or less
than the purchase price. Although a Fund will generally buy municipal securities
on a when-issued basis with the intention of acquiring the securities, it may
sell the securities before the settlement date if it is deemed advisable. When a
Fund is the buyer in such a transaction, it will maintain, in a segregated
account with its custodian bank, cash or high-grade marketable securities having
an aggregate value equal to the amount of its purchase commitments until payment
is made. To the extent a Fund engages in when-issued and delayed delivery
transactions, it will do so for the purpose of acquiring securities for the
Fund's portfolio consistent with its investment objective and policies and not
for the purpose of investment leverage.
Callable Bonds. Each Fund may buy and hold callable municipal bonds that contain
a provision in the indenture permitting the issuer to redeem the bonds prior to
their maturity dates at a specified price. This price typically reflects a
premium over the bonds' original issue price. These bonds generally have call
protection (that is, a period of time when the bonds may not be called) that
usually lasts for 5 to 10 years, after which time these 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 the
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 the bonds were redeemed.
Certificates of Participation. Each 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 that 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 buy the
property. Once these lease payments are completed, the municipality gains
ownership of the property for a nominal sum. This lease format is generally not
subject to constitutional limitations on the issuance of state debt, and COPs
may enable a governmental issuer to increase government liabilities beyond
constitutional debt limits.
A feature that 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 Fund
believes that this risk is mitigated by its policy of investing only in COPs
rated within the four highest rating categories of Moody's, S&P, or Fitch, or in
unrated COPs believed by Advisers to be of comparable quality. Criteria
considered by the rating agencies and Advisers in assessing this risk include
the issuing municipality's credit rating, how essential the leased property is
to the municipality, and the term of the lease compared to the useful life of
the leased property. The Board reviews the COPs held in each Fund's portfolio to
assure that they constitute liquid investments based on various factors reviewed
by Advisers and monitored by the Board. These factors include (a) the credit
quality of the securities and the extent to which they are rated or, if unrated,
comply with existing criteria and procedures followed to ensure that they are of
comparable quality to the ratings required for each Fund's investment, including
an assessment of the likelihood that the leases will not be canceled; (b) the
size of the municipal securities market, both in general and with respect to
COPs; and (c) the extent to which the type of COPs held by each Fund trade on
the same basis and with the same degree of dealer participation as other
municipal bonds of comparable credit rating or quality. While there is no limit
as to the amount of assets which each Fund may invest in COPs, as of February
29, 1996, the following Funds held more than five percent of the total face
amount of the securities in their portfolios in COPs and other municipal leases:
Kentucky, 20.25%; Maryland, 13.82%; Missouri, 28.08%; North Carolina, 10.60%;
and Virginia, 5.79%.
Other Investment Policies of the Funds
Borrowing. Each Fund may borrow from banks and pledge up to 5% of its total
assets for temporary or emergency purposes. Although the Funds do not currently
intend to do so, consistent with procedures approved by the Board, each Fund may
lend its portfolio securities to qualified securities dealers or other
institutional investors, if the loans do not exceed 10% of the value of the
Fund's total assets at the time of the most recent loan.
Illiquid Investments. Each Fund may not invest more than 10% of its net assets,
at the time of purchase, in illiquid securities. Illiquid securities are
generally securities that cannot be sold within seven days in the normal course
of business at approximately the amount at which the Fund has valued them.
Other Policies and Restrictions. Each Fund has a number of additional investment
restrictions that limit its activities to some extent. Some of these
restrictions may only be changed with shareholder approval. For a list of these
restrictions and more information about the Fund's investment policies, please
see "How Does the Fund Invest Its Assets?" and "Investment Restrictions" in the
SAI.
What Are the Fund's Potential Risks?
The value of your shares will increase as the value of the securities owned by
the Fund increases and will decrease as the value of the Fund's investments
decrease. In this way, you participate in any change in the value of the
securities owned by the Fund. In addition to the factors that affect the value
of any particular security that the Fund owns, the value of Fund shares may also
change with movements in the bond market as a whole.
Credit and Market Risk. Credit risk is a function of the ability of an issuer of
a municipal security to make 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.
Interest Rate Risk. Changes in interest rates will affect the value of the
Fund's portfolio and its share price. Rising interest rates, which often occur
during times of inflation or a growing economy, are likely to have a negative
effect on the value of the Fund's shares. Interest rates have increased and
decreased in the past. These changes are unpredictable and may happen again in
the future.
Since each Fund generally will invest primarily in the securities of its
respective state, there are certain specific factors and considerations
concerning each state that may affect the credit and market risk of the
municipal securities that the Fund buys. These factors are described in the
Appendices to this prospectus and in the SAI.
Diversification Risk. With respect to 75% of each Fund's net assets, except the
Maryland Fund, none of the Funds will, as a fundamental policy, buy a security
if, as a result of the investment, more than 5% of its assets would be in the
securities of any single issuer (with the exception of obligations of the U.S.
government). For this purpose, each political subdivision, agency, or
instrumentality and each multi-state agency of which a state is a member, and
each public authority that issues private activity bonds on behalf of a private
entity, will be regarded as a separate issuer for determining the
diversification of each Fund's portfolio. A bond for which the payments of
principal and interest are secured by an escrow account of securities backed by
the full faith and credit of the U.S. government ("defeased"), as described in
the SAI, will not generally be treated as an obligation of the original
municipality for purposes of determining diversification.
Non-Diversification Risk. The Maryland Fund is non-diversified under the federal
securities laws. As a non-diversified Fund, there are no restrictions under the
1940 Act on the percentage of assets that may be invested at any time in the
securities of any one issuer. To the extent the Maryland Fund is not fully
diversified under the 1940 Act, it may be more susceptible to adverse economic,
political or regulatory developments affecting a single issuer than would be the
case if the Maryland Fund were more broadly diversified. The Maryland Fund
intends, however, 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 Maryland Fund has adopted an
investment restriction, which may not be changed without shareholder approval,
prohibiting it from buying a security if, as a result, more than 25% of the
Maryland Fund's total assets would be invested in the securities of a single
issuer, or with respect to 50% of its total assets, more than 5% of its total
assets would be invested in the securities of a single issuer, with the
exception of obligations of the U.S. government.
Who Manages the Fund?
The Board. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations. The
Board also monitors the Fund to ensure no material conflicts exist between the
two classes of shares. While none is expected, the Board will act appropriately
to resolve any material conflict that may arise.
Investment Manager. Advisers is the investment manager of the Fund and other
funds with aggregate assets of over $80 billion, including $43 billion in the
municipal securities market. It is wholly owned by Resources, a publicly owned
company engaged in the financial services industry through its subsidiaries.
Charles B. Johnson and Rupert H. Johnson, Jr. are the principal shareholders of
Resources.
Management Team. The team responsible for the day-to-day management of each
Fund's portfolio is:
Thomas Kenny
Senior Vice President of Advisers
Mr. Kenny has been responsible for portfolio recommendations and decisions of
all series of the Trust since August 1994. He is the Director of Franklin's
Municipal Bond Department. He holds a Master of Science degree in finance from
Golden Gate University and a Bachelor of Arts degree in business and economics
from the University of California at Santa Barbara. Mr. Kenny joined Franklin in
1986. He is a member of several municipal securities industry-related committees
and associations.
John Pomeroy
Portfolio Manager of Advisers
Mr. Pomeroy has been responsible for portfolio recommendations and decisions for
the Alabama Fund, Florida Fund, Georgia Fund, Maryland Fund, and North Carolina
Fund since their inception. He holds a Bachelor of Arts degree in business
administration from San Francisco State University. He joined Advisers in 1986.
He is a member of several securities industry-related committees and
associations.
Stella Wong
Portfolio Manager of Advisers
Ms. Wong has been responsible for portfolio recommendations and decisions for
the Alabama Fund, Georgia Fund, Louisiana Fund, Maryland Fund, North Carolina
Fund, Texas Fund and Virginia Fund since their inception. Ms. Wong holds a
Master's degree in Financial Planning from Golden Gate University and a Bachelor
of Science degree in business administration from San Francisco State
University. She joined Advisers in 1986. She is a member of several securities
industry-related committees and associations.
Andrew Jennings, Sr.
Vice President of Advisers
Mr. Jennings has been responsible for portfolio recommendations and decisions of
the Louisiana Fund since joining Advisers in 1990. He attended Villanova
University in Philadelphia and has been in the securities industry for over 35
years. Prior to joining Advisers, Mr. Jennings was First Vice President and
Manager of the Municipal Institutional Bond Department at Dean Witter Reynolds,
Inc. He is a member of several municipal securities industry-related committees
and associations.
Don Duerson
Vice President of Advisers
Mr. Duerson has been responsible for portfolio recommendations and decisions of
the Missouri Fund, Texas Fund and Virginia Fund since their inception. He has a
Bachelor of Science degree in business and public administration from the
University of Arizona. He has been in the securities industry since 1956 and has
been with Franklin since 1986. He is a member of several industry-related
committees and associations.
Sheila Amoroso
Portfolio Manager of Advisers
Ms. Amoroso has been responsible for portfolio recommendations and decisions of
the Florida Fund, Kentucky Fund, and Missouri Fund since their inception. Ms.
Amoroso holds a Bachelor of Science degree from San Francisco State University.
She joined Franklin in 1986. She is a member of several securities
industry-related committees and associations.
Bernard Schroer
Vice President of Advisers
Mr. Schroer has been responsible for portfolio recommendations and decisions of
the Kentucky Fund since its inception. He holds a Bachelor of Arts degree in
finance from Santa Clara University. Prior to joining Advisers in 1987, he was
the manager of trading at Kidder, Peabody, and Company, Inc. He is a member of
several municipal securities industry-related committees and associations.
Services Provided by Advisers. Advisers manages the Fund's assets and makes its
investment decisions. Advisers also provides certain administrative services and
facilities for the Fund and performs similar services for other funds. Please
see "Investment Advisory and Other Services" and "Miscellaneous Information" in
the SAI for information on securities transactions and a summary of the Fund's
Code of Ethics.
Management Fees. During the fiscal year ended February 29, 1996, management fees
paid to Advisers and expenses borne by Class I and Class II shares, including
fees paid to Advisers (as a percentage of average monthly net assets) were as
follows:
TOTAL
MANAGEMENT OPERATING EXPENSES
FUND FEES CLASS I CLASS II*
Alabama Fund 0.57% 0.72% 1.29%
Florida Fund 0.47% 0.60% 1.18%
Georgia Fund 0.60% 0.77% 1.34%
Kentucky Fund** 0.14% 0.33% N/A
Louisiana Fund 0.62% 0.78% 1.35%
Maryland Fund 0.58% 0.74% 1.31%
Missouri Fund 0.55% 0.71% 1.27%
North Carolina Fund 0.56% 0.71% 1.28%
Texas Fund 0.60% 0.76% 1.34%
Virginia Fund 0.55% 0.69% 1.26%
*Annualized.
**Advisers agreed in advance to limit its management fees for the fiscal year
ended February 29, 1996. Before the advance waiver, management fees totaled
0.63% of the Fund's average monthly net assets and total operating expenses
totaled 0.82%. Advisers may end this arrangement at any time upon notice to the
Board.
Portfolio Transactions. Advisers tries to obtain the best execution on all
transactions. If Advisers believes more than one broker or dealer can provide
the best execution, it may consider research and related services and the sale
of Fund shares when selecting a broker or dealer. Please see "How Does the Fund
Buy Securities For Its Portfolio?" in the SAI for more information.
The Rule 12b-1 Plans
Each class has a distribution plan or "Rule 12b-1 plan" under which it may pay
or reimburse Distributors or others for activities primarily intended to sell
shares of the class. These expenses may include, among others, printing
prospectuses and reports used for sales purposes, preparing and distributing
sales literature and advertisements, a prorated portion of Distributors'
overhead expenses, and distribution or service fees paid to Securities Dealers
or others who have executed a servicing agreement with the Fund, Distributors or
its affiliates.
Payments by the Fund under the Class I plan may not exceed 0.10% per year of
Class I's average daily net assets. All distribution expenses over this amount
will be borne by those who have incurred them.
Under the Class II plan, the Fund may pay Distributors up to 0.50% per year of
Class II's average daily net assets to pay Distributors or others for providing
distribution and related services and bearing certain Class II expenses. All
distribution expenses over this amount will be borne by those who have incurred
them. During the first year after a purchase of Class II shares, Distributors
may keep this portion of the Rule 12b-1 fees associated with the Class II
purchase.
The Fund may also pay a servicing fee of up to 0.15% per year of Class II's
average daily net assets under the Class II plan. This fee may be used to pay
Securities Dealers or others for, among other things, helping to establish and
maintain customer accounts and records, helping with requests to buy and sell
shares, receiving and answering correspondence, monitoring dividend payments
from the Fund on behalf of customers, and similar servicing and account
maintenance activities.
The Rule 12b-1 fees charged to each class are based only on the fees
attributable to that particular class. For more information, please see "The
Fund's Underwriter" in the SAI.
How Does the Fund Measure Performance?
From time to time, each class of the Fund advertises its performance. The more
commonly used measures of performance are total return, current yield and
current distribution rate. Each class may also advertise its taxable-equivalent
yield and distribution rate. Performance figures usually assume that the maximum
sales charge is paid, but certain figures may not include the sales charge.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield for each
class shows the income per share earned by that class. The current distribution
rate shows the dividends or distributions paid to shareholders of a class. This
rate is usually computed by annualizing the dividends paid per share during a
certain period and dividing that amount by the current Offering Price of the
class. Unlike current yield, the current distribution rate may include income
distributions from sources other than dividends and interest. The
taxable-equivalent yield and distribution rate show the before-tax yield or
distribution rate that would have to be earned from a taxable investment to
equal the yield or distribution rate of the class, assuming one or more tax
rates.
The investment results of each class will vary. Performance figures are always
based on past performance and do not indicate future results. For a more
detailed description of how the Fund calculates its performance figures, please
see "How Does the Fund Measure Performance?" in the SAI. The Trust's Annual
Report to Shareholders also includes performance information.
How Is the Trust Organized?
Except for the Maryland Fund, the Funds are diversified series of the Trust, an
open-end management investment company, commonly called a mutual fund. The
Maryland Fund is a nondiversified series. The Trust was organized as a
Massachusetts business trust in September 1984 and registered with the SEC under
the 1940 Act. The Trust began offering two classes of shares on May 1, 1995. All
shares purchased before that time are considered Class I shares. Additional
classes of shares may be offered in the future.
Shares of each class represent proportionate interests in the assets of the Fund
and have the same voting and other rights and preferences as the other class of
the Fund for matters that affect the Fund as a whole. For matters that only
affect one class, however, only shareholders of that class may vote. Each class
will vote separately on matters (1) affecting only that class, (2) expressly
required to be voted on separately by state business trust law, or (3) required
to be voted on separately by the 1940 Act. 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. In the future,
additional series may be offered.
The Trust has noncumulative voting rights. This gives holders of more than 50%
of the shares voting the ability to elect all of the members of the Board. If
this happens, holders of the remaining shares voting will not be able to elect
anyone to the Board.
The Trust does not intend to hold annual shareholder meetings. It may hold a
special meeting of a series, however, for matters requiring shareholder approval
under the 1940 Act. A meeting may also be called by the Board in its discretion
or by shareholders holding at least 10% of the outstanding shares. The 1940 Act
requires that we help you communicate with other shareholders in connection with
electing or removing members of the Board.
About Your Account
How Do I Buy Shares?
Opening Your Account
To open your account, contact your investment representative or complete and
sign the enclosed shareholder application and return it to the Fund with your
check. Please indicate which class of shares you want to buy. If you do not
specify a class, your purchase will be automatically invested in Class I shares.
MINIMUM
INVESTMENTS*
To Open Your Account $100
To Add to Your Account $ 25
*We may refuse any order to buy shares. Currently, the Fund does not allow
investments by Market Timers.
Deciding Which Class to Buy
You should consider a number of factors when deciding which class of shares to
buy.
If you plan to buy $1 million or more in a single payment or you qualify to buy
Class I shares without a sales charge, you may not buy Class II shares.
Generally, you should consider buying Class I shares if:
o you expect to invest in the Fund over the long term;
o you qualify to buy Class I shares at a reduced sales charge; or
o you plan to buy $1 million or more over time.
You should consider Class II shares if:
o you expect to invest less than $100,000 in the Franklin Templeton Funds; and
o you plan to sell a substantial number of your shares within approximately six
years or less of your investment.
Class I shares are generally more attractive for long-term investors because of
Class II's higher Rule 12b-1 fees. These may accumulate over time to outweigh
the lower Class II front-end sales charge and result in lower income dividends
for Class II shareholders. If you qualify to buy Class I shares at a reduced
sales charge based upon the size of your purchase or through our Letter of
Intent or cumulative quantity discount programs, but plan to hold your shares
less than approximately six years, you should evaluate whether it is more
economical for you to buy Class I or Class II shares.
For purchases of $1 million or more, it is considered more beneficial for you to
buy Class I shares since there is no front-end sales charge, even though these
purchases may be subject to a Contingent Deferred Sales Charge. Any purchase of
$1 million or more is therefore automatically invested in Class I shares. You
may accumulate more than $1 million in Class II shares through purchases over
time, but if you plan to do this, you should determine whether it would be more
beneficial for you to buy Class I shares through a Letter of Intent.
Please consider all of these factors before deciding which class of shares to
buy. There are no conversion features attached to either class of shares.
Purchase Price of Fund Shares
For Class I shares, the sales charge you pay depends on the dollar amount you
invest, as shown in the table below. The sales charge for Class II shares is 1%
and, unlike Class I, does not vary based on the size of your purchase.
TOTAL SALES CHARGE AMOUNT PAID
AS A PERCENTAGE OF TO DEALER AS A
AMOUNT OF PURCHASE OFFERING NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE PRICE INVESTED OFFERING PRICE
CLASS I
Under $100,000 4.25% 4.44% 4.00%
$100,000 but less than $250,000 3.50% 3.63% 3.25%
$250,000 but less than $500,000 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000 2.15% 2.20% 2.00%
$1,000,000 or more* None None None
CLASS II
Under $1,000,000* 1.00% 1.01% 1.00%
*A Contingent Deferred Sales Charge of 1% may apply to Class I purchases of $1
million or more and any Class II purchase. Please see "How Do I Sell Shares? -
Contingent Deferred Sales Charge." Securities Dealers should also see "Other
Payments to Securities Dealers" below for a discussion of payments Distributors
may make out of its own resources for certain purchases. Purchases of Class II
shares are limited to purchases below $1 million. Please see "Deciding Which
Class to Buy."
Sales Charge Reductions and Waivers
- - If you qualify to buy shares under one of the sales charge reduction or
waiver categories described below, please include a written statement with each
purchase order explaining which privilege applies. If you don't include this
statement, we cannot guarantee that you will receive the sales charge reduction
or waiver.
Cumulative Quantity Discounts - Class I Only. To determine if you may pay a
reduced sales charge, you may add to the amount of your current Class I purchase
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. If you are
the sole owner of a company, you may also add any company accounts, including
retirement plan accounts.
Letter of Intent - Class I Only. You may buy Class I 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 Class I shares.
By completing the Letter of Intent section of the shareholder application, you
acknowledge and agree to the following:
o You authorize Distributors to reserve 5% of your total intended purchase in
Class I shares registered in your name until you fulfill your Letter.
o You give Distributors a security interest in the reserved shares and appoint
Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the Letter.
o Although you may exchange your shares, you may not sell reserved shares until
you complete the Letter or pay the higher sales charge.
Your periodic statements will include the reserved shares in the total shares
you own. We will pay or reinvest dividend and capital gain distributions on the
reserved shares as you direct.
If you would like more information about the Letter of Intent privilege, please
see "How Do I Buy, Sell and Exchange Shares? - Letter of Intent" in the SAI or
call Shareholder Services.
Group Purchases - Class I Only. If you are a member of a qualified group, you
may buy Class I shares at the reduced sales charge that applies to the group as
a whole. The sales charge is based on the combined dollar value of the group
members' existing investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include sales and other Franklin Templeton Fund materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
o Meets other uniform criteria that allow Distributors to achieve cost savings
in distributing shares.
Sales Charge Waivers. The Fund's sales charges (front-end and contingent
deferred) will not apply if you are buying Class I shares with money from the
following sources or Class II shares with money from the sources in waiver
categories 1 or 3.
- - For waiver categories 1 or 2 below: (i) the distributions or payments must
be reinvested within 365 days of their payment date, and (ii) Class II
distributions may be reinvested in either Class I or Class II shares. Class I
distributions may only be reinvested in Class I shares.
1. Dividend and capital gain distributions from any Franklin Templeton Fund or
a REIT sponsored or advised by Franklin Properties, Inc.
2. Annuity payments received under either an annuity option or from death
benefit proceeds, only if the annuity contract offers as an investment
option the Franklin Valuemark Funds, Templeton Variable Annuity Fund, the
Templeton Variable Products Series Fund, or the Franklin Government
Securities Trust. You should contact your tax advisor for information on
any tax consequences that may apply.
3. Redemptions from any Franklin Templeton Fund if you:
o Originally paid a sales charge on the shares,
o Reinvest the money within 365 days of the redemption date, and
o Reinvest the money in the same class of shares.
An exchange is not a redemption for this privilege. The Contingent Deferred
Sales Charge will not be waived if the shares reinvested were subject to a
Contingent Deferred Sales Charge when sold. We will credit your account for any
Contingent Deferred Sales Charge paid, but a new Contingency Period will begin.
If you immediately placed your redemption proceeds in a Franklin Bank CD, you
may reinvest them as described above. The proceeds must be reinvested within 365
days from the date the CD matures, including any rollover.
4. Redemptions from other mutual funds
If you sold shares of a fund that is not a Franklin Templeton Fund within the
past 60 days, you may invest the proceeds without any sales charge if (a) the
investment objectives were similar to the Fund's, and (b) your shares in that
fund were subject to any front-end or contingent deferred sales charges at the
time of purchase. You must provide a copy of the statement showing your
redemption.
The Fund's sales charges will also not apply to Class I purchases by:
5. Trust companies and bank trust departments agreeing to invest at least $1
million in Franklin Templeton Funds over a 13 month period of assets held
in a fiduciary, agency, advisory, custodial or similar capacity and over
which the trust companies and bank trust departments or other plan
fiduciaries or participants, in the case of certain retirement plans, have
full or shared investment discretion. We will accept orders for these
accounts by mail accompanied by a check or by telephone or other means of
electronic data transfer directly from the bank or trust company, with
payment by federal funds received by the close of business on the next
business day following the order.
6. An Eligible Governmental Authority. Please consult your legal and
investment advisors to determine if an investment in the Fund is suitable
for you and the effect, if any, of payments by the Fund on arbitrage rebate
calculations.
7. Broker-dealers who have entered into a supplemental agreement with
Distributors for clients who are participating in comprehensive fee
programs. These programs, sometimes known as wrap fee programs, are
sponsored by the broker-dealer and either advised by the broker-dealer or
by another registered investment advisor affiliated with that broker.
8. Registered Securities Dealers and their affiliates, for their investment
accounts only
9. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
10. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family members,
consistent with our then-current policies
11. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
12. Accounts managed by the Franklin Templeton Group
13. Certain unit investment trusts and their holders reinvesting distributions
from the trusts
Other Payments to Securities Dealers
The payments below apply to Securities Dealers who initiate and are responsible
for Class II purchases and certain Class I purchases made without a sales
charge. A Securities Dealer may only receive one of the following payments for
each qualifying purchase. The payments described below are paid by Distributors
or one of its affiliates, at its own expense, and not by the Fund or its
shareholders.
1. Securities Dealers may receive up to 1% of the purchase price for Class II
purchases. During the first year after the purchase, Distributors may keep
a part of the Rule 12b-1 fees associated with that purchase.
2. Securities Dealers will receive up to 0.75% of the purchase price for Class
I purchases of $1 million or more.
3. Securities Dealers may receive up to 1% of the purchase price for Class I
purchases made under waiver category 5 above.
4. Securities Dealers may receive up to 0.25% of the purchase price for Class
I purchases by an Eligible Governmental Authority.
Please see "How Do I Buy, Sell and Exchange Shares - Other Payments to
Securities Dealers" in the SAI for any breakpoints that may apply.
Securities Dealers may receive additional compensation from Distributors or an
affiliated company in connection with selling shares of the Franklin Templeton
Funds. Compensation may include financial assistance for conferences,
shareholder services, automation, sales or training programs, or promotional
activities. Registered representatives and their families may be paid for travel
expenses, including lodging, in connection with business meetings or seminars.
In some cases, this compensation may only be available to Securities Dealers
whose representatives have sold or are expected to sell significant amounts of
shares. 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 NASD.
May I Exchange Shares for Shares of Another Fund?
We offer a wide variety of funds. If you would like, you can move money from
your Fund account to an existing or new account in another Franklin Templeton
Fund (an "exchange"). Because it is technically a sale and a purchase of shares,
an exchange is a taxable transaction.
If you own Class I shares, you may exchange into any of our money funds except
Franklin Templeton Money Fund II ("Money Fund II"). Money Fund II is the only
money fund exchange option available to Class II shareholders. Unlike our other
money funds, shares of Money Fund II may not be purchased directly and no drafts
(checks) may be written on Money Fund II accounts.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund and its rules and
requirements for exchanges. For example, some Franklin Templeton Funds do not
accept exchanges and others may have different investment minimums. Some
Franklin Templeton Funds do not offer Class II shares.
METHOD STEPS TO FOLLOW
By Mail 1. Send us written instructions signed by all account owners
2. Include any outstanding share certificates for the shares
you're exchanging
By Phone Call Shareholder Services or TeleFACTS(R)
- If you do not want the ability to exchange by phone,
please let us know.
Through Your Dealer Call your investment representative
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
Will Sales Charges Apply to My Exchange?
You generally will not pay a front-end sales charge on exchanges. If you have
held your shares less than six months, however, you will pay the percentage
difference between the sales charge you previously paid and the applicable sales
charge of the new fund. If you have never paid a sales charge on your shares
because they have always been held in a money fund, you will pay the Fund's
applicable sales charge no matter how long you have held your shares. These
charges may not apply if you qualify to buy shares without a sales charge.
We will not impose a Contingent Deferred Sales Charge when you exchange shares.
Any shares subject to a Contingent Deferred Sales Charge at the time of
exchange, however, will remain so in the new fund. See the discussion on
Contingent Deferred Sales Charges below and under "How Do I Sell Shares?"
Contingent Deferred Sales Charge - Class I. For accounts with Class I shares
subject to a Contingent Deferred Sales Charge, shares are exchanged into the new
fund in the order they were purchased. If you exchange Class I shares into one
of our money funds, the time your shares are held in that fund will not count
towards the completion of any Contingency Period.
Contingent Deferred Sales Charge - Class II. For accounts with Class II shares
subject to a Contingent Deferred Sales Charge, shares are exchanged into the new
fund proportionately based on the amount of shares subject to a Contingent
Deferred Sales Charge and the length of time the shares have been held. For
example, suppose you own $1,000 in shares that have never been subject to a
CDSC, such as shares from the reinvestment of dividends and capital gains ("free
shares"), $2,000 in shares that are no longer subject to a CDSC because you have
held them for longer than 18 months ("matured shares"), and $3,000 in shares
that are still subject to a CDSC ("CDSC liable shares"). If you exchange $3,000
into a new fund, $500 will be exchanged from free shares, $1,000 from matured
shares, and $1,500 from CDSC liable shares.
Likewise, CDSC liable shares purchased at different times will be exchanged into
a new fund proportionately. For example, assume you purchased $1,000 in shares 3
months ago, 6 months ago, and 9 months ago. If you exchange $1,500 into a new
fund, $500 will be exchanged from shares purchased at each of these three
different times.
While Class II shares are exchanged proportionately, they are redeemed in the
order purchased. In some cases, this means exchanged shares may be CDSC liable
even though they would not be subject to a Contingent Deferred Sales Charge if
they were sold. We believe the proportional method of exchanging Class II shares
more closely reflects the expectations of Class II shareholders if shares are
sold during the Contingency Period. The tax consequences of a sale or exchange
are determined by the Code and not by the method used by the Fund to transfer
shares.
If you exchange your Class II shares for shares of Money Fund II, the time your
shares are held in that fund will count towards the completion of any
Contingency Period.
Exchange Restrictions
Please be aware that the following restrictions apply to exchanges:
o You may only exchange shares within the same class.
o The accounts must be identically registered. You may exchange shares from a
Fund account requiring two or more signatures into an identically
registered money fund account requiring only one signature for all
transactions. Please notify us in writing if you do not want this option to
be available on your account(s). Additional procedures may apply. Please
see "Transaction Procedures and Special Requirements."
o The new fund must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Currently, the Fund does not allow investments by Market Timers.
Because excessive trading can hurt Fund performance and shareholders, we may
refuse exchange purchases if (i) we believe the Fund would be harmed or unable
to invest effectively, or (ii) the Fund receives or anticipates simultaneous
orders that may significantly affect the Fund.
How Do I Sell Shares?
You may sell (redeem) your shares at any time.
METHOD STEPS TO FOLLOW
By Mail 1. Send us written instructions signed by all account owners
2. Include any outstanding share certificates for the shares
you are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may need
to send additional documents. Accounts under court
jurisdiction may have additional requirements.
By Phone Call Shareholder Services
(Only available if you have completed and sent to us the telephone redemption
agreement included with this prospectus) Telephone requests will be accepted:
o If the request is $50,000 or less. Institutional accounts
may exceed $50,000 by completing a separate agreement. Call
Institutional Services to receive a copy.
o If there are no share certificates issued for the shares you
want to sell or you have already returned them to the Fund
o Unless the address on your account was changed by phone
within the last 30 days
Through Your Dealer Call your investment representative.
We will send your redemption check within seven days after we receive your
request in proper form. We will make the check payable to all registered owners
on the account and send it to the address of record. We are not able to receive
or pay out cash in the form of currency.
If you sell shares you just purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
Contingent Deferred Sales Charge
A Contingent Deferred Sales Charge may apply to Class I purchases of $1 million
or more if you sell all or a portion of the shares within one year and any Class
II purchase if you sell the shares within 18 months. The charge is 1% of the
value of the shares sold or the Net Asset Value at the time of purchase,
whichever is less. Distributors keeps the charge to recover payments made to
Securities Dealers.
We will first redeem shares not subject to the charge in the following order:
1) A calculated number of shares equal to the capital appreciation on shares
held less than the Contingency Period,
2) Shares purchased with reinvested dividends and capital gain distributions,
and
3) Shares held longer than the Contingency Period.
We then redeem shares subject to the charge in the order they were purchased.
Unless otherwise specified, when you request a dollar amount, we will redeem
additional shares to cover any Contingent Deferred Sales Charge. For requests to
sell a certain number of shares, we will deduct the amount of the Contingent
Deferred Sales Charge, if any, from the sale proceeds.
Waivers. We waive the Contingent Deferred Sales Charge for:
o Exchanges
o Account fees
o Sales of shares purchased pursuant to a sales charge waiver
o Redemptions by the Fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before February 1,
1995
o Redemptions through a systematic withdrawal plan set up after February 1,
1995, up to 1% a month of an account's Net Asset Value (3% quarterly, 6%
semiannually or 12% annually). For example, if you maintain an annual
balance of $1 million in Class I shares, you can withdraw up to $120,000
annually through a systematic withdrawal plan free of charge. Likewise, if
you maintain an annual balance of $10,000 in Class II shares, $1,200 may be
withdrawn annually free of charge.
Transaction Procedures and Special Requirements
How and When Shares Are Priced
The Fund is open for business each day the Exchange is open. We determine the
Net Asset Value per share of each class as of the scheduled close of the
Exchange, generally 1:00 p.m. Pacific time. You can find the prior day's closing
Net Asset Value and Offering Price for each class in many newspapers.
The Net Asset Value of all outstanding shares of each class is calculated on a
pro rata basis. It is based on each class' proportionate participation in the
Fund, determined by the value of the shares of each class. Each class, however,
bears the Rule 12b-1 fees payable under its Rule 12b-1 plan. To calculate Net
Asset Value per share of each class, the assets of each class are valued and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of shares of the class outstanding. The Fund's assets are
valued as described under "How Are Fund Shares Valued?" in the SAI.
The Price We Use When You Buy or Sell Shares
You buy shares at the Offering Price of the class you wish to purchase, unless
you qualify to buy shares at a reduced sales charge or with no sales charge. The
Offering Price of each class is based on the Net Asset Value per share of the
class and includes the maximum sales charge. We calculate it to two decimal
places using standard rounding criteria. You sell shares at Net Asset Value.
We will use the Net Asset Value next calculated after we receive your
transaction request in proper form. If you buy or sell shares through your
Securities Dealer, however, we will use the Net Asset Value next calculated
after we receive the request from your dealer.
Proper Form
An order to buy shares is in proper form when we receive your signed shareholder
application and check. Written requests to sell or exchange shares are in proper
form when we receive written instructions signed by all registered owners, with
a signature guarantee if necessary. We must also receive any outstanding share
certificates for those shares.
Written Instructions
Written instructions must be signed by all registered owners. To avoid any delay
in processing your transaction, they should include:
o Your name,
o The Fund's name,
o The class of shares,
o A description of the request,
o For exchanges, the name of the fund you're exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the evening if
preferred.
Signature Guarantees
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered
owners,
3) The proceeds are not being sent to the address of record, preauthorized
bank account, or preauthorized brokerage firm account,
4) We receive instructions from someone other than the registered owners,
5) We believe a signature guarantee would protect us against potential claims
based on the instructions received.
A signature guarantee verifies the authenticity of your signature and may be
obtained from certain banks, brokers or other eligible guarantors. You should
verify that the institution is an eligible guarantor prior to signing. A
notarized signature is not sufficient.
Share Certificates
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate is
lost, stolen or destroyed, you may have to pay an insurance premium of up to 2%
of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form. In this case, you should send the certificate and assignment
form in separate envelopes.
Telephone Transactions
You may initiate many transactions by phone. Please refer to the sections of
this prospectus that discuss the transaction you would like to make or call
Shareholder Services.
We may only be liable for losses resulting from unauthorized transactions if we
do not follow reasonable procedures designed to verify the identity of the
caller. When you call, we will request personal or other information, and may
also record calls. For your protection, we may delay a transaction or not
implement one if we are not reasonably satisfied that telephone instructions are
genuine. If this occurs, we will not be liable for any loss.
If our lines are busy or you are otherwise unable to reach us by phone, you may
wish to ask your investment representative for assistance or send written
instructions to us, as described elsewhere in this prospectus. If you are unable
to execute a transaction by telephone, we will not be liable for any loss.
Account Registrations and Required Documents
When you open an account, you need to tell us how you want your shares
registered. How you register your account will affect your ownership rights and
ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
Joint Ownership. If you open an account with two or more owners, we register the
account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of survivorship"
is shown as "Jt Ten" on your account statement. For any account with two or more
owners, all owners must sign instructions to process transactions and changes to
the account. Even if the law in your state says otherwise, you will not be able
to change owners on the account unless all owners agree in writing. If you would
like another person or owner to sign for you, please send us a current power of
attorney.
Gifts and Transfers to Minors. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this form
of registration, a minor may not be named as an account owner.
Trusts. If you register your account as a trust, you should have a valid written
trust document to avoid future disputes or possible court action over who owns
the account.
Required Documents. For corporate, partnership and trust accounts, please send
us the following documents when you open your account. This will help avoid
delays in processing your transactions while we verify who may sign on the
account.
TYPE OF ACCOUNT DOCUMENTS REQUIRED
Corporation Corporate Resolution
Partnership 1. The pages from the partnership agreement that
identify the general partners, or
2. A certification for a partnership agreement
Trust 1. The pages from the trust document that identify the
trustees, or
2. A certification for trust
Street or Nominee Accounts. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the shares
to the street or nominee name account of another Securities Dealer. Both dealers
must have an agreement with Distributors or we will not process the transfer.
Contact your Securities Dealer to initiate the transfer. We will process the
transfer after we receive authorization in proper form from your delivering
Securities Dealer. Accounts may be transferred electronically through the NSCC.
For accounts registered in street or nominee name, we may take instructions
directly from the Securities Dealer or your nominee.
Electronic Instructions. If there is a Securities Dealer or other representative
of record on your account, you authorize the use and execution of electronic
instructions. We can accept electronic instructions directly from your dealer or
representative without further inquiry. Electronic instructions may be processed
through the services of the NSCC, which currently include the NSCC's
"Networking," "Fund/SERV," and "ACATS" systems, or through Franklin/Templeton's
PCTrades II(R) System.
Tax Identification Number
We must have your correct Social Security or tax identification number on a
signed shareholder application or applicable tax form. Federal law requires us
to withhold 31% of your taxable distributions and sale proceeds if (i) you have
not furnished a certified correct taxpayer identification number, (ii) you have
not certified that withholding does not apply, (iii) the IRS or a Securities
Dealer notifies the Fund that the number you gave us is incorrect, or (iv) you
are subject to backup withholding.
We may refuse to open an account if you fail to provide the required tax
identification number and certifications. We may also close your account if the
IRS notifies us that your tax identification number is incorrect. If you
complete an "awaiting TIN" certification, we must receive a correct tax
identification number within 60 days of your initial purchase to keep your
account open.
Keeping Your Account Open
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $50. We will only do this
if the value of your account fell below this amount because you voluntarily sold
your shares and your account has been inactive (except for the reinvestment of
distributions) for at least six months. Before we close your account, we will
notify you and give you 30 days to increase the value of your account to $100.
Services to Help You Manage Your Account
Automatic Investment Plan
Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can 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
included with this prospectus or contact your investment representative. 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
discontinue the program at any time by notifying Investor Services by mail or
phone.
Automatic Payroll Deduction
You may have money transferred from your paycheck to the Fund to buy additional
shares. Your investments will continue automatically until you instruct the Fund
and your employer to discontinue the plan. To process your investment, we must
receive both the check and payroll deduction information in required form. Due
to different procedures used by employers to handle payroll deductions, there
may be a delay between the time of the payroll deduction and the time we receive
the
money.
Systematic Withdrawal Plan
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or annual
basis. The value of your account must be at least $5,000 and the minimum payment
amount for each withdrawal must be at least $50.
If you would like to establish a systematic withdrawal plan, please complete the
systematic withdrawal plan section of the shareholder application included with
this prospectus and indicate how you would like to receive your payments. You
may choose to direct your payments to buy the same class of shares of another
Franklin Templeton Fund or have the money sent directly to you, to another
person, or to a checking account. If you choose to have the money sent to a
checking account, please see "Electronic Fund Transfers" below.
You will generally receive your payment by the fifth business day of the month
in which a payment is scheduled. When you sell your shares under a systematic
withdrawal plan, it is a taxable transaction.
Because of the front-end sales charge, you may not want to set up a systematic
withdrawal plan if you plan to buy shares on a regular basis. Shares sold under
the plan may also be subject to a Contingent Deferred Sales Charge. Please see
"Contingent Deferred Sales Charge" under "How Do I Sell Shares?"
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us in writing at
least seven business days before the end of the month preceding a scheduled
payment. Please see "How Do I Buy, Sell and Exchange Shares? - Systematic
Withdrawal Plan" in the SAI for more information.
Electronic Fund Transfers
You may choose to have dividend and capital gain distributions from the Fund or
payments under a systematic withdrawal plan sent directly to a checking account.
If the checking account is with a bank that is a member of the Automated
Clearing House, the payments may be made automatically by electronic funds
transfer. If you choose this option, please allow at least fifteen days for
initial processing. We will send any payments made during that time to the
address of record on your account.
TeleFACTS(R)
From a touch-tone phone, you may call our TeleFACTS system (day or night) at
1-800/247-1753 to:
o obtain information about your account;
o obtain price and performance information about any Franklin Templeton Fund;
o exchange shares between identically registered Franklin accounts; and
o request duplicate statements and deposit slips.
You will need the code number for each class to use TeleFACTS. The code numbers
for Class I and Class II are as follows:
FUND CODE FUND NAME
164 ALABAMA FUND, CLASS I
264 ALABAMA FUND, CLASS II
165 FLORIDA FUND, CLASS I
265 FLORIDA FUND, CLASS II
128 GEORGIA FUND, CLASS I
228 GEORGIA FUND, CLASS II
172 KENTUCKY FUND, CLASS I
168 LOUISIANA FUND, CLASS I
268 LOUISIANA FUND, CLASS II
FUND CODE FUND NAME
160 MISSOURI FUND, CLASS I
260 MISSOURI FUND, CLASS II
170 NORTH CAROLINA FUND, CLASS I
270 NORTH CAROLINA FUND, CLASS II
162 TEXAS FUND, CLASS I
262 TEXAS FUND, CLASS II
163 VIRGINIA FUND, CLASS I
263 VIRGINIA FUND, CLASS II
Statements and Reports to Shareholders
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your
account, including additional purchases and dividend reinvestments. Please
verify the accuracy of your statements when you receive them.
o Financial reports of the Fund will be sent every six months. To reduce Fund
expenses, we attempt to identify related shareholders within a household
and send only one copy of a report. Call Fund Information if you would like
an additional free copy of the Fund's financial reports or an interim
quarterly report.
Institutional Accounts
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. For further information, call Institutional
Services.
Availability of These Services
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, the Fund may not be able to offer these services directly to
you. Please contact your investment representative.
What If I Have Questions About My Account?
If you have any questions about your account, you may write to Investor Services
at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California 94403-7777.
The Fund, Distributors and Advisers are also located at this address. You may
also contact us by phone at one of the numbers listed below.
HOURS OF OPERATION (PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with high
quality service. You will hear a regular beeping tone if your call is being
recorded.
What Distributions Might I Receive from the Fund?
The Fund declares dividends from its net investment income daily and pays them
monthly on or about the last day of the month. The daily allocation of net
investment income begins on the day after we receive your money or settlement of
a wire order trade and continues to accrue through the day we receive your
request to sell your shares or the settlement of a wire order trade.
Capital gains, if any, may be distributed twice a year, usually once in December
and once after the end of the Fund's fiscal year.
Dividends and capital gains are calculated and distributed the same way for each
class. The amount of any income dividends per share will differ, however,
generally due to the difference in the Rule 12b-1 fees of each class.
Dividend payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. The Fund does not pay "interest" or guarantee any
fixed rate of return on an investment in its shares.
Distribution Options
You may receive your distributions from the Fund in any of these ways:
1. Buy additional shares of the Fund - You may buy additional shares of the same
class 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. If you own Class II shares, you may also reinvest
your distributions in Class I shares of the Fund. This is a convenient way to
accumulate additional shares and maintain or increase your earnings base.
2. Buy shares of other Franklin Templeton Funds - You may direct your
distributions to buy the same class of shares of another Franklin Templeton Fund
(without a sales charge or imposition of a Contingent Deferred Sales Charge). If
you own Class II shares, you may also direct your distributions to buy Class I
shares of another Franklin Templeton Fund. Many shareholders find this a
convenient way to diversify their investments.
3. Receive distributions in cash - You may receive dividends, or both dividend
and capital gain distributions in cash. If you have the money sent to another
person or to a checking account, you may need a signature guarantee. If you send
the money to a checking account, please see "Electronic Fund Transfers" under
"Services to Help You Manage Your Account."
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 you do not select an option, we will
automatically reinvest dividend and capital gain distributions in the same class
of the Fund. You may change your distribution option at any time by notifying us
by mail or phone. Please allow at least seven days prior to the reinvestment
date for us 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 more information on tax matters
relating to the Fund and its shareholders, see "Additional Information on
Distributions and Taxes" in the SAI.
Each Fund is treated as a separate entity for federal income tax purposes. The
Fund intends to continue to qualify as a regulated investment company under
Subchapter M of the Code. By distributing all of its income and meeting certain
other requirements relating to the sources of its income and diversification of
its assets, the Fund will not be liable for federal income or excise taxes.
By meeting certain requirements of the Code, the Fund 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 your state of residence or such state's political subdivisions, from interest
on direct obligations of the federal government, or from interest on obligations
of Puerto Rico, the U.S. Virgin Islands or Guam, they may be exempt from
personal income tax, if any, in such state. More information on the state
taxation of interest from federal and municipal obligations is included under
"Appendices - State Tax Treatment."
To the extent dividends paid by the Fund 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 buy 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 the 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 to you 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 you
received them 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 Fund shares and whether you receive the
distributions in cash or in additional shares.
Redemptions and exchanges of Fund shares are taxable events on which you may
realize a gain or loss. Any loss incurred on a 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 the 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, including the
portion of the dividends on an average basis which constitutes taxable income or
interest income that is a tax preference item under the federal alternative
minimum tax. If you have not held Fund shares 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 includible in the tax base for determining the
extent to which any social security or railroad retirement benefits you receive
will be subject to regular federal income tax. You are required to disclose the
receipt of tax-exempt interest on your federal income tax returns.
Interest on indebtedness incurred by you (directly or indirectly) to purchase or
carry Fund 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 advisor 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. The Appendices to this prospectus discuss the
tax treatment of the Funds with respect to distributions from each respective
Fund to shareholders in such states. Generally, individual shareholders of the
Funds are afforded tax-exempt treatment at the state level for distributions
derived from municipal securities of their state of residency.
Pursuant to federal law, interest received directly from U.S. government
obligations and from obligations of the U.S. territories is generally exempt
from taxation by all states and their municipal subdivisions. Each state's
treatment of dividends paid from the interest earned on direct federal and U.S.
territorial obligations is discussed under "Appendices State Tax Treatment."
You should consult your tax advisor 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.
Glossary
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
CD - Certificate of deposit
Class I and Class II - The Fund offers two classes of shares, designated "Class
I" and "Class II." The two classes have proportionate interests in the Fund's
portfolio. They differ, however, primarily in their sales charge structures and
Rule 12b-1 plans.
Code - Internal Revenue Code of 1986, as amended
Contingency Period - For Class I shares, the 12 month period during which a
Contingent Deferred Sales Charge may apply. For Class II shares, the contingency
period is 18 months. Regardless of when during the month you purchased shares,
they will age one month on the last day of that month and each following month.
Contingent Deferred Sales Charge (CDSC) - A sales charge of 1% that may apply if
you sell your shares within the Contingency Period.
Distributors - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Trustees."
Eligible Governmental Authority - Any state or local government or any
instrumentality, department, authority or agency thereof that has determined the
Fund is a legally permissible investment and that can only buy shares of the
Fund without paying sales charges.
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., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
Letter - Letter of Intent
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.
NASD - National Association of Securities Dealers, Inc.
Net Asset Value (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NSCC - National Securities Clearing Corporation
Offering Price - The public offering price is based on the Net Asset Value per
share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 4.25% for Class I and 1% for Class II.
REIT - Real Estate Investment Trust
Resources - Franklin Resources, Inc.
SAI - Statement of Additional Information
SEC - U.S. Securities and Exchange Commission
Securities Dealer - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the 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
We/Our/Us - Unless the context indicates a different meaning, these terms refer
to the Fund and/or Investor Services, Distributors, or another wholly owned
subsidiary of Resources.
Appendices
State Tax Treatment
The following information on the state income tax treatment of dividends from
the Funds is based upon correspondence and sources believed to be reliable.
Except where otherwise noted, the information pertains to individual state
income taxation only. You may be subject to local taxes on dividends or the
value of your shares. Corporations, trusts, estates and other entities may be
subject to other taxes and should consult with their tax advisors or their state
department of revenue. For some investors, a portion of the dividend income may
be subject to the federal and/or state alternative minimum tax.
Alabama
Section 40-18-14(2)f of the Alabama Code provides that interest on obligations
of the state of Alabama and any county, municipality or other political
subdivision thereof is exempt from personal income tax. Section 40-18-14(2)d
provides similar tax-exempt treatment for interest on exempt obligations of the
U.S. government or its possessions (including Puerto Rico, Guam and the Virgin
Islands). In addition, Regulation Section 810-3-14-.02(4)(b)2 and an
administrative ruling of the Alabama Department of Revenue, dated March 1, 1990,
extend the exemption for obligations of the U.S. government or its possessions
to distributions from a regulated investment company, such as the Alabama Fund,
to the extent that they are paid out of interest earned on such exempt
obligations. The March 1, 1990 ruling also indicates that the exemption would
apply to Alabama municipal obligations. Tax-exempt treatment is generally not
available for distributions attributable to income earned on indirect U.S.
government obligations (GNMAs, FNMAs, etc.), for repurchase agreements
collateralized by U.S. government obligations, or for obligations of other
states and their political subdivisions. To the extent such investments are made
by a Fund, such as for temporary or defensive purposes, such distributions will
generally be taxable on a pro rata basis.
Any distributions of net short-term and net long-term capital gains earned by
the Fund are fully includable in each individual shareholder's Alabama taxable
income and are currently taxed at ordinary income tax rates.
Florida
Florida does not have a personal income tax but does have an intangible personal
property tax for residents. According to Florida Statute Section 199.185 and
Technical Assistance Advisement 90(C)2-003, issued by the Florida Department of
Revenue on August 8, 1990 (as subsequently revised), shares in regulated
investment companies organized as business trusts, such as the Florida Fund,
will not be subject to Florida's intangible property tax to the extent that the
Fund is invested in obligations of the U.S. government, its agencies,
instrumentalities and territories (including Puerto Rico, Guam and the Virgin
Islands) at the close of business on the last business day of the calendar year.
If the Fund invests all of the remaining portion of its Net Asset Value in
exempt obligations of the state of Florida or its municipalities or political
subdivisions on such date, then that remaining portion of the Net Asset Value of
the Fund (and corresponding value of Fund shares) will also be exempt from
Florida's intangibles tax. According to Florida Technical Assistance Advisement
94(c)2-025, if the Fund invests, such as for temporary or defensive purposes,
any of the remaining portion of its portfolio in any asset which is taxable
under Florida's intangible tax law, including investments in indirect federal
obligations (GNMAs, FNMAs, etc.), repurchase agreements collateralized by U.S.
government securities or obligations of any other states, then only the portion
of Net Asset Value which is made up of direct obligations of the United States
government, or territories and possessions of the United States government, may
be removed from the net asset value; the remaining net asset value of the Fund
is subject to tax.
Georgia
Under Section 48-7-27(b)(1)(A) of the Georgia Code, interest on obligations of
the state of Georgia and its political subdivisions, which is not otherwise
included in federal adjusted gross income, is exempt from the state's individual
income tax. Likewise, under Section 48-7-27(b)(2) interest on exempt obligations
of the U.S. government, its territories and possessions (including Puerto Rico,
Guam and the Virgin Islands), or of any authority, commission, or
instrumentality of the U.S. government is also exempt from the state's
individual income tax. Since distributions from the Georgia Fund attributable to
interest on obligations of the state of Georgia and its political subdivisions
is excluded from federal adjusted gross income, they will likewise be excluded
from the Georgia individual income tax.
Under the administrative authority of the Georgia Department of Revenue, the
exempt treatment for interest derived from such exempt obligations is also
extended to distributions of regulated investment companies, such as the Georgia
Fund. Tax-exempt treatment is generally not available for distributions
attributable to income earned on indirect U.S. government obligations (GNMAs,
FNMAs, etc.), for repurchase agreements collateralized by U.S. government
obligations, or for obligations of other states and their political
subdivisions. To the extent such investments are made by a Fund, such as for
temporary or defensive purposes, such distributions will generally be taxable on
a pro rata basis.
The Georgia Department of Revenue announced on March 21, 1996 that the Georgia
intangible property tax has been repealed, effective for 1996 intangible
property tax returns.
Any distributions of net short-term and net long-term capital gains earned by
the Fund are fully included in each individual shareholder's Georgia taxable
income as dividend income and long-term capital gain, respectively, and are
currently taxed at ordinary income tax rates.
Kentucky
Pursuant to Kentucky Revised Statute 141.010(10)(a) and (12)(a), interest earned
on exempt obligations of the U.S. government, its agencies and
instrumentalities, or its territories (including Puerto Rico, Guam and the
Virgin Islands) and obligations issued by the Commonwealth of Kentucky or its
political subdivisions will be exempt from Kentucky's personal income tax. Under
Kentucky Income Tax Revenue Policy 42P161 (as revised December 1, 1990),
dividends from regulated investment companies, such as the Kentucky Fund, which
are derived from such exempt obligations, will also be exempt from state income
tax. Tax-exempt treatment is generally not available for distributions
attributable to income earned on indirect U.S. government obligations (GNMAs,
FNMAs, etc.), for repurchase agreements collateralized by U.S. government
obligations, or for obligations of other states and their political
subdivisions. To the extent such investments are made by a Fund, such as for
temporary or defensive purposes, such distributions will generally be taxable on
a pro rata basis.
Kentucky Revenue Circular 40C003 states that Section 170 of the Kentucky
Constitution exempts from intangible property taxation obligations of Kentucky,
and its counties, municipalities, and taxing and school districts. The Revenue
Circular further states that though neither the Kentucky Constitution nor the
Kentucky Revised Statutes contain specific language to exempt federal
obligations from the intangible property tax, the courts of Kentucky have
recognized the power of the U.S. Congress to declare that obligations of federal
instrumentalities are exempt from state taxation. According to a Kentucky
Revenue Cabinet Tax Alert dated July 1988, shares of a regulated investment
company, such as the Kentucky Fund, will not be subject to the intangibles tax
to the extent that the value of the shares is attributable to such exempt
obligations.
Any distributions of net short-term and net long-term capital gains earned by
the Fund are includable in each shareholder's Kentucky adjusted gross income and
are taxed at ordinary income tax rates. Kentucky Revenue Circular 40C003 also
states that gain on the sale of some U.S. government and Kentucky obligations
may be exempt from state income tax, but the availability of the exemption
depends upon the specific legislation authorizing the bonds.
Louisiana
Under Section 293 of Louisiana's individual income tax law, interest earned on
obligations of the state of Louisiana or its political subdivisions is exempt
from individual and corporate income tax. Under Section 293, interest earned on
qualifying obligations of the U.S. government or its agencies and possessions
(including Puerto Rico, Guam and the Virgin Islands) is also exempt from
individual and corporate income tax. Under Section 293, distributions from a
regulated investment company, such as the Louisiana Fund, will also be exempt
from individual and corporate income tax to the extent that they are derived
from interest earned on such exempt obligations. Tax-exempt treatment is
generally not available for distributions attributable to income earned on
indirect U.S. government obligations (GNMAs, FNMAs, etc.), for repurchase
agreements collateralized by U.S. government obligations, or for obligations of
other states and their political subdivisions. To the extent such investments
are made by the Fund, such as for temporary or defensive purposes, such
distributions will generally be taxable on a pro rata basis.
Any distributions of net short-term and net long-term capital gains earned by
the Fund are included in each shareholder's Louisiana taxable income and are
currently taxed at ordinary income tax rates.
Maryland
Since distributions from the Maryland Fund attributable to interest on
obligations of the state of Maryland and its political subdivisions are excluded
from federal taxable income, they will likewise be exempt from Maryland's
personal income tax. Under Section 10-207 of the Tax General Article, interest
on exempt obligations of the U.S. government and any authority, commission,
instrumentality, possession or territory of the U.S. (including Puerto Rico,
Guam and the Virgin Islands) is also exempt from Maryland's personal income tax.
Under Section 10-207(c-1) and Administrative Release No. 11, this exemption is
extended to distributions from a regulated investment company, such as the
Maryland Fund, to the extent such distributions are paid out of interest earned
on exempt obligations of the U.S. government or its agencies and possessions
(including Puerto Rico, Guam and the U.S. Virgin Islands). Tax-exempt treatment
is generally not available for distributions attributable to income earned on
indirect U.S. government obligations (GNMAs, FNMAs, etc.), for repurchase
agreements collateralized by U.S. government obligations, or for obligations of
other states and their political subdivisions. To the extent such investments
are made by the Fund, such as for temporary or defensive purposes, such
distributions will generally be taxable on a pro rata basis.
Any distributions of capital gains by the Fund derived from gain realized from
the sale or exchange of obligations issued by the state of Maryland or its
subdivisions may also be tax-exempt to the Fund's shareholders. Distributions of
all net short-term capital gain and net long-term capital gain earned by the
Fund on non-Maryland obligations are includable in each shareholder's Maryland
adjusted gross income and are taxed at ordinary income tax rates.
Missouri
Under Section 143.121 of the Revised Statutes of Missouri, interest earned on
exempt obligations of the U.S. government, its authorities, commissions,
instrumentalities, possessions or territories (including Puerto Rico, Guam and
the Virgin Islands), or the State of Missouri, its political subdivisions or
authorities are exempt from Missouri personal income tax. Under Missouri's
income tax regulations (Title 12, Section 10-2.155), a regulated investment
company such as the Missouri Fund may pass the tax-exempt character of such
interest through to its shareholders. Tax-exempt treatment is generally not
available for distributions attributable to income earned on indirect U.S.
government obligations (GNMAs, FNMAs, etc.), for repurchase agreements
collateralized by U.S. government obligations, or for obligations of other
states and their political subdivisions. To the extent such investments are made
by the Fund, such as for temporary or defensive purposes, such distributions
will generally be taxable on a pro rata basis.
Any distributions of net short-term and net long-term capital gains earned by
the Fund are included in each shareholder's Missouri taxable income and are
currently taxed at ordinary income tax rates.
North Carolina
Section 105-134.6(b) of the North Carolina General Statutes provides that
interest on obligations of the U.S. government, its possessions, or its
territories (including Puerto Rico, Guam and the Virgin Islands) and obligations
of the state of North Carolina or its political subdivisions are exempt from
state income tax. Pursuant to a North Carolina Department of Revenue Information
Release dated October 4, 1990, dividends received from a regulated investment
company, such as the North Carolina Fund, are exempt from personal income tax to
the extent that the distributions are derived from interest on such exempt
obligations. Tax-exempt treatment is generally not available for distributions
attributable to income earned on indirect U.S. government obligations (GNMAs,
FNMAs, etc.), for repurchase agreements collateralized by U.S. government
obligations, or for obligations of other states and their political
subdivisions. To the extent such investments are made by the Fund, such as for
temporary or defensive purposes, such distributions will generally be taxable on
a pro rata basis.
Pursuant to an administrative Revenue Memorandum, distributions attributable to
net realized long-term capital gains earned by the Fund on the sale or exchange
of certain obligations of the state of North Carolina or its political
subdivisions issued prior to July 1, 1995, may also be tax-exempt to the Fund's
shareholders. Distributions of all net short-term capital gain and of net
long-term capital gain earned by the Fund on other North Carolina obligations
and on non-North Carolina obligations are includable in each shareholder's North
Carolina taxable income and are currently taxed at ordinary income rates.
Texas
Texas does not presently impose any income tax on individuals, trusts, or
estates.
Virginia
Section 58.1-322 of the Code of Virginia provides that interest on obligations
of the state of Virginia, its political subdivisions, and instrumentalities or
direct obligations of the U.S. government or its authority, commission,
instrumentality or territories (including Puerto Rico, Guam and the Virgin
Islands) is exempt from personal income tax. Under Virginia Regulation Section
630-2-322, distributions from a regulated investment company, such as the
Virginia Fund, will also be exempt from personal income tax if the Fund invests
in such exempt obligations. Tax-exempt treatment is generally not available for
distributions attributable to income earned on indirect U.S. government
obligations (GNMAs, FNMAs, etc.), for repurchase agreements collateralized by
U.S. government obligations, or for obligations of other states and their
political subdivisions. To the extent such investments are made by the Fund,
such as for temporary or defensive purposes, such distributions will generally
be taxable on a pro rata basis.
Any distributions of net short-term and net long-term capital gains earned by
the Fund are included in each shareholder's Virginia taxable income and are
currently taxed at ordinary income tax rates.
Special Factors Affecting Each Fund
Some of the economic factors that may affect each Fund are summarized below. The
information is based primarily on information from municipal credit reports,
public documents relating to the securities offerings of state issuers and
historically reliable sources. This information has not been independently
verified by the Trust, nor is it intended to be comprehensive. More information
about each state is included in the SAI.
Alabama
While in the early 1980's Alabama's economic base was concentrated in the
manufacturing, construction and agricultural sectors, in recent years the trade
and service sectors have supplied 75% of job growth. This diversification has
been fueled by the growth in high tech, health care and business services.
Government employment has also surged, primarily in higher education. State
unemployment has remained near 7%, slightly higher than the national average.
Although Alabama's economy faltered during the spring and summer of 1993, it
generally has outperformed the national and east south central region economies
over the past three years. In 1993, the state adopted an aggressive economic
development and business recruitment policy which has been responsible for 58
companies investing $2.2 billion and creating 7,400 new jobs. Through
infrastructure improvements, worker training and tax incentives, Alabama has
lured new and expanding industries to the state, such as the new Mercedes-Benz'
plant scheduled to open in 1997. The state is positioned for economic expansion,
with continued gains in services and trade as well as gains in manufacturing,
especially the wood and paper products industry that benefits from Alabama's
abundant supply of lumber and timber.
Weaknesses may show in the state's apparel,
textile and transportation equipment industries, however, which may leave the
state if the North American Free Trade Agreement allows Mexico and Canada to
offer lower-cost business environments.
Florida
Employment and population have experienced steady growth in Florida since 1991,
and Florida's economic recovery has been among the strongest in the region.
Florida's service sector, which includes health and business services, accounts
for more than one third of its total employment. Growth in trade and
construction also remain strong, and tourism and agriculture are still important
components of Florida's economy. Florida's population growth has placed more
demands on education, corrections, and other government services, but so far
Florida has been able to meet these challenges.
In November 1994, Florida voters limited the amount of taxes and other revenues
that can be raised by the state in any fiscal year unless a two-thirds vote of
each house agrees to increase the revenue cap. Because the cap exempts revenue
pledged to bonds, revenue needed to pay Medicaid, and proceeds from the state
lottery, however, it appears to allow the state to raise sufficient revenue for
its needs. For fiscal 1997, the state is projected to be under the cap by $738
million.
Georgia
Georgia's strong economy is based largely on its manufacturing, trade, service,
and transportation sectors. The recession, the demise of Eastern Airlines and
weakness in the retail trade and construction sectors had a considerable effect
on the state's economy in the early 1990's. Recovery from the recession, though
about twice as slow as earlier recoveries, has been steady, however, and
employment growth in the state outperforms the region. In 1994, Georgia ranked
29th in personal income per capita. Its population growth has exceeded the
national average for nearly three decades.
The service, trade and construction sectors contributed to strong growth in
1995, and the economy is receiving a boost from the economic activity associated
with the summer Olympic Games. In mid-1994, Georgia's unemployment rate was 4.9%
versus the 5.9% national average, and employment growth is projected to be above
the national average through 1999.
In March 1989, the U.S Supreme Court ruled it unconstitutional for states to tax
federal retirement benefits if a retiree's state and local benefits are exempted
from state income taxes. Several lawsuits were filed in Georgia, with the
plaintiffs seeking state income tax refunds retroactive to 1980. Maximum
liability for these suits under the state's three-year statute of limitations is
estimated at $104 million. In 1995, the state enacted legislation to provide for
payment of refunds for the 1985-1988 tax years in an amount expected to be $110
million.
Kentucky
Kentucky's economy, with its base in the manufacturing and service industries,
has outperformed the national economic growth rates during the 1990's. Its low
costs of living and doing business and its aggressive business recruitment and
incentive programs have attracted high profile corporate expansions and
relocations over the past several years. Kentucky also has a low unemployment
rate and a manageable debt burden.
The region of the state bounded by Cincinnati on the north, Louisville on the
west, and Lexington on the east has seen more economic development than the rest
of the state. Access to several forms of transportation, good higher education
systems, and Toyota's decision to locate there have led Kentucky's "Golden
Triangle" to experience strong economic growth. The remainder of the
commonwealth, however, has not prospered nearly as much.
Major structural weaknesses in Kentucky's economic base persist. The state has
committed itself to the improvement of primary and secondary education, which is
badly needed for it to remain economically competitive. It may take decades,
however, to combat its historic underfunding of higher education, rural poverty
and illiteracy. In addition, the state has difficulty at times in balancing its
budget.
Louisiana
Although Louisiana's economy has recovered to some degree from the energy sector
decline and its economic downturn in the 1980's, its economic difficulties over
the last decade have held down income levels. Per capita personal income slipped
to 79% of the national average by 1994, and 23% of its population lives in
poverty. Low workforce education levels, the export of raw materials and
importation of finished goods, and below average wealth and income have hindered
the economic recovery. In addition, its property tax code structure is
unfavorable to businesses because it favors residences over commercial real
estate. The state also has a high level of debt.
Employment growth has led to a modest recovery, with the labor force expected to
increase 1-2% annually through 1999. Job growth in the service sector has
replaced that in energy and related industries. While the economy is more
diversified than it was in the 1980's, with growth in industries such as
defense-related manufacturing and lumber and paper, these industries are also
sensitive to defense spending cuts, the impact of foreign competition, interest
rates and the national business cycle. Tourism and gaming activity are expected
to be sources of growth in the future, but gaming is also vulnerable to market
saturation, competition from other states and the amount of new tourism. While
gaming has helped improve the economy in some parts of the states, gaming has
been below expectations in New Orleans, leading to the closure of at least three
casinos.
The state constitution is a major obstacle to achieving financial stability. It
limits revenue raising capacity and spending flexibility and requires a large
share of revenues to go to constitutionally protected functions, primarily
education and transportation.
Louisiana is expected to continue to face substantial future budgetary problems.
The 1996 budget includes a $41 million shortfall, and the 1996 budgeted revenues
fail to address the needs of future years' health care services and other
programs. If proposed revenues and expense reductions are not realized, the
state's outlook and creditworthiness could weaken even further.
Maryland
Maryland's economic base is well diversified. Services (31.2% of
non-agricultural wage and salary employment), trade (23.9%), finance, insurance,
real estate (6.3%), and government (19.6%) are the leading sectors of employment
and income. Manufacturing is the state's most volatile sector. Its unemployment
rate of 5.5% in 1994 was below the national average of 6.1%, although its job
growth in the 1990's trails that of the nation. Its citizens have a per capita
income above the national average. The state has an above-average debt burden.
Maryland's close proximity to Washington D.C. has resulted in its dependence on
the government sector. Cutbacks in federal spending, such as defense, have
slowed Maryland's growth and personal income, and reductions in funding for
social services and budget cuts are also likely to disproportionately impact
Maryland's growth. Still, increases in nonbanking financial services, commercial
construction and high technology have partially offset this trend. The service
sector is projected to provide two-thirds of all new jobs through 1997, although
job growth is expected to remain low. Maryland is still slowly recovering from
the early 1990s recession, which was particularly severe in the mid- Atlantic
region and which significantly affected Maryland's construction, real estate,
and retail trade, and some services.
Missouri
Because Missouri is a manufacturing, financial and agricultural state, its
diverse economy mirrors and is closely linked to the national economy. The state
experienced a prolonged downturn in the 1990's but now shows signs of
above-average growth. Defense-related industries continue to downsize, but motor
vehicle manufacturing has helped offset these losses. Printing, publishing and
food processing add stability to the economy, and the health care sector has
shown employment growth. Transportation is also a significant sector of the
economy. Missouri has a low debt burden.
Litigation and costs related to court-ordered school desegregation continue to
grow, with the state currently expecting to pay out about $360 million in school
desegregation payments in fiscal 1995. A constitutional amendment limiting
taxation and government spending that took effect in 1982 may also affect
Missouri's economy.
A strong growing season in 1994 and strong construction gains helped the state
rebound quickly from the 1993 floods. The construction sector, buoyed by flood
damage reconstruction, and the tourism sector grew in 1994, helping Missouri's
unemployment rate to drop below 4% for the first time since 1979. Employment is
expected to be stable through 1996, although the defense industry remains
vulnerable to spending cuts and base closures and the automobile industry can be
volatile.
North Carolina
North Carolina's economic growth is among the top ten states as measured by job
and personal income growth. The state's economic base continues to become more
diversified, with finance, services and trade sectors increasing in importance,
although 31% of the state's gross product still comes from the manufacturing
sector. North Carolina has a low debt level and an unemployment rate in 1994 of
4%, well below the national rate.
Although job growth in the state's non-manufacturing sectors is expected to be
among the strongest in the country in 1996 and 1997, tobacco industry cutbacks
and the transition from textile and apparel dependence are expected to cut
growth in the manufacturing sector. State employment growth has been strong over
the past three years, however, and residential construction and retail trade
employment gains have helped the state out of the early 1990's recession. While
median family income in the state ranks 36th in the nation, it is expected to
improve above regional levels as a result of higher-paying high technology,
knowledge intensive industries. North Carolina has also experienced strong
population growth.
Despite a generally stable outlook, North Carolina still has to contend with a
large poor population. Educational improvements, employment opportunities and
new infrastructure are needed. In addition, the state may have to return up to
$135 million in taxes if a Superior Court ruling regarding taxation of certain
retirement benefits is upheld.
Texas
For the last five years, Texas' economy has outperformed the nation. As the
state continues to diversify into construction, manufacturing and services and
away from oil and gas, employment growth has been strong. Although unemployment
has been high in the past, it fell below 6% in October, 1994. Per capita
personal income rates have improved since 1989 and in 1994 were 92.1% of the
national average.
Through the first quarter of 1995, services accounted for nearly 26% of
employment, trade accounted for 24% of jobs and total manufacturing exceeded
13%. Construction, transportation, and manufacturing, particularly in the high
tech and apparel industries, have shown strong growth in the state.
With a population of 18.75 million, Texas has the second largest population in
the country. Net migration has increased at a rate that has not been seen since
the oil boom of the early 1980's.
Texas relies heavily on its sales and property taxes. While a state income tax
appears unlikely at this time, the state must address its needs for education,
health care and prisons. Other problems that Texas may face include
possibilities of cutbacks in defense and military base shutdowns, and changes to
the status of NASA and the space station. The devaluation of the Mexican peso in
December 1994 has slowed growth along the Texas/Mexico border.
Virginia
The Commonwealth's economy remains strong and diversified despite
defense-related cutbacks, their subsequent impact on the state's shipyards and
further reductions in the textiles, apparel and tobacco sectors. Offsetting the
pending job losses was the recent announcement that Motorola, Inc. plans to
build a $1 billion semi-conductor plant that promises 5,000 jobs.
The unemployment rate has remained relatively low, at 4.9% in 1994. The service
sector accounts for 28% of the state's total employment and is expected to grow
at a 4.4% rate annually throughout the year 2000. Virginia's per capita income
is 104% of the national average.
The U.S Supreme Court ruled it unconstitutional for states to tax federal
retirement benefits if a retiree's state and local benefits are exempted from
state income taxes. Several lawsuits were filed in Virginia, with the plaintiffs
seeking state income tax refunds. The settlement of the class action lawsuit
will cost the state $418 million. Those who opted out of the class action
recently won a settlement of almost $80 million, although the commonwealth
expects to appeal this decision.
Franklin Templeton
Telephone Redemption Authorization Agreement
You may use Franklin Templeton's telephone redemption privilege to redeem
uncertificated Franklin Templeton Fund shares for up to $50,000 (or your
shareholder account balance, whichever is less) per day, per fund account in
accordance with the terms of the Funds' prospectus.
The telephone redemption privilege is available only to shareholders who
specifically request it. If you would like to add this redemption privilege to
the other telephone transaction privileges now automatically available to
Franklin Templeton Fund shareholders, please sign and return this authorization
to Franklin/Templeton Investor Services, Inc. ("Investor Services"), transfer
agent and shareholder servicing agent for the Franklin Templeton Funds.
Shareholder Authorization: I/We request the telephone redemption privilege under
the terms described below and in the prospectus for each investment company in
Franklin Templeton (a "Franklin Templeton Fund" or a "Fund"), now open or opened
at a later date, holding shares registered as follows:
Print name(s) as shown in registration (called "Shareholder")
Account number(s)
I/We authorize each Fund and Investor Services to honor and act upon telephone
requests, given as provided in this agreement, to redeem shares from any
Shareholder account.
Signature(s) of all registered owners and date
Printed name (and title/capacity, if applicable)
Verification Procedures: I/We understand and agree that: (1) each Fund and
Investor Services will employ reasonable procedures to confirm that redemption
instructions communicated by telephone are genuine and that if these
confirmation procedures are not followed, the Fund or Investor Services may be
liable for any losses due to unauthorized or fraudulent telephone instructions;
(2) the confirmation procedures will include the recording of telephone calls
requesting redemptions, 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 the
sending of confirmation statements to the address of record each time a
redemption is initiated by telephone; and (3) as long as the Fund and Investor
Services follow the confirmation procedures in acting on instructions
communicated by telephone which were reasonably believed to be genuine at the
time of receipt, neither they nor their parent or affiliates will be liable for
any loss, damages or expenses caused by an unauthorized or fraudulent redemption
request.
Jointly Owned/Co-Trustee Accounts: Each of us signing this agreement as either
joint owners or co-trustees authorize each Fund and Investor Services to honor
telephone redemption requests given by ANY ONE of the signers or our investment
representative of record, if any, ACTING ALONE.
20.21/140 (07/96)
Appointment of Attorney-in-Fact: In order to issue telephone redemption requests
acting alone, each of us individually makes the following appointment: I hereby
appoint the other joint owner(s)/co-trustee(s) as my agent(s)
(attorney[s]-in-fact) with full power and authority to individually act for me
in any lawful way with respect to the issuance of instructions to a Fund or
Investor Services in accordance with the telephone redemption privilege we have
requested by signing this agreement. This appointment shall not be affected by
my subsequent disability or incompetency and shall remain in effect until it is
revoked by either written notice from any one of us delivered to a Fund or
Investor Services by registered mail, return receipt requested, or by a Fund or
Investor Services upon receipt of any information that causes a Fund or Investor
Services to believe in good faith that there is or that there may be a dispute
among any of us with respect to the Franklin Templeton Fund account(s) covered
by this agreement. Each of us agrees to notify the Fund or Investor Services
immediately upon the death of any of the undersigned.
Corporate/Partnership/Trust/Retirement Accounts: The Shareholder and each of us
signing this agreement on behalf of the Shareholder represent and warrant to
each Franklin Templeton Fund and Investor Services that the Shareholder has the
authority to enter into this agreement and that each of us are duly authorized
to execute this agreement on behalf of the Shareholder. The Shareholder agrees
that its election of the telephone redemption privilege means that a Fund or
Investor Services may honor a telephone redemption request given by ANY
officer/partner/member/administrator or agent of Shareholder ACTING ALONE.
Restricted Accounts: Telephone redemptions and dividend option changes may not
be accepted on Franklin Templeton Trust Company retirement accounts.
Please Return this Form to:
Franklin/Templeton Investor Services, Inc.
Attn: D/P REVISIONS Dept.
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777.
20.21/140 (07/96)
Instructions and Important Notice
Substitute W-9 Instructions Information
General. Backup withholding is not an additional tax. Rather, the tax liability
of persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained from the IRS.
Obtaining A Number. If you do not have a Social Security Number Taxpayer
Identification Number or you do not know your SSN TIN, you must obtain Form SS-5
or Form SS-4 from your local Social Security or IRS office and apply for one. If
you have checked the "Awaiting TIN" box and signed the certification,
withholding will apply to payments relating to your account unless you provide a
certified TIN within 60 days.
What SSN/TIN to Give. Please refer to the following guidelines:
<TABLE>
<CAPTION>
ACCOUNT TYPE GIVE SSN OF ACCOUNT TYPE GIVE EMPLOYER ID # OF
<S> <C> <C> <C>
oIndividual Individual oTrust, Estate, or Trust, Estate, or
Pension Plan Trust Pension Plan Trust
oJoint Individual Owner who will be oCorporation, Partnership, Corporation,
paying tax or first- or other organization Partnership, or
named individual other organization
oUnif. Gift/ Minor oBroker nominee Broker nominee
Transfer to Minor
oSole Proprietor Owner of business
oLegal Guardian Ward, Minor, or
Incompetent
</TABLE>
Exempt Recipients. Please provide your TIN and check the "Exempt Recipient" box
if you are an exempt recipient. Exempt recipients include:
A corporation
A financial institution
An organization exempt from tax
under section 501(a), or an individual retirement plan
A registered dealer in securities or commodities registered in the U.S.
or a U.S. possession
A real estate investment trust
A common trust fund operated by
a bank under section 584(a)
An exempt charitable remainder trust
or a non-exempt trust described in section 4947(a)(1)
An entity registered at all times under
the Investment Company Act of 1940
IRS Penalties. If you do not supply us with your SSN/TIN, you will be subject to
an IRS $50 penalty unless your failure is due to reasonable cause and not
willful neglect. If you fail to report certain income on your federal income tax
return, you will be treated as negligent and subject to an IRS 20% penalty on
any underpayment of tax attributable to such negligence, unless there was
reasonable cause for the resulting underpayment and you acted in good faith. If
you falsify information on this form or make any other false statement resulting
in no backup withholding on an account which should be subject to backup
withholding, you may be subject to an IRS $500 penalty and certain criminal
penalties including fines and imprisonment.
20.21/150 (07/96)
Substitute W-8 Instructions Information
Exempt Foreign Person. Check the "Exempt Foreign Person" box if you qualify as a
non-resident alien or foreign entity that is not subject to certain U.S.
information return reporting or to backup withholding rules. Dividends paid to
your account may be subject to withholding of up to 30%. You are an "Exempt
Foreign Person" if you are not (1) a citizen or resident of the U.S., or (2) a
U.S. corporation, partnership, estate, or trust. In the case of an individual,
an "Exempt Foreign Person" is one who has been physically present in the U.S.
for less than 31 days during the current calendar year. An individual who is
physically present in the U.S. for at least 31 days during the current calendar
year will still be treated as an "Exempt Foreign Person," provided that the
total number of days physically present in the current calendar year and the two
preceding calendar years does not exceed 183 days (counting all of the days in
the current calendar year, only one-third of the days in the first preceding
calendar year and only one-sixth of the days in the second preceding calendar
year). In addition, lawful permanent residents or green card holders may not be
treated as "Exempt Foreign Persons." If you are an individual or an entity, you
must not now be, or at this time expect to be, engaged in a U.S. trade or
business with respect to which any gain derived from transactions effected by
the Fund/Payer during the calendar year is effectively connected to the U.S. (or
your transactions are exempt from U.S. taxes under a tax treaty).
Permanent Address. The Shareholder Application must contain your permanent
address if you are an "Exempt Foreign Person." If you are an individual, provide
your permanent address. If you are a partnership or corporation, provide the
address of your principal office. If you are an estate or trust, provide the
address of your permanent residence or the principal office of any fiduciary.
Notice of Change in Status. If you become a U.S. citizen or resident after you
have provided certification of your foreign status, or if you cease to be an
"Exempt Foreign Person," you must notify the Fund/Payer within 30 days of your
change in status. Reporting will then begin on the account(s) listed, and backup
withholding may also begin unless you certify to the Fund/Payer that (1) the tax
payer identification number you have given is correct, and (2) the Internal
Revenue Service has not notified you that you are subject to backup withholding
because you failed to report certain interest or dividend income. You may use
Form W-9, "Payer's Request for Taxpayer Identification Number and
Certification," to make these certifications. If an account is no longer active,
you do not have to notify a Fund/Payer or broker of your change in status unless
you also have another account with the same Fund/Payer that is still active. If
you receive interest from more than one Fund/Payer or have dealings with more
than one broker or barter exchange, file a certificate with each. If you have
more than one account with the same Fund/Payer, the Fund/Payer may require you
to file a separate certificate for each account.
When to File. File these certifications with the Fund before a payment is made
to you, unless you have already done this in either of the two preceding
calendar years.
How Often You Must File. This certificate generally remains in effect for three
calendar years. A Fund/Payer or broker, however, may require that a new
certificate be filed each time a payment is made. On joint accounts for which
each joint owner is a foreign person, each must provide a certification of
foreign status.
20.21/150 (07/96)
Franklin Funds
Automatic Investment Plan
777 Mariners Island Blvd., P.O. Box 7777, San Mateo, CA 94403-7777
The Franklin Automatic Investment Plan gives you the convenience of
automatically investing in a Fund on a monthly basis. Shares are purchased at
the applicable offering price, as indicated in the Prospectus, next calculated
after receipt of funds from your bank. There is no additional charge for this
service by the Fund or Franklin/Templeton Investor Services, Inc.
Your monthly investments will be made by electronic funds transfer (EFT) from
your checking account if your bank is a member of an Automated Clearing House
(ACH). Otherwise, they will be made by checks prepared by our bank. Your
signature below is the authorizing signature for each transfer or check. This
service is subject to the rules for the bank account, ACH and the Fund. Franklin
may correct any transfer error by a debit or credit to your bank account and/or
Fund account.
You may sign up for the Automatic Investment Plan at the time you open a new
account or any time after you have established an account at Franklin. If the
Automatic Investment Plan is initiated at the time you open your account, the
Fund's minimum initial investment amount is reduced and the account may be
opened with an investment of $25 or more. Existing account holders may choose
any amount, starting with the $25 minimum subsequent amount, for investment in
their Fund account from their bank account. All you need to do is complete the
application below and attach a voided, unsigned check which shows your bank
account number in magnetic coding. Please allow up to six weeks for the Plan to
begin.
Changing or Discontinuing the Plan
When Franklin/Templeton Investor Services, Inc. is advised by you to stop your
Automatic Investment Plan, no investments will be processed until written notice
is received to initiate the Plan again. Franklin will need ten days written or
verbal notice to stop an Automatic Investment Plan prior to an upcoming pay
date. Ten days written notice is required if you are changing bank information
other than the dollar amount. If a check or transfer is returned to Franklin for
any reason, including stop payment, insufficient funds or account closed, your
Automatic Investment Plan will be discontinued. Franklin may also change or
terminate the service by written notice to you.
Exchanges
If you exchange shares from one Franklin fund to another, the Automatic
Investment Plan does not transfer to the new account, but Franklin will
automatically send you a Plan application. Or, you may notify us by telephone if
the Plan is to be transferred and credited to a fund other than that listed on
the original application.
Retirement Accounts
When using the Automatic Investment Plan for Franklin Templeton Trust Company
retirement accounts, all purchases will be credited as a contribution for the
year in which they are received. Please be sure to monitor the amount of money
credited to your retirement account to avoid making an excess contribution.
20.24/101 A (07/96)
Automatic Investment Plan Application:
Name(s)
(Please print as shown on Franklin account registration.)
Address
Telephone
Bank's Name
Branch Address
Name(s) on Bank Account
Checking Account No.
Please attach a voided check.
[Franklin Use Only: ABA No. ]
Please invest my Automatic investments for $ per month in:
Franklin Fund Name
Franklin Fund Account No.
Preferred Monthly Date of Checking Account Debit:
1st bank business day on or after the: 5th or 20th
Signature(s) Date
All registered owners must sign.
If you have any questions, please call a Shareholder Services
representative, toll free, at 1-800/632-2301.
Automatic Investment Plan Revision -
Complete only if you are revising existing Automatic Investment Plan: (and
complete section above)
Bank Change Amount Change $
(Attach new voided check) (Indicate new amount)
Other
Note: Please give Franklin ten days written notice to change bank information
other than the dollar amount.
Please Return this Form to:
Franklin/Templeton Investor Services, Inc., Attn: AUTOMATIC INVESTMENT PLAN
Dept., 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, CA 94403-7777.
20.24/101 A (07/96)
Franklin Templeton Group of Funds
Literature Request ~ Call 1-800/DIAL BEN (1-800/342-5236) today for a free
descriptive brochure and prospectus on any of the funds listed below. The
prospectus contains more complete information, including fees, charges and
expenses, and should be read carefully before investing or sending money.
International Growth
Franklin Global Health Care Fund
Franklin International Equity Fund
Franklin Templeton Japan Fund
Templeton Developing Markets Trust
Templeton Foreign Fund
Templeton Global Infrastructure Fund
Templeton Global
Opportunities Trust
Templeton Global Real Estate Fund
Templeton Global Smaller
Companies Fund
Templeton Greater European Fund
Templeton Growth Fund
Templeton Latin America Fund
Templeton Pacific Growth Fund
Templeton World Fund
International Growth
and Income
Franklin Global Utilities Fund
Franklin Templeton German
Government Bond Fund
Franklin Templeton
Global Currency Fund
Templeton Global Bond Fund
Templeton Growth and Income Fund
International Income
Franklin Global Government
Income Fund
Franklin Templeton Hard
Currency Fund
Franklin Templeton High
Income Currency Fund
Templeton Americas
Government Securities Fund
Growth
Franklin Blue Chip Fund
Franklin California Growth Fund
Franklin DynaTech Fund
Franklin Equity Fund
Franklin Gold Fund
Franklin Growth Fund
Franklin MidCap Growth Fund
Franklin Small Cap Growth Fund
Growth and Income
Franklin Balance Sheet
Investment Fund
Franklin Convertible Securities Fund
Franklin Equity Income Fund
Franklin Income Fund
Franklin MicroCap Value Fund
Franklin Natural Resources Fund
Franklin Premier Return Fund
Franklin Real Estate Securities Fund
Franklin Rising Dividends Fund
Franklin Strategic Income Fund
Franklin Utilities Fund
Franklin Value Fund
Templeton American Trust, Inc.
Income
Franklin Adjustable Rate
Securities Fund
Franklin Adjustable U.S.
Government Securities Fund
Franklin AGE High Income Fund
Franklin Investment
Grade Income Fund
Franklin Short-Intermediate U.S.
Government Securities Fund
Franklin U.S. Government
Securities Fund
Franklin Money Fund
Franklin Federal Money Fund
For Non-U.S. Investors:
Franklin Tax-Advantaged
High Yield Securities Fund
Franklin Tax-Advantaged
International Bond Fund
Franklin Tax-Advantaged U.S.
Government Securities Fund
For Corporations:
Franklin Corporate Qualified
Dividend Fund
Franklin Funds Seeking
Tax-Free Income
Federal Intermediate-Term
Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund
Puerto Rico Tax-Free Income Fund
Tax-Exempt Money Fund
Franklin State-Specific Funds Seeking Tax-Free Income
Alabama
Arizona*
Arkansas**
California*
Colorado
Connecticut
Florida*
Georgia
Hawaii**
Indiana
Kentucky
Louisiana
Maryland
Massachusetts***
Michigan*
Minnesota***
Missouri
New Jersey
New York*
North Carolina
Ohio***
Oregon
Pennsylvania
Tennessee**
Texas
Virginia
Washington**
Variable Annuities
Franklin ValuemarkSM
Franklin Templeton Valuemark
Income Plus (an immediate annuity)
*Two or more fund options available: long-term portfolio, intermediate-term
portfolio, a portfolio of insured municipal securities, and/or a high yield
portfolio (CA) and a money market portfolio (CA and NY).
**The fund may invest up to 100% of its assets in bonds that pay interest
subject to the federal alternative minimum tax.
***Portfolio of insured municipal securities.
FGF 07/96
TF2 P 07/96
PROSPECTUS & APPLICATION
Franklin
Tax-Free
Trust
JULY 1, 1996
Franklin Arizona Tax-Free Income Fund - Class I & Class II
Franklin ColoradoTax-Free Income Fund - Class I & Class II
Franklin Connecticut Tax-Free IncomeFund - Class I & Class II
Franklin High Yield Tax-Free Income Fund - Class I & Class II
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 & Class II
Franklin Oregon Tax-Free Income Fund - Class I & Class II
Franklin Pennsylvania Tax-Free Income Fund - Class I & Class II
Franklin Puerto Rico Tax-Free Income Fund - Class I & Class II
INVESTMENT STRATEGY
TAX-FREE INCOME
This prospectus contains information you should know before investing in the
Fund. Please keep it for future reference.
THE HIGH YIELD FUND MAY INVEST UP TO 100% OF ITS NET ASSETS IN NON-INVESTMENT
GRADE BONDS. THESE ARE COMMONLY KNOWN AS "JUNK BONDS." THEIR DEFAULT AND OTHER
RISKS ARE GREATER THAN THOSE OF HIGHER RATED SECURITIES. YOU SHOULD CAREFULLY
CONSIDER THESE RISKS BEFORE INVESTING IN THE HIGH YIELD FUND. PLEASE SEE "WHAT
ARE THE FUND'S POTENTIAL RISKS?"
The Fund's SAI, dated July 1, 1996, as may be amended from time to time,
includes more information about the Fund's procedures and policies. It has been
filed with the SEC and is incorporated by reference into this prospectus. For a
free copy or a larger print version of this prospectus, call 1-800/DIAL BEN or
write the Fund at the address shown.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SEC OR ANY STATE SECURITIES COMMISSION NOR HAS THE SEC 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 DISTRIBUTORS.
This prospectus describes the ten series of Franklin Tax-Free Trust (the
"Trust") listed above. Eight of the series offer two classes of shares.
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 in its name.
Franklin
Tax-Free
Trust
July 1, 1996
When reading this prospectus, you will see terms that are capitalized. This
means the term is explained in our glossary section.
Table of Contents
About the Fund
Expense Summary................................... 2
Financial Highlights.............................. 4
How Does the Fund Invest Its Assets?.............. 14
What Are the Fund's Potential Risks?.............. 21
Who Manages the Fund?............................. 25
How Does the Fund Measure Performance?............ 30
How Is the Trust Organized?....................... 30
About Your Account
How Do I Buy Shares?.............................. 31
May I Exchange Shares for Shares of Another Fund?. 37
How Do I Sell Shares?............................. 39
Transaction Procedures and Special Requirements... 41
Services to Help You Manage Your Account.......... 45
What Distributions Might I Receive from the Fund?. 49
How Taxation Affects You and the Fund............. 50
Glossary
Useful Terms and Definitions...................... 52
Appendices
Description of Ratings............................ 54
State Tax Treatment............................... 56
Special Factors Affecting Each State Fund......... 62
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN
About the Fund
Expense Summary
This table is designed to help you understand the costs of investing in the
Fund. It is based on the historical expenses of each class for the fiscal year
ended February 29, 1996. The Class II expenses are annualized. Your actual
expenses may vary.
<TABLE>
<CAPTION>
Shareholder Transaction Expenses+
Connec-High New Penn- Puerto
ArizonaColorado ticut Yield Indiana Jersey Oregon sylvania Rico
Fund Fund Fund Fund Fund Fund Fund Fund Fund
Class IClass I Class I Class IClass I Class I Class I Class I Class I
Maximum Sales Charge Imposed on Purchases
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(as a percentage of offering price) 4.25% 4.25% 4.25% 4.25% 4.25% 4.25% 4.25% 4.25% 4.25%
Deferred Sales Charge+++ NONE NONE NONE NONE NONE NONE NONE NONE NONE
Annual Fund Operating Expenses-
(as a percentage of average net assets)
Management Fees 0.48% 0.56% 0.58% 0.46% 0.63% 0.50% 0.52% 0.49% 0.57%
Rule 12b-1 Fees** 0.07% 0.07% 0.08% 0.08% 0.07% 0.07% 0.07% 0.07% 0.07%
Other Expenses 0.07% 0.08% 0.07% 0.07% 0.10% 0.08% 0.07% 0.08% 0.10%
Total Fund Operating Expenses 0.62% 0.71% 0.73% 0.61% 0.80% 0.65% 0.66% 0.64% 0.74%
Shareholder Transaction Expenses+
Connec- High New Penn- Puerto
Arizona Colorado ticut Yield Jersey Oregon sylvania Rico
Fund Fund Fund Fund Fund Fund Fund Fund
Class II Class II Class II Class II Class II Class II Class II Class II
Maximum Sales Charge Imposed on Purchases
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(as a percentage of offering price)++ 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
Deferred Sales Charge+++ 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
Annual Fund Operating Expenses -
(as a percentage of average net assets)
Management Fees 0.48% 0.56% 0.58% 0.46% 0.50% 0.52% 0.49% 0.57%
Rule 12b-1 Fees** 0.65% 0.65% 0.65% 0.65% 0.65% 0.65% 0.65% 0.65%
Other Expenses 0.07% 0.08% 0.07% 0.07% 0.08% 0.07% 0.08% 0.10%
Total Fund Operating Expenses 1.20% 1.29% 1.30% 1.18% 1.23% 1.24% 1.22% 1.32%
</TABLE>
This table is designed to help you understand the costs of investing in the
Michigan Fund. It is based on the Michigan Fund's estimated expenses for the
current fiscal year. Your actual expenses may vary.
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 0.19%*
Rule 12b-1 Fees 0.15%**
Other Expenses 0.16%
Total Fund Operating Expenses 0.50%*
+Many transactions may be processed through your Securities Dealer. Your dealer
may charge a fee for this service.
++Although Class II has a lower front-end sales charge than Class I, its Rule
12b-1 fees are higher. Over time you may pay more for Class II shares. Please
see "How Do I Buy Shares? - Deciding Which Class to Buy."
+++A Contingent Deferred Sales Charge of 1% may apply to Class I purchases of $1
million or more if you sell the shares within one year and any Class II purchase
if you sell the shares within 18 months. There is no front-end sales charge if
you buy $1 million or more in Class I shares. See "How Do I Sell Shares? -
Contingent Deferred Sales Charge" for details.
*Advisers has agreed in advance to limit its management fee so the Michigan
Fund's aggregate annual operating expenses do not exceed 0.50% of the Fund's
average net assets for the current fiscal year. With this reduction, management
fees and total Fund operating expenses are expected to represent 0.63% and 0.94%
respectively, of the Fund's average net assets. After February 28, 1997,
Advisers may end this arrangement at any time.
**The Class II fees are annualized. These fees may not exceed 0.10% for Class I
of the Funds except that they may not exceed 0.15% for Class I shares of the
Michigan Fund. These fees may not exceed 0.65% for Class II shares. The
combination of front-end sales charges and Rule 12b-1 fees could cause long-term
shareholders to pay more than the economic equivalent of the maximum front-end
sales charge permitted under the NASD's rules.
Example
Assume the annual return for each class is 5% and operating expenses are as
described above. For each $1,000 investment, you would pay the following
projected expenses if you sold your shares after the number of years shown.
NAME OF FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
Arizona Fund, Class I* $49 $62 $76 $117
Arizona Fund, Class II 32 48 75 154
Colorado Fund, Class I* 49 64 80 127
Colorado Fund, Class II 33 50 80 164
Connecticut Fund, Class II 33 51 81 165
NAME OF FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
High Yield Fund, Class I* 48 61 75 115
High Yield Fund, Class II 32 47 74 152
Indiana Fund, Class I* 50 67 85 137
Michigan Fund, Class I* 47 58 - -
New Jersey Fund, Class I* 49 62 77 120
New Jersey Fund, Class II 32 49 77 157
Oregon Fund, Class I* 49 63 78 121
Oregon Fund, Class II 32 49 77 158
Pennsylvania Fund, Class I* 49 62 77 119
Pennsylvania Fund, Class II 32 48 76 156
Puerto Rico Fund, Class I* 50 65 82 130
Puerto Rico Fund, Class II 33 51 82 167
*Assumes a Contingent Deferred Sales Charge will not apply.
For the same Class II investment, you would pay the following projected expenses
if you did not sell your shares at the end of the first year. Your projected
expenses for the remaining periods would be the same as above.
NAME OF FUND 1 YEAR
Arizona Fund, Class II $22 Colorado Fund, Class II 23 Connecticut Fund, Class II
23 High Yield Fund, Class II 22 New Jersey Fund, Class II 22 Oregon Fund, Class
II 23 Pennsylvania Fund, Class II 22 Puerto Rico Fund, Class II 23
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. The
Fund pays its operating expenses. These expenses are reflected in the Net Asset
Value or dividends of each class and are not directly charged to your account.
Financial Highlights
This table summarizes the Fund's financial history (except the Michigan Fund
which was not effective until June 1, 1996). The information has been audited by
Coopers & Lybrand L.L.P., the Fund's independent auditors. Their audit report
covering each of the most recent five years appears in the financial statements
in the Trust's Annual Report to Shareholders for the fiscal year ended February
29, 1996.
<TABLE>
<CAPTION>
Franklin Arizona Tax-Free Income Fund: Class I Shares
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Period Ended February 29 1996 1995 1994 1993 1992 1991 1990 1989 19884
Per Share Operating Performance
Net asset value at beginning of period $11.11 $11.58 $11.57 $10.82 $10.57 $10.51 $10.37 $10.41 $10.00
Net investment income 0.64 0.65 0.66 0.68 0.67 0.70 0.71 0.75 0.42
Net realized & unrealized gain (loss)
on securities 0.362 (0.481) 0.020 0.733 0.308 0.128 0.198 (0.040) 0.170
Total from investment operations 1.002 0.169 0.680 1.413 0.978 0.828 0.908 0.710 0.590
Distributions from net (0.651) (0.639) (0.670) (0.663) (0.728) (0.768) (0.768) (0.748) (0.180)
investment income
Distributions from capital gains (0.121) -- -- -- -- -- -- (0.002) --
Total distribution (0.772) (0.639) (0.670) (0.663) (0.728) (0.768) (0.768) (0.750) (0.180)
Net asset value at end of period $11.34 $11.11 $11.58 $11.57 $10.82 $10.57 $10.51 $10.37 $10.41
Total return+ 9.24% 1.63% 5.76% 13.22% 9.45% 7.92% 8.70% 6.86% 9.88%*
Ratios/Supplemental Data
Net assets at end of period (in 000's) $750,797 $720,801 $796,838 $707,702 $585,986 $412,912 $214,606 $65,710 $7,885
Ratio of expenses to average
Net assets** 0.62% 0.60% 0.54% 0.55% 0.56% 0.59% 0.68% 0.51% --%
Ratio of net investment income to
average net assets 5.67% 5.86% 5.65% 6.11% 6.37% 6.58% 6.53% 6.58% 6.20%*
Portfolio turnover rate 25.12% 18.65% 14.17% 5.67% 1.56% 4.13% 20.82% 26.64% 24.07%
</TABLE>
Franklin Arizona Tax-Free Income Fund: Class II Shares
Period Ended February 29 1996++
Per Share Operating Performance
Net asset value at beginning of period $11.15
Net investment income 0.49
Net realized & unrealized gain (loss) on securities 0.344
Total from investment operations 0.834
Distributions from net investment income (0.483)
Distributions from capital gains (0.121)
Total distribution (0.604)
Net asset value at end of period $11.38
Total return+ 7.60%
Ratios/Supplemental Data
Net assets at end of period (in 000's) $1,892
Ratio of expenses to average net assets** 1.20%*
Ratio of net investment income to average net assets 5.05%*
Portfolio turnover rate 25.12%
<TABLE>
<CAPTION>
Franklin Colorado Tax-Free Income Fund: Class I Shares
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Period Ended February 29 1996 1995 1994 1993 1992 1991 1990 1989 19884
Per Share Operating Performance
Net asset value at beginning of period $11.38 $11.94 $11.85 $11.00 $10.70 $10.70 $10.53 $10.40 $10.00
Net investment income 0.67 0.67 0.68 0.70 0.68 0.70 0.73 0.79 0.46
Net realized & unrealized gain (loss)
on securities 0.453 (0.568) 0.100 0.845 0.361 0.056 0.196 0.076 0.117
Total from investment operations 1.123 0.102 0.780 1.545 1.041 0.756 0.926 0.866 0.577
Distributions from net (0.663) (0.662) (0.690) (0.695) (0.741) (0.756) (0.756) (0.736) (0.177)
investment income
Distributions from capital gains -- -- -- -- -- -- -- -- --
Total distribution (0.663) (0.662) (0.690) (0.695) (0.741) (0.756) (0.756) (0.736) (0.177)
Net asset value at end of period $11.84 $11.38 $11.94 $11.85 $11.00 $10.70 $10.70 $10.53 $10.40
Total return+ 10.12% 1.05% 6.49% 14.26% 9.93% 7.07% 8.76% 8.41% 9.00%*
Ratios/Supplemental Data
Net assets at end of period (in 000's) $215,609 $194,564 $202,158 $159,280 $110,085 $69,715 $38,315 $11,026 $1,969
Ratio of expenses to average
Net assets** 0.71% 0.70% 0.64% 0.67% 0.70% 0.74% 0.56% -% -%
Ratio of net investment income to
average net assets 5.73% 5.94% 5.69% 6.20% 6.44% 6.54 6.63% 7.25% 6.91%*
Portfolio turnover rate 17.58% 28.83% 10.85% 5.66% 21.46% 17.72% 0.82% 7.83% 22.46%
</TABLE>
Franklin Colorado Tax-Free Income Fund: Class II Shares
Period Ended February 29 1996++
Per Share Operating Performance
Net asset value at beginning of period $11.40
Net investment income 0.50
Net realized & unrealized gain (loss) on securities 0.461
Total from investment operations 0.961
Distributions from net investment income (0.491)
Distributions from capital gains --
Total distribution (0.491)
Net asset value at end of period $11.87
Total return+ 8.57%
Ratios/Supplemental Data
Net assets at end of period (in 000's) $1,656
Ratio of expenses to average net assets** 1.29%*
Ratio of net investment income to average net assets 5.12%*
Portfolio turnover rate 17.58%
<TABLE>
<CAPTION>
Franklin Connecticut Tax-Free Income Fund: Class I Shares
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Period Ended February 29 1996 1995 1994 1993 1992 1991 1990 19891
Per Share Operating Performance
Net asset value at beginning of period $10.64 $11.23 $11.16 $10.49 $10.34 $10.36 $10.16 $10.00
Net investment income 0.62 0.62 0.62 0.64 0.62 0.64 0.70 0.20
Net realized & unrealized gain (loss) 0.319 (0.597) 0.080 0.664 0.211 0.024 0.184 0.017
on securities
Total from investment operations 0.939 0.023 0.700 1.304 0.831 0.664 0.884 0.217
Distributions from net investment income (0.619) (0.613) (0.630) (0.634) (0.681) (0.684) (0.684)(0.057)
Distributions from capital gains -- -- -- -- -- -- -- --
Total distribution (0.619) (0.613) (0.630) (0.634) (0.681) (0.684) (0.684)(0.057)
Net asset value at end of period $10.96 $10.64 $11.23 $11.16 $10.49 $10.34 $10.36 $10.16
Total return+ 9.04% 0.37% 6.16% 12.60% 8.16% 6.39% 8.65% 5.16%*
Ratios/Supplemental Data
Net assets at end of period (in 000's) $167,045 $155,623 $163,050 $126,816 $88,184 $48,035 $22,793$5,637
Ratio of expenses to average net assets** 0.73% 0.71% 0.65% 0.69% 0.71% 0.71% 0.36% -%
Ratio of net investment income to 5.70% 5.83% 5.54% 5.97% 6.11% 6.10% 6.37% 4.68%*
average net assets
Portfolio turnover rate 3.88% 75.72% 5.54% 28.52% 28.28% 8.65% 3.69% 5.21%
</TABLE>
Franklin Connecticut Tax-Free Income Fund: Class II Shares
Period Ended February 29 1996++
Per Share Operating Performance
Net asset value at beginning of period $10.65
Net investment income 0.47
Net realized & unrealized gain (loss) on securities 0.312
Total from investment operations 0.782
Distributions from net investment income (0.462)
Distributions from capital gains --
Total distribution (0.462)
Net asset value at end of period $10.97
Total return+ 7.45%
Ratios/Supplemental Data
Net assets at end of period (in 000's) $1,656
Ratio of expenses to average net assets** 1.30%*
Ratio of net investment income to average net assets 5.12%*
Portfolio turnover rate 3.88%
<TABLE>
<CAPTION>
Franklin Indiana Tax-Free Income Fund: Class I Shares
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Period Ended February 29 1996 1995 1994 1993 1992 1991 1990 1989 19884
Per Share Operating Performance
Net asset value at beginning of period $11.40 $12.01 $11.90 $11.07 $10.83 $10.77 $10.49 $10.47 $10.00
Net investment income 0.67 0.66 0.68 0.71 0.69 0.74 0.80 0.79 0.45
Net realized & unrealized gain (loss)
on securities 0.350 (0.608) 0.108 0.828 0.325 0.096 0.236 (0.014) (0.209)
Total from investment operations 1.020 0.052 0.788 1.538 1.015 0.836 1.036 0.776 0.659
Distributions from net (0.660) (0.662) (0.678) (0.708) (0.775) (0.776) (0.756) (0.756) (0.189)
investment income
Distributions from capital gains -- -- -- -- -- -- -- -- --
Total distribution (0.660) (0.662) (0.678) (0.708) (0.775) (0.776) (0.756) (0.756) (0.189)
Net asset value at end of period $11.76 $11.40 $12.01 $11.90 $11.07 $10.83 $10.77 $10.49 $10.47
Total return+ 9.20% 0.58% 6.53% 14.10% 9.53% 7.78% 9.86% 7.47% 11.28%*
Ratios/Supplemental Data
Net assets at end of period (in 000's) $48,949 $46,583 $47,870 $37,367 $23,914 $14,946 $11,310 $5,875 $1,693
Ratio of expenses to average
net assets** 0.80% 0.81% 0.71% 0.59% 0.50% 0.51% 0.06% -% -%
Ratio of net investment income to
average net assets 5.80% 5.84% 5.62% 6.16% 6.60% 6.91% 7.34% 7.41% 6.70%*
Portfolio turnover rate 10.56% 26.49% 16.12% 7.98% 0.03% 24.60% 0.06% 10.67% -%
</TABLE>
<TABLE>
<CAPTION>
Franklin New Jersey Tax-Free Income Fund: Class I Shares
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Period Ended February 29 1996 1995 1994 1993 1992 1991 1990 19895
Per Share Operating Performance
Net asset value at beginning of period $11.28 $11.82 $11.85 $11.16 $10.84 $10.68 $10.52 $10.00
Net investment income 0.65 0.66 0.67 0.69 0.68 0.69 0.71 0.58
Net realized & unrealized gain (loss) 0.389 (.550) (0.016) 0.694 0.348 0.238 0.230 0.317
on securities
Total from investment operations 1.039 0.110 0.654 1.384 1.028 0.928 0.940 0.897
Distributions from net investment income (0.639) (.650) (0.684) (0.688) (0.708) (0.768) (0.780) (0.375)
Distributions from capital gains -- -- -- (0.006) -- -- -- (0.002)
Total distribution (0.639) (0.650) (0.684) (0.694) (0.708) (0.768) (0.780) (0.377)
Net asset value at end of period $11.68 $11.28 $11.82 $11.85 $11.16 $10.84 $10.68 $10.52
Total return+ 9.43% 1.12% 5.39% 12.55% 9.65% 8.79% 8.87% 11.20%*
Ratios/Supplemental Data
Net assets at end of period (in 000's) $564,864 $533,937 $561,130 $433,702 $332,536 $258,514 $99,299 $19,973
Ratio of expenses to average net assets** 0.65% 0.63% 0.57% 0.59% 0.60% 0.65% 0.73% 0.25%
Ratio of net investment income to 5.65% 5.86% 5.60% 6.06% 6.30% 6.40% 6.41% 6.09%*
average net assets
Portfolio turnover rate 12.04% 31.05% 4.16% 14.12% 3.66% 1.84% 10.86% 7.44%
</TABLE>
Franklin New Jersey Tax-Free Income Fund: Class II Shares
Period Ended February 29 1996++
Per Share Operating Performance
Net asset value at beginning of period $11.30
Net investment income 0.49
Net realized & unrealized gain (loss) on securities 0.403
Total from investment operations 0.893
Distributions from net investment income (0.473)
Distributions from capital gains --
Total distribution (0.473)
Net asset value at end of period $11.72
Total return+ 8.02%
Ratios/Supplemental Data
Net assets at end of period (in 000's) $4,542
Ratio of expenses to average net assets** 1.23%*
Ratio of net investment income to average net assets 5.15%*
Portfolio turnover rate 12.04%
<TABLE>
<CAPTION>
Franklin Oregon Tax-Free Income Fund: Class I Shares
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Period Ended February 29 1996 1995 1994 1993 1992 1991 1990 1989 19884
Per Share Operating Performance
Net asset value at beginning of period $11.22 $11.70 $11.73 $11.02 $10.71 $10.59 $10.44 $10.37 $10.00
Net investment income 0.63 0.63 0.64 0.66 0.63 0.68 0.69 0.72 0.44
Net realized & unrealized gain (loss)
on securities 0.377 (0.493) (0.021) 0.702 0.384 0.148 0.165 0.046 0.046
Total from investment operations 1.007 0.137 0.619 1.362 1.014 0.828 0.855 0.766 0.486
Distributions from net (0.627) (0.617) (0.649) (0.652) (0.704) (0.708) (0.705) (0.696) (0.116)
investment income
Distributions from capital gains -- -- -- -- -- -- -- -- --
Total distribution (0.627) (0.617) (0.649) (0.652) (0.704) (0.708) (0.705) (0.696) (0.116)
Net asset value at end of period $11.60 $11.22 $11.70 $11.73 $11.02 $10.71 $10.59 $10.44 $10.37
Total return+ 9.19% 1.36% 5.15% 12.52% 9.61% 7.87% 8.11% 7.44% 6.56%*
Ratios/Supplemental Data
Net assets at end of period (in 000's) $375,415 $349,458 $375,684 $303,719 $208,972 $123,486 $73,798 $24,453 $5,436
Ratio of expenses to average
net assets** 0.66% 0.65% 0.58% 0.62% 0.65% 0.70% 0.70% 0.45% -%
Ratio of net investment income to
average net assets 5.51% 5.71% 5.47% 5.87% 6.09% 6.40% 6.28% 6.72% 6.16%*
Portfolio turnover rate 6.52% 26.44% 9.42% 7.78% 4.65% 10.74% 12.58% 15.08% 14.49%
</TABLE>
Franklin Oregon Tax-Free Income Fund: Class II Shares
Period Ended February 29 1996++
Per Share Operating Performance
Net asset value at beginning of period $11.23
Net investment income 0.47
Net realized & unrealized gain (loss) on securities 0.414
Total from investment operations 0.884
Distributions from net investment income (0.464)
Distributions from capital gains --
Total distribution (0.464)
Net asset value at end of period $11.65
Total return+ 7.99%
Ratios/Supplemental Data
Net assets at end of period (in 000's) $2,044
Ratio of expenses to average net assets** 1.24%*
Ratio of net investment income to average net assets 4.87%*
Portfolio turnover rate 6.52%
<TABLE>
<CAPTION>
Franklin Pennsylvania Tax-Free Income Fund: Class I Shares
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Period Ended February 29 1996 1995 1994 1993 1992 1991 1990 1989 1988 19873
Per Share Operating Performance
Net asset value at
beginning of period $10.16 $10.56 $10.55 $9.84 $9.49 $9.65 $9.52 $9.49 $10.23 $10.00
Net investment income 0.62 0.62 0.63 0.64 0.64 0.65 0.66 0.69 0.72 0.17
Net realized & unrealized
gain (loss) on securities 0.287 (0.406) 0.014 0.703 0.380 (0.090) 0.190 0.060 (0.799) 0.060
Total from investment operations 0.907 0.214 0.644 1.343 1.020 0.560 0.850 0.750 (0.079) 0.230
Distributions from net
investment income (0.627) (0.614) (0.634) (0.633) (0.670) (0.720) (0.720) (0.720) (0.660) --
Distributions from capital gains -- -- -- -- -- -- -- -- (0.001) --
Total distribution (0.627) (0.614) (0.634) (0.633) (0.670) (0.720) (0.720) (0.720) (0.661) --
Net asset value at end of period $10.44 $10.16 $10.56 $10.55 $9.84 $9.49 $9.65 $9.52 $9.49 $10.23
Total return+ 9.15% 2.22% 5.99% 13.84% 10.99% 5.76% 8.86% 7.97% (0.53)% 9.20%
Ratios/Supplemental Data
Net assets at end
of period (in 000's) $639,847 $587,366 $615,546 $505,845 $391,301 $305,592 $180,720 $73,851 $20,663 $1,706
Ratio of expenses to
average net assets** 0.64% 0.63% 0.56% 0.58% 0.59% 0.62% 0.73% 0.59% 0.24% -%
Ratio of net investment
income to average net assets 5.96% 6.15% 5.90% 6.34% 6.71% 6.82% 6.66% 6.97% 7.21% 3.95%*
Portfolio turnover rate 9.71% 12.91% 4.73% 5.87% 4.44% 5.23% 6.31% 1.56% 18.69% 3.80%
</TABLE>
Franklin Pennsylvania Tax-Free Income Fund: Class II Shares
Period Ended February 29 1996++
Per Share Operating Performance
Net asset value at beginning of period $10.17
Net investment income 0.47
Net realized & unrealized gain (loss) on securities 0.302
Total from investment operations 0.772
Distributions from net investment income (0.472)
Distributions from capital gains --
Total distribution (0.472)
Net asset value at end of period $10.47
Total return+ 7.71%
Ratios/Supplemental Data
Net assets at end of period (in 000's) $3,110
Ratio of expenses to average net assets** 1.22%*
Ratio of net investment income to average net assets 5.36%*
Portfolio turnover rate 9.71%
<TABLE>
<CAPTION>
Franklin Puerto Rico Tax-Free Income Fund: Class I Shares
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Period Ended February 29 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
Per Share Operating Performance
Net asset value at
beginning of period $11.31 $11.83 $11.81 $11.12 $10.84 $10.76 $10.54 $10.57 $11.29 $11.19
Net investment income 0.66 0.67 0.68 0.70 0.69 0.76 0.71 0.70 0.72 0.85
Net realized & unrealized
gain (loss) on securities 0.299 (0.504) 0.034 0.673 0.301 0.040 0.235 0.042 (0.588) 0.139
Total from
investment operations 0.959 0.166 0.714 1.373 0.991 0.800 0.945 0.742 0.132 0.989
Distributions from net
investment income (0.669)+++ (0.686) (0.694) (0.683) (0.711) (0.720) (0.725) (0.772) (0.852) (0.872)
Distributions from
capital gains (0.010) -- -- -- -- -- -- -- -- (0.017)
Total distribution (0.679) (0.686) (0.694) (0.683) (0.711) (0.720) (0.725) (0.772) (0.852) (0.889)
Net asset value
at end of period $11.59 $11.31 $11.83 $11.81 $11.12 $10.84 $10.76 $10.54 $10.57 $11.29
Total return+ 8.68 1.60 5.95 12.48 9.31 7.45 8.91 7.06 1.29 8.92
Ratios/Supplemental Data
Net assets at end
of period (in 000's) $190,577 $176,888 $175,036 $144,806 $112,714 $91,601 $82,819 $80,431 $66,598 $22,913
Ratio of expenses to
average net assets** 0.74% 0.73% 0.66% 0.69% 0.70% 0.70% 0.70% 0.72% 0.75% 0.28%
Ratio of net investment
income to average net assets 5.71% 5.95% 5.77% 6.18% 6.45% 7.08% 6.65% 6.76% 6.67% 5.83%
Portfolio turnover rate 27.99% 18.30% 5.10% 10.37% 15.01% 6.09% 14.12% 50.57% 41.98% 1.68%
</TABLE>
Franklin Puerto Rico Tax-Free Income Fund: Class II Shares
Period Ended February 29 1996++
Per Share Operating Performance
Net asset value at beginning of period $11.32
Net investment income 0.50
Net realized & unrealized gain (loss)
on securities 0.304
Total from investment operations 0.804
Distributions from net investment income (0.494)
Distributions from capital gains (0.010)
Total distribution (0.504)
Net asset value at end of period $11.62
Total return+ 7.21%
Ratios/Supplemental Data
Net assets at end of period (in 000's) $533
Ratio of expenses to average net assets** 1.32%*
Ratio of net investment income to average net assets 5.16%*
Portfolio turnover rate 27.99%
<TABLE>
<CAPTION>
Franklin High Yield Tax-Free Income Fund: Class I Shares
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Period Ended February 29 1996 1995 1994 1993 1992 1991 1990 1989 1988 19872
Per Share Operating Performance
Net asset value at
beginning of period $10.74 $11.25 $11.10 $10.48 $10.31 $10.54 $10.50 $10.34 $10.70 $10.00
Net investment income 0.74 0.74 0.76 0.79 0.78 0.82 0.81 0.79 1.00 0.62
Net realized & unrealized
gain (loss) on securities 0.446 (0.509) 0.169 0.624 0.230 (0.210) 0.120 0.240 (0.409) 0.222
Total from investment
Operations 1.186 0.231 0.929 1.414 1.010 0.610 0.930 1.030 0.591 0.842
Distributions from net
investment income (0.736) (0.741) (0.779) (0.784) (0.840) (0.840) (0.890) (0.870) (0.951) (0.142)
Distributions from
capital gains -- -- -- (0.010) -- -- -- -- -- --
Total distribution (0.736) (0.741) (0.779) (0.794) (0.840) (0.840) (0.890) (0.870) (0.951) (0.142)
Net asset value
at end of period $11.19 $10.74 $11.25 $11.10 $10.48 $10.31 $10.54 $10.50 $10.34 $10.70
Total return+ 11.35% 2.28% 8.33% 13.72% 9.97% 5.71% 8.80% 10.87% 5.70% 8.73%*
Ratios/Supplemental Data
Net assets at end
of period (in 000's) $3,787,147 $3,287,270$3,372,533$2,742,765$2,110,055 $1,718,082$1,575,016$746,018 $103,807 $2,604
Ratio of expenses to
average net assets** 0.61% 0.60% 0.53% 0.54% 0.53% 0.52% 0.54% 0.61% 0.65% -%
Ratio of net investment
income to average net assets 6.68% 6.92% 6.79% 7.45% 7.73% 7.90% 7.52% 7.68% 7.79% 7.10%*
Portfolio turnover rate 9.23% 15.89% 16.09% 33.46% 102.57% 70.60% 23.41% 2.02% 26.65% 118.29%
</TABLE>
Franklin High Yield Tax-Free Income Fund: Class II Shares
Period Ended February 29 1996++
Per Share Operating Performance
Net asset value at beginning of period $10.81
Net investment income 0.56
Net realized & unrealized gain (loss) on securities 0.423
Total from investment operations 0.983
Distributions from net investment income (0.553)
Distributions from capital gains --
Total distribution (0.553)
Net asset value at end of period $11.24
Total return+ 9.27%
Ratios/Supplemental Data
Net assets at end of period (in 000's) $48,163
Ratio of expenses to average net assets** 1.18%*
Ratio of net investment income to average net assets6.07%*
Portfolio turnover rate 9.23%
1For the period October 3, 1988 (effective date of registration) to February 28,
1989.
2For the period March 1, 1986 (effective date of registration) to February 28,
1987.
3For the period December 1, 1986 (effective date of registration) to February
28, 1987.
4For the period September 1, 1987 (effective date of registration) to February
29, 1988.
5For the period April 23, 1988 (effective date of registration) to February 28,
1989.
+Total return measures the change in value of an investment over the periods
indicated. It is not annualized except as indicated. It does not include the
maximum front-end sales charge or the Contingent Deferred Sales Charge and
assumes reinvestment of dividends and capital gains, if any, at Net Asset Value.
Effective May 1, 1994, with the implementation of the Rule 12b-1 distribution
plan, as discussed in this prospectus, the sales charge on reinvested dividends
was eliminated.
++For the period May 1, 1995 to February 29, 1996
+++Includes distributions in excess of net investment income in the amount $.001
*Annualized
**For the periods indicated below, Advisers agreed in advance to limit
management fees and to make payments of certain operating expenses of the Fund.
Had such action not been taken, the ratio of operating expenses to average net
assets would have been as follows:
Ratio of expenses
to average net assets
Franklin Arizona
Tax-Free Income Fund:
1989 0.73%
Franklin Colorado
Tax-Free Income Fund:
1989 0.74
1990 0.72
Franklin Connecticut
Tax-Free Income Fund
19891 0.65*
1990 0.72
1991 0.72
Ratio of expenses
to average net assets
Franklin Indiana
Tax-Free Income Fund:
1989 0.77%
1990 0.70
1991 0.74
1992 0.74
1993 0.73
Franklin New Jersey
Tax-Free Income Fund:
19895 0.66*
Franklin Oregon
Tax-Free Income Fund:
1989 0.73
Franklin Pennsylvania
Tax-Free Income Fund:
1989 0.75
How Does the Fund Invest Its Assets?
THE FUND'S INVESTMENT OBJECTIVE
Each State Fund seeks to provide investors with as high a level of income exempt
from federal income taxes and from the personal income taxes, if any, for
resident shareholders of the named state as is consistent with prudent investing
while seeking preservation of shareholders' capital. Each Fund's investment
objective is a fundamental policy and may not be changed without shareholder
approval. Of course, there is no assurance that the Fund's objective will be
achieved.
The Puerto Rico Fund seeks to provide a maximum level of income that is exempt
from the personal income taxes of the majority of states. If you are a resident
of Puerto Rico, you should consult your tax advisor prior to investing in any of
the Funds.
Each State Fund will invest primarily in municipal securities issued by its
respective state and that state's municipalities, political subdivisions and
public authorities, the interest on which is exempt from regular federal income
taxes and the personal income taxes, if any, of its respective state.
Each State Fund will attempt to invest 100% and, as a matter of fundamental
policy, will invest at least 80% of its net assets in securities that pay
interest exempt from federal income taxes, including the alternative minimum
tax, and from the personal income taxes, if any, of its respective state or
territory. It is possible, although not anticipated, that up to 20% of a State
Fund's net assets could be in taxable obligations.
At least 65% of each State Fund's total assets will be invested in municipal
securities and obligations issued by or on behalf of its respective state, its
local governments, municipalities, authorities, agencies and political
subdivisions. It is possible, although not anticipated, that up to 35% of a
State Fund's total assets may be in qualifying municipal securities and
obligations of a state or territory other than its respective state.
If a state requires the Fund to consist of a specified amount of obligations of
that state or the U.S. government, its agencies, instrumentalities, commissions,
possessions or territories that are exempt from taxation under the laws of that
state in order for any portion of the distributions from that Fund to be exempt
from income taxation, the Fund will attempt to invest at least the minimum
amount required by the state in those securities. See "How Taxation Affects You
and the Fund" for additional information.
As a fundamental policy, the Pennsylvania Fund will invest in securities for
income earnings rather than trading for profit. This Fund will not vary its
investments, except to 1) eliminate unsafe investments and investments not
consistent with the preservation of capital or the tax status of the Fund; 2)
honor redemption orders, meet anticipated redemption requirements and negate
gains from discount purchases; 3) reinvest the earnings from securities in like
securities; or 4) defray normal administrative expenses.
Each Fund may invest, without percentage limitations, in securities having, at
the time of purchase, one of the four highest ratings of Moody's Investor
Services ("Moody's") (Aaa, Aa, A, Baa), Standard & Poor's Corporation ("S&P")
(AAA, AA, A, BBB), or Fitch Investor Services ("Fitch") (AAA, AA, A, BBB), or in
securities that are unrated if, in the opinion of Advisers, such securities are
comparable in quality to those within the four highest ratings. These are
considered to be "investment grade" securities. Bonds rated in the fourth
highest ratings level are regarded as having an adequate capacity to pay
principal and interest but with greater vulnerability to adverse economic
conditions and some speculative characteristics. In the event the rating of an
issue held in the Fund's portfolio is lowered by the rating services, such
change will be considered by the Fund in its evaluation of the overall
investment merits of that security, but such change will not necessarily result
in an automatic sale of the security. A description of the ratings is contained
in the Appendices in this prospectus and in the SAI.
Advisers considers the terms of an offering and various other factors when
determining whether securities are consistent with the Fund's investment
objective and policies and thereafter when determining the issuer's comparative
credit rating. When making these determinations, Advisers may (i) interview
representatives of the issuer at its offices, (ii) tour and inspect the physical
facilities of the issuer to evaluate the issuer and its operations, (iii)
perform analysis of the issuer's financial and credit position, including
comparisons of all appropriate ratios, and (iv) compare other similar securities
offerings to the issuer's proposed offering.
Under normal market conditions, each Fund will invest its assets as described
above. For temporary defensive purposes, however, each Fund may invest up to
100% of its net assets in obligations that pay interest that may be subject to
federal income tax, including the alternative minimum tax. Also for temporary
defensive purposes, each Fund may invest up to 100% of its net assets in (i)
municipal securities and obligations of state and local governments other than
its respective state (for State Funds), (ii) commercial paper rated at least A-1
by S&P, P-1 by Moody's or F-1 by Fitch, or (iii) obligations issued or
guaranteed by the full faith and credit of the U.S. government.
The High Yield Fund seeks to provide investors with a high current yield exempt
from federal income taxes by investing primarily in non-investment grade rated
or unrated municipal securities of comparable quality. As a secondary objective,
the Fund will seek capital appreciation to the extent this is possible and
consistent with its principal investment objective. At least 65% of the High
Yield Fund will be invested in high yielding securities.
The High Yield Fund may invest in municipal securities regardless of their
rating, including, from time to time, defaulted debt securities if, in the
opinion of Advisers, the issuer may resume interest payments or other
advantageous developments appear likely in the near term. The Fund may also
invest in municipal securities that are unrated but that are deemed to be of
comparable credit quality by Advisers. Higher yields are ordinarily available
from municipal securities in the lower-rated categories (BBB or lower by S&P or
Fitch or Baa or lower by Moody's) or from unrated securities of comparable
quality. Securities in the categories that are rated below investment grade 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
obligation. The Fund does not intend to invest more than 10% of its total
assets, at the time of purchase, in defaulted debt securities. If the rating on
an issue held in any Fund's portfolio is changed, this event will be considered
by the Fund in its evaluation of the overall investment merits of that security.
While it is expected that the High Yield Fund's portfolio will normally consist
of lower-rated, higher yielding bonds, there may be times when the portfolio
will contain medium grade (BBB or Baa rated), lower yielding bonds because
adequate quantities of lower-rated bonds are not available at that time. In
addition, there may be times when, due to unusual market conditions, or when the
difference in yields on higher and lower-rated bonds is narrowed so that the
higher risk is not justified by higher return, the High Yield Fund may acquire
higher-rated bonds for its portfolio. It is expected that the portfolio of the
High Yield Fund will generally consist of longer-term municipal securities, as
these normally return higher yields than short-term obligations.
When seeking to achieve its objectives, the High Yield Fund may invest primarily
in securities of states, territories, and possessions of the U.S. and the
District of Columbia and their political subdivisions, agencies, and
instrumentalities, the interest on which is exempt from federal income taxes.
Under normal market conditions, the High Yield Fund will attempt to invest 100%
and, as a matter of fundamental policy, will invest at least 80% of its net
assets in securities that pay interest exempt from federal income taxes,
including the alternative minimum tax.
TYPES OF SECURITIES THE FUND MAY INVEST IN
The term "municipal securities," as used in this prospectus, means obligations
issued by or on behalf of any state, territory or possession 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 is generally
rendered to the issuer by the issuer's bond counsel at the time of issuance of
the security.
Municipal securities are used to raise money for various public purposes, such
as constructing public facilities and making loans to public institutions.
Certain types of municipal securities are issued to provide funding for
privately operated facilities.
The Funds have no restrictions on the maturities of municipal securities in
which they may invest. Each Fund will seek to invest in municipal securities
with maturities that, in Advisers' judgment, will provide a high level of
current income consistent with prudent investing. Advisers will also consider
current market conditions.
It is possible that any Fund from time to time will invest more than 25% of its
assets in a particular segment of the municipal securities market, including,
but not limited to, hospital revenue bonds, housing agency bonds, tax-exempt
industrial development revenue bonds, transportation bonds, or pollution control
revenue bonds. In these 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 and municipal securities markets, the
size of a particular offering, the maturity of the obligation, and the credit
rating of the issuer. Generally, municipal securities with longer maturities
produce higher current yields than municipal securities with shorter maturities.
Prices of longer term securities, however, typically fluctuate more than those
of short-term securities due to changes in interest rates, tax laws and other
general market conditions. 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 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 may subject you
to, or increase your liability under, the federal and state alternative minimum
tax. In addition, all distributions derived from interest exempt from regular
federal income tax may subject corporate shareholders to, or increase their
liability under, the federal alternative minimum tax, because these
distributions are included in the corporation's adjusted current earnings. In
states with a corporate franchise tax, distributions of a Fund may also be fully
taxable to corporate shareholders under their state franchise tax systems.
Consistent with each Fund's investment objective, each Fund may acquire private
activity bonds if, in Advisers' opinion, these bonds represent the most
attractive investment opportunity then available to a Fund. For the fiscal year
ended February 29, 1996, the Funds' portfolios derived the following percentages
of their income from bonds, the interest on which constitutes a preference item
subject to the federal alternative minimum tax for certain investors:
FUND PERCENTAGE
Arizona Fund 13.75%
Colorado Fund 9.73%
Connecticut Fund 7.53%
High Yield Fund 14.37%
Indiana Fund 0.87%
New Jersey Fund 8.08%
Oregon Fund 12.15%
Pennsylvania Fund 9.61%
Puerto Rico Fund 13.22%
Floating and Variable Rate Obligations. Each Fund may buy floating rate and
variable rate obligations. These obligations bear interest at rates that are not
fixed, but that vary with changes in prevailing market rates on predesignated
dates. The Fund may also invest in variable or floating rate demand notes
("VRDNs"), which carry a demand feature that permits the Fund to tender the
obligation back to the issuer or a third party at par value plus accrued
interest prior to maturity, according to the terms of the obligation.
Frequently, VRDNs are secured by letters of credit or other credit support
arrangements. Although it is not a put option in the usual sense, such a demand
feature is sometimes known as a "put." Except for the Maryland Fund, with
respect to 75% of the total value of each Fund's assets, no more than 5% of such
value may be in securities underlying "puts" from the same institution, except
that each Fund may invest up to 10% of its asset value in unconditional "puts"
(exercisable even in the event of a default in the payment of principal or
interest on the underlying security) and other securities issued by the same
institution. Each Fund will limit its purchase of municipal securities that are
floating rate and variable rate obligations to those meeting the quality
standards set forth in this prospectus.
When-Issued and Delayed Delivery Transactions. Each Fund may buy and sell
municipal securities on a "when-issued" and "delayed delivery" basis. The price
is subject to market fluctuation, and the value at delivery may be more or less
than the purchase price. Although a Fund will generally buy municipal securities
on a when-issued basis with the intention of acquiring the securities, it may
sell the securities before the settlement date if it is deemed advisable. When a
Fund is the buyer in such a transaction, it will maintain, in a segregated
account with its custodian bank, cash or high-grade marketable securities having
an aggregate value equal to the amount of its purchase commitments until payment
is made. To the extent a Fund engages in when-issued and delayed delivery
transactions, it will do so for the purpose of acquiring securities for the
Fund's portfolio consistent with its investment objective and policies and not
for the purpose of investment leverage.
Callable Bonds. Each Fund may buy and hold callable municipal bonds that contain
a provision in the indenture permitting the issuer to redeem the bonds prior to
their maturity dates at a specified price. This price typically reflects a
premium over the bonds' original issue price. These bonds generally have call
protection (that is, a period of time when the bonds may not be called) that
usually lasts for 5 to 10 years, after which time these 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 the
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 the bonds were redeemed.
Certificates of Participation. Each 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 buy the
property. Once these lease payments are completed, the municipality gains
ownership of the property for a nominal sum. This lease format is generally not
subject to constitutional limitations on the issuance of state debt, and COPs
may enable a governmental issuer to increase government liabilities beyond
constitutional debt limits.
A feature that 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 Fund
believes that this risk is mitigated by its policy of investing only in COPs
rated within the four highest rating categories of Moody's, S&P, or Fitch
(except for the High Yield Fund which may invest in securities rated in any
category), or in unrated COPs believed by Advisers to be of comparable quality.
Criteria considered by the rating agencies and Advisers in assessing this risk
include the issuing municipality's credit rating, how essential the leased
property is to the municipality, and the term of the lease compared to the
useful life of the leased property. The Board reviews the COPs held in each
Fund's portfolio to assure that they constitute liquid investments based on
various factors reviewed by Advisers and monitored by the Board. These factors
include (a) the credit quality of the securities and the extent to which they
are rated or, if unrated, comply with existing criteria and procedures followed
to ensure that they are of comparable quality to the ratings required for each
Fund's investment, including an assessment of the likelihood that the leases
will not be canceled; (b) the size of the municipal securities market, both in
general and with respect to COPs; and (c) the extent to which the type of COPs
held by each Fund trade on the same basis and with the same degree of dealer
participation as other municipal bonds of comparable credit rating or quality.
While there is no limit as to the amount of assets which each Fund may invest in
COPs, as of February 29, 1996, the following Funds held more than five percent
of the total face amount of the securities in their portfolios in COPs and other
municipal leases: New Jersey Fund, 5.74%, Colorado Fund, 5.36%, and Indiana
Fund, 7.60%.
OTHER INVESTMENT POLICIES OF THE FUND
Borrowing. Each Fund may borrow from banks and pledge up to 5% of its total
assets for temporary or emergency purposes. Although the Funds do not currently
intend to do so, consistent with procedures approved by the Board, each Fund may
lend its portfolio securities to qualified securities dealers or other
institutional investors, if the loans do not exceed 10% of the value of the
Fund's total assets at the time of the most recent loan.
Illiquid Investments. Each Fund may not invest more than 10% of its net assets,
at the time of purchase, in illiquid securities. Illiquid securities are
generally securities that cannot be sold within seven days in the normal course
of business at approximately the amount at which the Fund has valued them.
Portfolio Turnover. The Michigan Fund anticipates its annual portfolio turnover
rate generally will not exceed 100%, but you should not consider this rate a
limiting factor in the operation of the Fund's portfolio.
Other Policies and Restrictions. The Fund has a number of additional investment
restrictions that limit its activities to some extent. Some of these
restrictions may only be changed with shareholder approval. For a list of these
restrictions and more information about the Fund's investment policies, please
see "How Does the Fund Invest Its Assets?" and "Investment Restrictions" in the
SAI.
What Are the Fund's Potential Risks?
The value of your shares will increase as the value of the securities owned by
the Fund increases and will decrease as the value of the Fund's investments
decrease. In this way, you participate in any change in the value of the
securities owned by the Fund. In addition to the factors that affect the value
of any particular security that the Fund owns, the value of Fund shares may also
change with movements in the bond market as a whole.
High Yielding Municipal Securities. Because of the High Yield Fund's ability to
invest in municipal securities rated below investment grade and unrated
securities of comparable quality, an investment in the Fund is subject to a
higher degree of risk than is present with an investment in higher rated
securities. Accordingly, an investment in the Fund should not be considered a
complete investment program and should be carefully evaluated for its
appropriateness in light of your overall investment needs and goals. You should
also consider the increased risk of loss to principal that is present with an
investment in higher risk securities such as those in which the Fund invests.
The market value of lower rated municipal securities and unrated securities of
comparable quality, commonly known as junk bonds, tends to reflect individual
developments affecting the issuer to a greater extent than the market value of
higher rated securities, which react primarily to fluctuations in the general
level of interest rates. Lower rated securities also tend to be more sensitive
to economic conditions than higher rated securities. These lower rated municipal
securities are considered by the rating agencies, on balance, to be
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation and will
generally involve more credit risk than securities in the higher rating
categories. Even securities rated triple B by S&P, Moody's or Fitch, ratings
which are considered investment grade, possess some speculative characteristics.
Projects financed by the issuance of high yielding municipal securities are
often highly leveraged and may not have more traditional methods of financing
available to them. Therefore, the risk associated with acquiring the securities
of such issuers is generally greater than is the case with higher rated
securities. For example, during an economic downturn or a sustained period of
rising interest rates, projects financed by high yielding securities may
experience financial stress. During these periods, such projects may not have
sufficient cash flow to meet their interest payment obligations. The issuer's
ability to service its obligations may also be adversely affected by specific
developments affecting the issuer, the issuer's inability to meet specific
projected revenue forecasts, or the unavailability of additional financing.
The risk of loss due to default may be significantly greater for the holders of
high yielding securities. Current prices for defaulted bonds are generally
significantly lower than their purchase price, and the Fund may have unrealized
losses on such defaulted securities that are reflected in the price of the High
Yield Fund's shares. In general, securities that default lose much of their
value in the time period prior to the actual default so that the Fund's net
assets are impacted prior to the default. The Fund may retain an issue that has
defaulted because the issue may present an opportunity for subsequent price
recovery. The premature disposition of a high yielding security due to a call or
buy-back feature, the deterioration of the issuer's creditworthiness, or a
default may make it more difficult for the Fund to manage the timing of its
receipt of income, which may have tax implications. The Fund may be required
under the Code and U.S. Treasury regulations to accrue income for income tax
purposes on defaulted obligations and to distribute the income to the Fund's
shareholders even though the Fund is not currently receiving interest or
principal payments on such obligations. In order to generate cash to satisfy any
or all of these distribution requirements, the Fund may be required to dispose
of portfolio securities that it otherwise would have continued to hold or to use
cash flows from other sources such as the sale of Fund shares.
The High Yield Fund may have difficulty disposing of certain high yielding
securities because there may be a thin trading market for a particular security
at any given time. To the extent the secondary trading market for a particular
high yielding municipal security does exist, it is generally not as liquid as
the secondary market for higher rated securities. Reduced liquidity in the
secondary market may have an adverse impact on market price and the Fund's
ability to dispose of particular issues, when necessary, to meet the Fund's
liquidity needs or in response to a specific economic event, such as a
deterioration in the creditworthiness of the issuer. Reduced liquidity in the
secondary market for certain securities may also make it more difficult for the
Fund to obtain market quotations based on actual trades for purposes of valuing
the Fund's portfolio. Current values for these high yield issues are obtained
from pricing services and/or a limited number of dealers and may be based upon
factors other than actual sales. Please see "How Are Fund Shares Valued?" in the
SAI.
The high yield securities market is relatively new and much of its growth prior
to 1990 paralleled a long economic expansion. The recession that began in 1990
disrupted the market for high yielding securities and adversely affected the
value of outstanding securities and the ability of issuers of such securities to
meet their obligations. Although the economy has improved considerably and high
yielding securities have performed more consistently since that time, there is
no assurance that the adverse effects previously experienced will not reoccur.
For example, the highly publicized defaults of some high yield issuers during
1989 and 1990 and concerns regarding a sluggish economy which continued into
1993, depressed the prices for many of these securities. Factors adversely
impacting the market value of high yielding securities may adversely impact the
High Yield Fund's net asset value. In addition, the Fund may incur additional
expenses to the extent it is required to seek recovery upon a default in the
payment of principal or interest on its portfolio holdings. The Fund will rely
on Advisers' judgment, analysis and experience in evaluating the
creditworthiness of an issuer. In this evaluation, Advisers will take into
consideration, among other things, the issuer's financial resources, its
sensitivity to economic conditions and trends, its credit history, the quality
of the issuer's management and regulatory matters.
The credit risk factors pertaining to lower rated securities also apply to lower
rated zero-coupon and deferred interest bonds. These bonds carry an additional
risk in that, unlike bonds that pay interest throughout the period to maturity,
the High Yield Fund will realize no cash until the cash payment date and, if the
issuer defaults, the Fund may obtain no return at all on its investment.
Zero-coupon and deferred interest bonds involve additional special
considerations.
Zero-coupon or deferred interest securities are debt obligations that do not
entitle the holder to any periodic payments of interest prior to maturity or a
specified date when the securities begin paying current interest (the "cash
payment date") and therefore are generally issued and traded at a discount from
their face amounts or par value. The discount varies depending on the time
remaining until maturity or cash payment date, prevailing interest rates,
liquidity of the security and the perceived credit quality of the issuer. The
discount, in the absence of financial difficulties of the issuer, typically
decreases as the final maturity or cash payment date of the security approaches.
The market prices of zero-coupon securities are generally more volatile than the
market prices of securities that pay interest periodically and are likely to
respond to changes in interest rates to a greater degree than do non-zero-coupon
or deferred interest securities having similar maturities and credit quality.
Current federal income tax law requires that a holder of a zero-coupon security
report as income each year the portion of the original issue discount on such
security that accrues that year, even though the holder receives no cash
payments of interest during the year. Further information is included under "How
Taxation Affects You and the Fund."
Asset Composition Table. A credit rating by a rating agency evaluates only the
safety of principal and interest of a bond, and does not consider the market
value risk associated with an investment in such a bond. The table below shows
the percentage of the High Yield Fund's assets invested in municipal securities
rated in each of the specific rating categories shown and those that are not
rated by the rating agency but deemed by Advisers to be of comparable credit
quality. The information was prepared based on a dollar weighted average of the
Fund's portfolio composition based on month-end assets for each of the 12 months
in the fiscal year ended February 29, 1996. The Appendices to this prospectus
and the SAI include a description of ratings categories.
AVERAGE WEIGHTED
S&P'S RATING PERCENTAGE OF ASSETS
AAA 7.83%
AAA* 5.67%
AA 3.28%
A 7.18%
BBB 26.03%
BBB* 17.58%
BB 7.22%
BB* 21.27%
B 1.26%
B* 1.38%
CCC 1.22%
CC .00%
C .00%
D 0.10%
*Not Rated by the rating agency. Indicates an internal rating by Advisers.
Credit and Market Risk. Credit risk is a function of the ability of an issuer of
a municipal security to make 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.
Since each State Fund generally will invest primarily in the securities of its
respective state or territory, there are certain specific factors and
considerations concerning each state or territory that may affect the credit and
market risk of the municipal securities that the Fund buys. These factors are
described in the Appendices to this prospectus and in the SAI.
Interest Rate Risk. Changes in interest rates will affect the value of the
Fund's portfolio and its share price. Rising interest rates, which often occur
during times of inflation or a growing economy, are likely to have a negative
effect on the value of the Fund's shares. Interest rates have increased and
decreased in the past. These changes are unpredictable and may happen again in
the future.
Diversification Risk. The High Yield Fund is diversified nationally and, as a
matter of policy, this Fund will not invest more than 25% of its net assets in
the municipal securities of any one state or territory. In addition, with
respect to 75% of each Fund's net assets, except the Connecticut and Michigan
Funds, none of the Funds will, as a fundamental policy, buy a security if, as a
result of the investment, more than 5% of its assets would be in the securities
of any single issuer (with the exception of obligations of the U.S. government).
For this purpose, each political subdivision, agency, or instrumentality and
each multi-state agency of which a state is a member, and each public authority
that issues private activity bonds on behalf of a private entity, will be
regarded as a separate issuer for determining the diversification of each Fund's
portfolio. A bond for which the payments of principal and interest are secured
by an escrow account of securities backed by the full faith and credit of the
U.S. government ("defeased"), as described in the SAI, will generally not be
treated as an obligation of the original municipality for purposes of
determining diversification.
The Connecticut and Michigan Funds are non-diversified under the federal
securities laws. As non-diversified Funds, there are no restrictions under the
1940 Act on the percentage of assets that may be invested at any time in the
securities of any one issuer. To the extent the Funds are not fully diversified
under the 1940 Act, they may be more susceptible to adverse economic, political
or regulatory developments affecting a single issuer than would be the case if
the Funds were more broadly diversified. The Connecticut and Michigan Funds
intend, however, to comply with the diversification and other requirements of
the Code applicable to "regulated investment companies," so that they will not
be subject to federal income tax, and distributions to shareholders will be free
from regular federal income tax to the extent they are derived from interest on
municipal securities. For this reason, the Connecticut Fund has adopted an
investment restriction, which may not be changed without shareholder approval,
prohibiting it from buying 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, with the exception of
obligations of the U.S. government. The Michigan Fund intends to follow this
same policy although it has not adopted it as an investment restriction, and
therefore can modify the policy without shareholder approval.
Who Manages the Fund?
The Board. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations. The
Board also monitors the Fund to ensure no material conflicts exist between the
two classes of shares. While none is expected, the Board will act appropriately
to resolve any material conflict that may arise.
Investment Manager. Advisers is the investment manager of the Fund and other
funds with aggregate assets of over $80 billion, including $43 billion in the
municipal securities market. It is wholly owned by Resources, a publicly owned
company engaged in the financial services industry through its subsidiaries.
Charles B. Johnson and Rupert H. Johnson, Jr. are the principal shareholders of
Resources.
Management Team. The team responsible for the day-to-day management of each
Fund's portfolio is:
Thomas Kenny
Senior Vice President of Advisers
Mr. Kenny has been responsible for portfolio recommendations and decisions of
all series of the Trust since August 1994. He is the Director of Franklin's
Municipal Bond Department. He holds a Master of Science degree in finance from
Golden Gate University and a Bachelor of Arts degree in business and economics
from the University of California at Santa Barbara. Mr. Kenny joined Franklin in
1986. He is a member of several municipal securities industry-related committees
and associations.
John Pinkham
Portfolio Manager of Advisers
Mr. Pinkham has been responsible for portfolio recommendations and decisions
since inception of the Connecticut Fund. He has a Bachelor of Science degree in
business from Columbia University. He has been in the securities industry since
1956 and with Advisers since 1985. He is a member of the Financial Analysts
Federation.
John Pomeroy
Portfolio Manager of Advisers
Mr. Pomeroy has been responsible for portfolio recommendations and decisions
since inception of the Connecticut Fund. He holds a Bachelor of Arts degree in
business administration from San Francisco State University. He joined Advisers
in 1986 and is a member of several securities industry-related committees and
associations.
Stella Wong
Portfolio Manager of Advisers
Ms. Wong has been responsible for portfolio recommendations and decisions for
the Indiana Fund, New Jersey Fund and Pennsylvania Fund since their inception,
the Puerto Rico Fund since 1986 and the High Yield Fund since 1994. Ms. Wong
holds a Master's degree in Financial Planning from Golden Gate University and a
Bachelor of Science degree in business administration from San Francisco State
University. She joined Advisers in 1986. She is a member of several securities
industry-related committees and associations.
Andrew Jennings, Sr.
Vice President of Advisers
Mr. Jennings has been responsible for portfolio recommendations and decisions of
the Indiana Fund since 1990. He attended Villanova University in Philadelphia
and has been in the securities industry for over 35 years. Prior to joining
Advisers in 1990, Mr. Jennings was First Vice President and Manager of the
Municipal Institutional Bond Department at Dean Witter Reynolds, Inc. He is a
member of several municipal securities industry-related committees and
associations.
Don Duerson
Vice President of Advisers
Mr. Duerson has been responsible for portfolio recommendations and decisions
since inception of the Arizona Fund and Colorado Fund. He has a Bachelor of
Science degree in business and public administration from the University of
Arizona. He has been in the securities industry since 1956 and has been with
Franklin since 1986. He is a member of several industry-related committees and
associations.
Sheila Amoroso
Portfolio Manager of Advisers
Ms. Amoroso has been responsible for portfolio recommendations and decisions of
the Arizona Fund, Colorado Fund, High Yield Fund, Oregon Fund, Pennsylvania Fund
and Puerto Rico Fund since 1987 and the New Jersey Fund since its inception. She
will also be responsible for portfolio recommendations and decisions for the
Michigan Fund. Ms. Amoroso holds a Bachelor of Science degree from San Francisco
State University. She joined Franklin in 1986. She is a member of several
securities industry-related committees and associations.
Robert Schubert
Portfolio Manager of Advisers
Mr. Schubert has been responsible for portfolio recommendations and decisions of
the Oregon Fund since 1994. He attended Fairleigh Dickenson University,
Rutherford, New Jersey, and has been in the securities industry since 1960. He
joined Templeton in 1989 and Advisers in 1992. Prior to joining Templeton, he
managed the bond department for First Equity Corporation of Florida. He is a
member of several securities industry-related associations.
Services Provided by Advisers. Advisers manages the Fund's assets and makes its
investment decisions. Advisers also provides certain administrative services and
facilities for the Fund and performs similar services for other funds. Please
see "Investment Advisory and Other Services" and "Miscellaneous Information" in
the SAI for information on securities transactions and a summary of the Fund's
Code of Ethics.
Management Fees. During the fiscal year ended February 29, 1996, management fees
paid to Advisers and expenses borne by Class I and Class II shares, including
fees paid to Advisers (as a percentage of average monthly net assets) were as
follows:
TOTAL
MANAGEMENT OPERATING EXPENSES
FUND NAME FEES CLASS I CLASS II*
Arizona Fund 0.48% 0.62% 1.20%
Colorado Fund 0.56% 0.71% 1.29%
Connecticut Fund 0.58% 0.73% 1.30%
High Yield Fund 0.46% 0.61% 1.18%
Indiana Fund 0.63% 0.80% N/A
New Jersey Fund 0.50% 0.65% 1.23%
Oregon Fund 0.52% 0.66% 1.24%
Pennsylvania Fund 0.49% 0.64% 1.22%
Puerto Rico Fund 0.57% 0.74% 1.32%
*Annualized.
The Fund pays its own operating expenses. These expenses include Advisers' fee;
taxes, if any; custodian, legal and auditing fees; the fees and expenses of
Board members who are not members of, affiliated with, or interested persons of
Advisers; salaries of any personnel not affiliated with Advisers; insurance
premiums; trade associate dues; expenses of obtaining quotations for calculating
the Fund's Net Asset Value; and printing and other expenses that are not
expressly assumed by Advisers.
Under its management agreement, the Fund pays Advisers a management fee 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. The fee is computed at the close of business of the
last business day of each month. Each class will pay its proportionate share of
the management fee.
During the start-up period of the Michigan 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
0.50% of the Fund's average net assets for the current fiscal year. After the
current fiscal year, Advisers may end this arrangement at any time upon notice
to the Board.
The management fee will be reduced as necessary to comply with the most
stringent limits on Fund expenses of any state where the Fund offers it shares.
Currently, the most restrictive limitation on a fund's allowable expenses for
each fiscal year, as a percentage of its average net assets, is 2.5% of the
first $30 million in assets, 2% of the next $70 million, and 1.5% of assets over
$100 million. Expense reductions have not been necessary based on state
requirements.
Portfolio Transactions. Advisers tries to obtain the best execution on all
transactions. If Advisers believes more than one broker or dealer can provide
the best execution, it may consider research and related services and the sale
of Fund shares when selecting a broker or dealer. Please see "How Does the Fund
Buy Securities For Its Portfolio?" in the SAI for more information.
THE RULE 12B-1 PLANS
Each class has a distribution plan or "Rule 12b-1 plan" under which it may pay
or reimburse Distributors or others for activities primarily intended to sell
shares of the class. These expenses may include, among others, printing
prospectuses and reports used for sales purposes, preparing and distributing
sales literature and advertisements, a prorated portion of Distributors'
overhead expenses, and distribution or service fees paid to Securities Dealers
or others who have executed a servicing agreement with the Fund, Distributors or
its affiliates.
Michigan Fund. Under the Class I plan, the Michigan Fund may currently reimburse
Distributors or others up to 0.10% per year of its average daily net assets,
payable on a quarterly basis, for distribution expenses.
Under the Class II plan, the Fund may pay Distributors up to 0.50% per year of
Class II's average daily net assets to pay Distributors or others for providing
distribution and related services and bearing certain Class II expenses. All
distribution expenses over this amount will be borne by those who have incurred
them. During the first year after a purchase of Class II shares, Distributors
may keep this portion of the Rule 12b-1 fees associated with the Class II
purchase.
The Fund may also pay a servicing fee of up to 0.15% per year of Class II's
average daily net assets under the Class II plan. This fee may be used to pay
Securities Dealers or others for, among other things, helping to establish and
maintain customer accounts and records, helping with requests to buy and sell
shares, receiving and answering correspondence, monitoring dividend payments
from the Fund on behalf of customers, and similar servicing and account
maintenance activities.
The Rule 12b-1 fees charged to each class are based only on the fees
attributable to that particular class. For more information, please see "The
Fund's Underwriter" in the SAI.
How Does the Fund Measure Performance?
From time to time, each class of the Fund advertises its performance. The more
commonly used measures of performance are total return, current yield and
current distribution rate. Each class may also advertise its taxable-equivalent
yield and distribution rate. Performance figures usually assume that the maximum
sales charge is paid, but certain figures may not include the sales charge.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield for each
class shows the income per share earned by that class. The current distribution
rate shows the dividends or distributions paid to shareholders of a class. This
rate is usually computed by annualizing the dividends paid per share during a
certain period and dividing that amount by the current Offering Price of the
class. Unlike current yield, the current distribution rate may include income
distributions from sources other than dividends and interest. The
taxable-equivalent yield and distribution rate show the before-tax yield or
distribution rate that would have to be earned from a taxable investment to
equal the yield or distribution rate of the class, assuming one or more tax
rates.
The investment results of each class will vary. Performance figures are always
based on past performance and do not indicate future results. For a more
detailed description of how the Fund calculates its performance figures, please
see "How Does the Fund Measure Performance?" in the SAI. The Trust's Annual
Report to Shareholders also includes performance information.
How Is the Trust Organized?
Except for the Connecticut and Michigan Funds, the Funds are diversified series'
of the Trust, an open-end management investment company, commonly called a
mutual fund. The Connecticut and Michigan Funds are nondiversified series of the
Trust. The Trust was organized as a Massachusetts business trust in September
1984 and registered with the SEC under the 1940 Act. The Trust began offering
two classes of shares on May 1, 1995. All shares purchased before that time are
considered Class I shares. Additional classes of shares may be offered in the
future.
Shares of each class represent proportionate interests in the assets of the Fund
and have the same voting and other rights and preferences as the other class of
the Fund for matters that affect the Fund as a whole. For matters that only
affect one class, however, only shareholders of that class may vote. Each class
will vote separately on matters (1) affecting only that class, (2) expressly
required to be voted on separately by state business trust law, or (3) required
to be voted on separately by the 1940 Act. 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. In the future,
additional series may be offered.
The Trust has noncumulative voting rights. This gives holders of more than 50%
of the shares voting the ability to elect all of the members of the Board. If
this happens, holders of the remaining shares voting will not be able to elect
anyone to the Board.
The Trust does not intend to hold annual shareholder meetings. It may hold a
special meeting of a series, however, for matters requiring shareholder approval
under the 1940 Act. A meeting may also be called by the Board in its discretion
or by shareholders holding at least 10% of the outstanding shares. The 1940 Act
requires that we help you communicate with other shareholders in connection with
electing or removing members of the Board.
About Your Account
How Do I Buy Shares?
OPENING YOUR ACCOUNT
To open your account, contact your investment representative or complete and
sign the enclosed shareholder application and return it to the Fund with your
check. Please indicate which class of shares you want to buy. If you do not
specify a class, your purchase will be automatically invested in Class I shares.
MINIMUM
INVESTMENTS*
To Open Your Account $100
To Add to Your Account $ 25
*We may refuse any order to buy shares. Currently, the Fund does not allow
investments by Market Timers.
DECIDING WHICH CLASS TO BUY
You should consider a number of factors when deciding which class of shares to
buy. If you plan to buy $1 million or more in a single payment or you qualify to
buy Class I shares without a sales charge, you may not buy Class II shares.
Generally, you should consider buying Class I shares if:
o you expect to invest in the Fund over the long term;
o you qualify to buy Class I shares at a reduced sales charge; or
o you plan to buy $1 million or more over time.
You should consider Class II shares if:
o you expect to invest less than $100,000 in the Franklin Templeton Funds; and
o you plan to sell a substantial number of your shares within approximately six
years or less of your investment.
Class I shares are generally more attractive for long-term investors because of
Class II's higher Rule 12b-1 fees. These may accumulate over time to outweigh
the lower Class II front-end sales charge and result in lower income dividends
for Class II shareholders. If you qualify to buy Class I shares at a reduced
sales charge based upon the size of your purchase or through our Letter of
Intent or cumulative quantity discount programs, but plan to hold your shares
less than approximately six years, you should evaluate whether it is more
economical for you to buy Class I or Class II shares.
For purchases of $1 million or more, it is considered more beneficial for you to
buy Class I shares since there is no front-end sales charge, even though these
purchases may be subject to a Contingent Deferred Sales Charge. Any purchase of
$1 million or more is therefore automatically invested in Class I shares. You
may accumulate more than $1 million in Class II shares through purchases over
time, but if you plan to do this, you should determine whether it would be more
beneficial for you to buy Class I shares through a Letter of Intent.
Please consider all of these factors before deciding which class of shares to
buy. There are no conversion features attached to either class of shares.
PURCHASE PRICE OF FUND SHARES
For Class I shares, the sales charge you pay depends on the dollar amount you
invest, as shown in the table below. The sales charge for Class II shares is 1%
and, unlike Class I, does not vary based on the size of your purchase.
TOTAL SALES CHARGE AMOUNT PAID
AS A PERCENTAGE OF TO DEALER AS A
AMOUNT OF PURCHASE OFFERING NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE PRICE INVESTED OFFERING PRICE
CLASS I
Under $100,000 4.25% 4.44% 4.00%
$100,000 but less than $250,000 3.50% 3.63% 3.25%
$250,000 but less than $500,000 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000 2.15% 2.20% 2.00%
$1,000,000 or more* None None None
TOTAL SALES CHARGE AMOUNT PAID
AS A PERCENTAGE OF TO DEALER AS A
AMOUNT OF PURCHASE OFFERING NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE PRICE NVESTED OFFERING PRICE
CLASS II
Under $1,000,000* 1.00% 1.01% 1.00%
*A Contingent Deferred Sales Charge of 1% may apply to Class I purchases of $1
million or more and any Class II purchase. Please see "How Do I Sell Shares?
Contingent Deferred Sales Charge." Securities Dealers should also see "Other
Payments to Securities Dealers" below for a discussion of payments Distributors
may make out of its own resources for certain purchases. Purchases of Class II
shares are limited to purchases below $1 million. Please see "Deciding Which
Class to Buy."
SALES CHARGE REDUCTIONS AND WAIVERS
If you qualify to buy shares under one of the sales charge reduction or
waiver categories described below, please include a written statement with each
purchase order explaining which privilege applies. If you don't include this
statement, we cannot guarantee that you will receive the sales charge reduction
or waiver.
Cumulative Quantity Discounts - Class I Only. To determine if you may pay a
reduced sales charge, you may add to the amount of your current Class I purchase
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. If you are
the sole owner of a company, you may also add any company accounts, including
retirement plan accounts.
Letter of Intent - Class I Only. You may buy Class I 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 Class I shares.
By completing the Letter of Intent section of the shareholder application, you
acknowledge and agree to the following:
o You authorize Distributors to reserve 5% of your total intended purchase in
Class I shares registered in your name until you fulfill your Letter.
o You give Distributors a security interest in the reserved shares and appoint
Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the Letter.
o Although you may exchange your shares, you may not sell reserved shares until
you complete the Letter or pay the higher sales charge.
Your periodic statements will include the reserved shares in the total shares
you own. We will pay or reinvest dividend and capital gain distributions on the
reserved shares as you direct.
If you would like more information about the Letter of Intent privilege, please
see "How Do I Buy, Sell and Exchange Shares? - Letter of Intent" in the SAI or
call Shareholder Services.
Group Purchases - Class I Only. If you are a member of a qualified group, you
may buy Class I shares at the reduced sales charge that applies to the group as
a whole. The sales charge is based on the combined dollar value of the group
members' existing investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include sales and other Franklin Templeton Fund materials in
publications and mailings to its members at reduced or no cost to Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
o Meets other uniform criteria that allow Distributors to achieve cost savings
in distributing shares.
Sales Charge Waivers. The Fund's sales charges (front-end and contingent
deferred) will not apply if you are buying Class I shares with money from the
following sources or Class II shares with money from the sources in waiver
categories 1 or 3.
For waiver categories 1 or 2 below: (i) the distributions or payments must
be reinvested within 365 days of their payment date, and (ii) Class II
distributions may be reinvested in either Class I or Class II shares. Class I
distributions may only be reinvested in Class I shares.
1. Dividend and capital gain distributions from any Franklin Templeton Fund or a
REIT sponsored or advised by Franklin Properties, Inc.
2. Annuity payments received under either an annuity option or from death
benefit proceeds, only if the annuity contract offers as an investment option
the Franklin Valuemark Funds, Templeton Variable Annuity Fund, the Templeton
Variable Products Series Fund, or the Franklin Government Securities Trust. You
should contact your tax advisor for information on any tax consequences that may
apply.
3. Redemptions from any Franklin Templeton Fund if you:
o Originally paid a sales charge on the shares,
o Reinvest the money within 365 days of the redemption date, and
o Reinvest the money in the same class of shares.
An exchange is not a redemption for this privilege. The Contingent Deferred
Sales Charge will not be waived if the shares reinvested were subject to a
Contingent Deferred Sales Charge when sold. We will credit your account for any
Contingent Deferred Sales Charge paid, but a new Contingency Period will begin.
If you immediately placed your redemption proceeds in a Franklin Bank CD, you
may reinvest them as described above. The proceeds must be reinvested within 365
days from the date the CD matures, including any rollover.
4. Redemptions from other mutual funds
If you sold shares of a fund that is not a Franklin Templeton Fund within the
past 60 days, you may invest the proceeds without any sales charge if (a) the
investment objectives were similar to the Fund's, and (b) your shares in that
fund were subject to any front-end or contingent deferred sales charges at the
time of purchase. You must provide a copy of the statement showing your
redemption.
The Fund's sales charges will also not apply to Class I purchases by:
5. Trust companies and bank trust departments agreeing to invest at least $1
million in Franklin Templeton Funds over a 13 month period of assets held in a
fiduciary, agency, advisory, custodial or similar capacity and over which the
trust companies and bank trust departments or other plan fiduciaries or
participants, in the case of certain retirement plans, have full or shared
investment discretion. We will accept orders for these accounts by mail
accompanied by a check or by telephone or other means of electronic data
transfer directly from the bank or trust company, with payment by federal funds
received by the close of business on the next business day following the order.
6. An Eligible Governmental Authority. Please consult your legal and investment
advisors to determine if an investment in the Fund is suitable for you and the
effect, if any, of payments by the Fund on arbitrage rebate calculations.
7. Broker-dealers who have entered into a supplemental agreement with
Distributors for clients who are participating in comprehensive fee programs.
These programs, sometimes known as wrap fee programs, are sponsored by the
broker-dealer and either advised by the broker-dealer or by another registered
investment advisor affiliated with that broker.
8. Registered Securities Dealers and their affiliates, for their investment
accounts only
9. Current employees of Securities Dealers and their affiliates and their family
members, as allowed by the internal policies of their employer
10. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family members,
consistent with our then-current policies
11. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
12. Accounts managed by the Franklin Templeton Group
13. Certain unit investment trusts and their holders reinvesting distributions
from the trusts
OTHER PAYMENTS TO SECURITIES DEALERS
The payments below apply to Securities Dealers who initiate and are responsible
for Class II purchases and certain Class I purchases made without a sales
charge. A Securities Dealer may only receive one of the following payments for
each qualifying purchase. The payments described below are paid by Distributors
or one of its affiliates, at its own expense, and not by the Fund or its
shareholders.
1. Securities Dealers may receive up to 1% of the purchase price for Class II
purchases. During the first year after the purchase, Distributors may keep a
part of the Rule 12b-1 fees associated with that purchase.
2. Securities Dealers will receive up to 0.75% of the purchase price for Class I
purchases of $1 million or more.
3. Securities Dealers may receive up to 1% of the purchase price for Class I
purchases made under waiver category 5 above.
4. Securities Dealers may receive up to 0.25% of the purchase price for Class I
purchases by an Eligible Governmental Authority.
Please see "How Do I Buy, Sell and Exchange Shares - Other Payments to
Securities Dealers" in the SAI for any breakpoints that may apply.
Securities Dealers may receive additional compensation from Distributors or an
affiliated company in connection with selling shares of the Franklin Templeton
Funds. Compensation may include financial assistance for conferences,
shareholder services, automation, sales or training programs, or promotional
activities. Registered representatives and their families may be paid for travel
expenses, including lodging, in connection with business meetings or seminars.
In some cases, this compensation may only be available to Securities Dealers
whose representatives have sold or are expected to sell significant amounts of
shares. 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 NASD.
May I Exchange Shares for Shares of Another Fund?
We offer a wide variety of funds. If you would like, you can move money from
your Fund account to an existing or new account in another Franklin Templeton
Fund (an "exchange"). Because it is technically a sale and a purchase of shares,
an exchange is a taxable transaction.
If you own Class I shares, you may exchange into any of our money funds except
Franklin Templeton Money Fund II ("Money Fund II"). Money Fund II is the only
money fund exchange option available to Class II shareholders. Unlike our other
money funds, shares of Money Fund II may not be purchased directly and no drafts
(checks) may be written on Money Fund II accounts.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund and its rules and
requirements for exchanges. For example, some Franklin Templeton Funds do not
accept exchanges and others may have different investment minimums. Some
Franklin Templeton Funds do not offer Class II shares.
METHOD STEPS TO FOLLOW
By Mail 1. Send us written instructions signed by all account owners
2. Include any outstanding share certificates for the shares
you're exchanging
By Phone Call Shareholder Services or TeleFACTS(R)
If you do not want the ability to exchange by phone, please let
us know.
Through Your
Dealer Call your investment representative
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
WILL SALES CHARGES APPLY TO MY EXCHANGE?
You generally will not pay a front-end sales charge on exchanges. If you have
held your shares less than six months, however, you will pay the percentage
difference between the sales charge you previously paid and the applicable sales
charge of the new fund. If you have never paid a sales charge on your shares
because they have always been held in a money fund, you will pay the Fund's
applicable sales charge no matter how long you have held your shares. These
charges may not apply if you qualify to buy shares without a sales charge.
We will not impose a Contingent Deferred Sales Charge when you exchange shares.
Any shares subject to a Contingent Deferred Sales Charge at the time of
exchange, however, will remain so in the new fund. See the discussion on
Contingent Deferred Sales Charges below and under "How Do I Sell Shares?"
Contingent Deferred Sales Charge - Class I. For accounts with Class I shares
subject to a Contingent Deferred Sales Charge, shares are exchanged into the new
fund in the order they were purchased. If you exchange Class I shares into one
of our money funds, the time your shares are held in that fund will not count
towards the completion of any Contingency Period.
Contingent Deferred Sales Charge - Class II. For accounts with Class II shares
subject to a Contingent Deferred Sales Charge, shares are exchanged into the new
fund proportionately based on the amount of shares subject to a Contingent
Deferred Sales Charge and the length of time the shares have been held. For
example, suppose you own $1,000 in shares that have never been subject to a
CDSC, such as shares from the reinvestment of dividends and capital gains ("free
shares"), $2,000 in shares that are no longer subject to a CDSC because you have
held them for longer than 18 months ("matured shares"), and $3,000 in shares
that are still subject to a CDSC ("CDSC liable shares"). If you exchange $3,000
into a new fund, $500 will be exchanged from free shares, $1,000 from matured
shares, and $1,500 from CDSC liable shares.
Likewise, CDSC liable shares purchased at different times will be exchanged into
a new fund proportionately. For example, assume you purchased $1,000 in shares 3
months ago, 6 months ago, and 9 months ago. If you exchange $1,500 into a new
fund, $500 will be exchanged from shares purchased at each of these three
different times.
While Class II shares are exchanged proportionately, they are redeemed in the
order purchased. In some cases, this means exchanged shares may be CDSC liable
even though they would not be subject to a Contingent Deferred Sales Charge if
they were sold. We believe the proportional method of exchanging Class II shares
more closely reflects the expectations of Class II shareholders if shares are
sold during the Contingency Period. The tax consequences of a sale or exchange
are determined by the Code and not by the method used by the Fund to transfer
shares.
If you exchange your Class II shares for shares of Money Fund II, the time your
shares are held in that fund will count towards the completion of any
Contingency Period.
EXCHANGE RESTRICTIONS
Please be aware that the following restrictions apply to exchanges:
o You may only exchange shares within the same class.
o The accounts must be identically registered. You may exchange shares from a
Fund account requiring two or more signatures into an identically registered
money fund account requiring only one signature for all transactions. Please
notify us in writing if you do not want this option to be available on your
account(s). Additional procedures may apply. Please see "Transaction Procedures
and Special Requirements."
o The new fund must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Currently, the Fund does not allow investments by Market Timers.
Because excessive trading can hurt Fund performance and shareholders, we may
refuse exchange purchases if (i) we believe the Fund would be harmed or unable
to invest effectively, or (ii) the Fund receives or anticipates simultaneous
orders that may significantly affect the Fund.
How Do I Sell Shares?
You may sell (redeem) your shares at any time.
METHOD STEPS TO FOLLOW
By Mail 1. Send us written instructions signed by all account owners
2. Include any outstanding share certificates for the shares
you are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may need to send
additional documents. Accounts under court jurisdiction may
have additional requirements.
METHOD STEPS TO FOLLOW
By Phone
(Only available if you have completed and sent to us the telephone redemption
agreement included with this prospectus)
Call Shareholder Services
Telephone requests will be accepted:
o If the request is $50,000 or less. Institutional accounts may exceed
$50,000 by completing a separate agreement. Call Institutional
Services to receive a copy.
o If there are no share certificates issued for the shares you want to
sell or you have already returned them to the Fund
o Unless the address on your account was changed by phone within the
last 30 days
Through Your Dealer Call your investment representative.
We will send your redemption check within seven days after we receive your
request in proper form. We will make the check payable to all registered owners
on the account and send it to the address of record. We are not able to receive
or pay out cash in the form of currency.
If you sell shares you just purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
CONTINGENT DEFERRED SALES CHARGE
A Contingent Deferred Sales Charge may apply to Class I purchases of $1 million
or more if you sell all or a portion of the shares within one year and any Class
II purchase if you sell the shares within 18 months. The charge is 1% of the
value of the shares sold or the Net Asset Value at the time of purchase,
whichever is less. Distributors keeps the charge to recover payments made to
Securities Dealers.
We will first redeem shares not subject to the charge in the following order:
1) A calculated number of shares equal to the capital appreciation on shares
held less than the Contingency Period,
2) Shares purchased with reinvested dividends and capital gain distributions,
and
3) Shares held longer than the Contingency Period.
We then redeem shares subject to the charge in the order they were purchased.
Unless otherwise specified, when you request a dollar amount, we will redeem
additional shares to cover any Contingent Deferred Sales Charge. For requests to
sell a certain number of shares, we will deduct the amount of the Contingent
Deferred Sales Charge, if any, from the sale proceeds.
Waivers. We waive the Contingent Deferred Sales Charge for:
o Exchanges
o Account fees
o Sales of shares purchased pursuant to a sales charge waiver
o Redemptions by the Fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before February 1,
1995
o Redemptions through a systematic withdrawal plan set up after February 1,
1995, up to 1% a month of an account's Net Asset Value (3% quarterly, 6%
semiannually or 12% annually). For example, if you maintain an annual balance of
$1 million in Class I shares, you can withdraw up to $120,000 annually through a
systematic withdrawal plan free of charge. Likewise, if you maintain an annual
balance of $10,000 in Class II shares, $1,200 may be withdrawn annually free of
charge.
Transaction Procedures and Special Requirements
HOW AND WHEN SHARES ARE PRICED
The Fund is open for business each day the Exchange is open. We determine the
Net Asset Value per share of each class as of the scheduled close of the
Exchange, generally 1:00 p.m. Pacific time. You can find the prior day's closing
Net Asset Value and Offering Price for each class in many newspapers.
The Net Asset Value of all outstanding shares of each class is calculated on a
pro rata basis. It is based on each class' proportionate participation in the
Fund, determined by the value of the shares of each class. Each class, however,
bears the Rule 12b-1 fees payable under its Rule 12b-1 plan. To calculate Net
Asset Value per share of each class, the assets of each class are valued and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of shares of the class outstanding. The Fund's assets are
valued as described under "How Are Fund Shares Valued?" in the SAI.
THE PRICE WE USE WHEN YOU BUY OR SELL SHARES
You buy shares at the Offering Price of the class you wish to purchase, unless
you qualify to buy shares at a reduced sales charge or with no sales charge. The
Offering Price of each class is based on the Net Asset Value per share of the
class and includes the maximum sales charge. We calculate it to two decimal
places using standard rounding criteria. You sell shares at Net Asset Value.
We will use the Net Asset Value next calculated after we receive your
transaction request in proper form. If you buy or sell shares through your
Securities Dealer, however, we will use the Net Asset Value next calculated
after we receive the request from your dealer.
PROPER FORM
An order to buy shares is in proper form when we receive your signed shareholder
application and check. Written requests to sell or exchange shares are in proper
form when we receive written instructions signed by all registered owners, with
a signature guarantee if necessary. We must also receive any outstanding share
certificates for those shares.
WRITTEN INSTRUCTIONS
Written instructions must be signed by all registered owners. To avoid any delay
in processing your transaction, they should include:
o Your name,
o The Fund's name,
o The class of shares,
o A description of the request,
o For exchanges, the name of the fund you're exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the evening if
preferred.
SIGNATURE GUARANTEES
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered owners,
3) The proceeds are not being sent to the address of record, preauthorized bank
account, or preauthorized brokerage firm account,
4) We receive instructions from someone other than the registered owners,
5) We believe a signature guarantee would protect us against potential claims
based on the instructions received.
A signature guarantee verifies the authenticity of your signature and may be
obtained from certain banks, brokers or other eligible guarantors. You should
verify that the institution is an eligible guarantor prior to signing. A
notarized signature is not sufficient.
SHARE CERTIFICATES
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate is
lost, stolen or destroyed, you may have to pay an insurance premium of up to 2%
of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form. In this case, you should send the certificate and assignment
form in separate envelopes.
TELEPHONE TRANSACTIONS
You may initiate many transactions by phone. Please refer to the sections of
this prospectus that discuss the transaction you would like to make or call
Shareholder Services.
We may only be liable for losses resulting from unauthorized transactions if we
do not follow reasonable procedures designed to verify the identity of the
caller. When you call, we will request personal or other information, and may
also record calls. For your protection, we may delay a transaction or not
implement one if we are not reasonably satisfied that telephone instructions are
genuine. If this occurs, we will not be liable for any loss.
If our lines are busy or you are otherwise unable to reach us by phone, you may
wish to ask your investment representative for assistance or send written
instructions to us, as described elsewhere in this prospectus. If you are unable
to execute a transaction by telephone, we will not be liable for any loss.
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, you need to tell us how you want your shares
registered. How you register your account will affect your ownership rights and
ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
Joint Ownership. If you open an account with two or more owners, we register the
account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of survivorship"
is shown as "Jt Ten" on your account statement. For any account with two or more
owners, all owners must sign instructions to process transactions and changes to
the account. Even if the law in your state says otherwise, you will not be able
to change owners on the account unless all owners agree in writing. If you would
like another person or owner to sign for you, please send us a current power of
attorney.
Gifts and Transfers to Minors. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this form
of registration, a minor may not be named as an account owner.
Trusts. If you register your account as a trust, you should have a valid written
trust document to avoid future disputes or possible court action over who owns
the account.
Required Documents. For corporate, partnership and trust accounts, please send
us the following documents when you open your account. This will help avoid
delays in processing your transactions while we verify who may sign on the
account.
TYPE OF ACCOUNT DOCUMENTS REQUIRED
Corporation Corporate Resolution
Partnership 1. The pages from the partnership agreement that identify the
general partners, or
2. A certification for a partnership agreement
Trust 1. The pages from the trust document that identify the trustees
, or
2. A certification for trust
Street or Nominee Accounts. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the shares
to the street or nominee name account of another Securities Dealer. Both dealers
must have an agreement with Distributors or we will not process the transfer.
Contact your Securities Dealer to initiate the transfer. We will process the
transfer after we receive authorization in proper form from your delivering
Securities Dealer. Accounts may be transferred electronically through the NSCC.
For accounts registered in street or nominee name, we may take instructions
directly from the Securities Dealer or your nominee.
Electronic Instructions. If there is a Securities Dealer or other representative
of record on your account, you authorize the use and execution of electronic
instructions. We can accept electronic instructions directly from your dealer or
representative without further inquiry. Electronic instructions may be processed
through the services of the NSCC, which currently include the NSCC's
"Networking," "Fund/SERV," and "ACATS" systems, or through Franklin/Templeton's
PCTrades II(TM) System.
TAX IDENTIFICATION NUMBER
We must have your correct Social Security or tax identification number on a
signed shareholder application or applicable tax form. Federal law requires us
to withhold 31% of your taxable distributions and sale proceeds if (i) you have
not furnished a certified correct taxpayer identification number, (ii) you have
not certified that withholding does not apply, (iii) the IRS or a Securities
Dealer notifies the Fund that the number you gave us is incorrect, or (iv) you
are subject to backup withholding.
We may refuse to open an account if you fail to provide the required tax
identification number and certifications. We may also close your account if the
IRS notifies us that your tax identification number is incorrect. If you
complete an "awaiting TIN" certification, we must receive a correct tax
identification number within 60 days of your initial purchase to keep your
account open.
KEEPING YOUR ACCOUNT OPEN
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $50. We will only do this
if the value of your account fell below this amount because you voluntarily sold
your shares and your account has been inactive (except for the reinvestment of
distributions) for at least six months. Before we close your account, we will
notify you and give you 30 days to increase the value of your account to $100.
Services to Help You Manage Your Account
AUTOMATIC INVESTMENT PLAN
Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can 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
included with this prospectus or contact your investment representative. 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
discontinue the program at any time by notifying Investor Services by mail or
phone.
AUTOMATIC PAYROLL DEDUCTION
You may have money transferred from your paycheck to the Fund to buy additional
shares. Your investments will continue automatically until you instruct the Fund
and your employer to discontinue the plan. To process your investment, we must
receive both the check and payroll deduction information in required form. Due
to different procedures used by employers to handle payroll deductions, there
may be a delay between the time of the payroll deduction and the time we receive
the money.
SYSTEMATIC WITHDRAWAL PLAN
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or annual
basis. The value of your account must be at least $5,000 and the minimum payment
amount for each withdrawal must be at least $50.
If you would like to establish a systematic withdrawal plan, please complete the
systematic withdrawal plan section of the shareholder application included with
this prospectus and indicate how you would like to receive your payments. You
may choose to direct your payments to buy the same class of shares of another
Franklin Templeton Fund or have the money sent directly to you, to another
person, or to a checking account. If you choose to have the money sent to a
checking account, please see "Electronic Fund Transfers" below.
You will generally receive your payment by the fifth business day of the month
in which a payment is scheduled. When you sell your shares under a systematic
withdrawal plan, it is a taxable transaction.
Because of the front-end sales charge, you may not want to set up a systematic
withdrawal plan if you plan to buy shares on a regular basis. Shares sold under
the plan may also be subject to a Contingent Deferred Sales Charge. Please see
"Contingent Deferred Sales Charge" under "How Do I Sell Shares?"
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us in writing at
least seven business days before the end of the month preceding a scheduled
payment. Please see "How Do I Buy, Sell and Exchange Shares? - Systematic
Withdrawal Plan" in the SAI for more information.
ELECTRONIC FUND TRANSFERS
You may choose to have dividend and capital gain distributions from the Fund or
payments under a systematic withdrawal plan sent directly to a checking account.
If the checking account is with a bank that is a member of the Automated
Clearing House, the payments may be made automatically by electronic funds
transfer. If you choose this option, please allow at least fifteen days for
initial processing. We will send any payments made during that time to the
address of record on your account.
TELEFACTS(R)
From a touch-tone phone, you may call our TeleFACTS system (day or night) at
1-800/247-1753 to:
o obtain information about your account;
o obtain price and performance information about any Franklin Templeton Fund;
o exchange shares between identically registered Franklin accounts; and
o request duplicate statements and deposit slips.
You will need the code number for each class to use TeleFACTS. The code numbers
for Class I and Class II are as follows:
FUND
CODE FUND NAME
126 ARIZONA FUND, CLASS I
226 ARIZONA FUND, CLASS II
127 COLORADO FUND, CLASS I
227 COLORADO FUND, CLASS II
166 CONNECTICUT FUND, CLASS I
266 CONNECTICUT FUND, CLASS II
167 INDIANA FUND, CLASS I
179 MICHIGAN FUND, CLASS I
171 NEW JERSEY FUND, CLASS I
271 NEW JERSEY FUND, CLASS II
161 OREGON FUND, CLASS I
261 OREGON FUND, CLASS II
129 PENNSYLVANIA FUND, CLASS I
229 PENNSYLVANIA FUND, CLASS II
123 PUERTO RICO FUND, CLASS I
223 PUERTO RICO FUND, CLASS II
130 HIGH YIELD FUND, CLASS I
230 HIGH YIELD FUND, CLASS II
STATEMENTS AND REPORTS TO SHAREHOLDERS
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your
account, including additional purchases and dividend reinvestments. Please
verify the accuracy of your statements when you receive them.
o Financial reports of the Fund will be sent every six months. To reduce Fund
expenses, we attempt to identify related shareholders within a household
and send only one copy of a report. Call Fund Information if you would like
an additional free copy of the Fund's financial reports or an interim
quarterly report.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. For further information, call Institutional
Services.
AVAILABILITY OF THESE SERVICES
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, the Fund may not be able to offer these services directly to
you. Please contact your investment representative.
WHAT IF I HAVE QUESTIONS ABOUT MY ACCOUNT?
If you have any questions about your account, you may write to Investor Services
at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California 94403-7777.
The Fund, Distributors and Advisers are also located at this address. You may
also contact us by phone at one of the numbers listed below.
HOURS OF OPERATION (PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with high
quality service. You will hear a regular beeping tone if your call is being
recorded.
What Distributions Might I Receive from the Fund?
The Fund declares dividends from its net investment income daily and pays them
monthly on or about the last day of the month. The daily allocation of net
investment income begins on the day after we receive your money or settlement of
a wire order trade and continues to accrue through the day we receive your
request to sell your shares or the settlement of a wire order trade.
Capital gains, if any, may be distributed twice a year, usually once in December
and once after the end of the Fund's fiscal year.
Dividends and capital gains are calculated and distributed the same way for each
class. The amount of any income dividends per share will differ, however,
generally due to the difference in the Rule 12b-1 fees of each class.
Dividend payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. The Fund does not pay "interest" or guarantee any
fixed rate of return on an investment in its shares.
DISTRIBUTION OPTIONS
You may receive your distributions from the Fund in any of these ways:
1. Buy additional shares of the Fund - You may buy additional shares of the same
class 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. If you own Class II shares, you may also reinvest
your distributions in Class I shares of the Fund. This is a convenient way to
accumulate additional shares and maintain or increase your earnings base.
2. Buy shares of other Franklin Templeton Funds - You may direct your
distributions to buy the same class of shares of another Franklin Templeton Fund
(without a sales charge or imposition of a Contingent Deferred Sales Charge). If
you own Class II shares, you may also direct your distributions to buy Class I
shares of another Franklin Templeton Fund. Many shareholders find this a
convenient way to diversify their investments.
3. Receive distributions in cash - You may receive dividends, or both dividend
and capital gain distributions in cash. If you have the money sent to another
person or to a checking account, you may need a signature guarantee. If you send
the money to a checking account, please see "Electronic Fund Transfers" under
"Services to Help You Manage
Your Account."
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 you do not select an option, we will
automatically reinvest dividend and capital gain distributions in the same class
of the Fund. You may change your distribution option at any time by notifying us
by mail or phone. Please allow at least seven days prior to the reinvestment
date for us 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 more information on tax matters
relating to the Fund and its shareholders, see "Additional Information on
Distributions and Taxes" in the SAI.
Each Fund is treated as a separate entity for federal income tax purposes. The
Fund intends to continue to qualify as a regulated investment company under
Subchapter M of the Code. By distributing all of its income, and meeting certain
other requirements relating to the sources of its income and diversification of
its assets, the Fund will not be liable for federal income or excise taxes.
By meeting certain requirements of the Code, the Fund 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 your state of residence or such state's political subdivisions, 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 under "Appendices - State Tax Treatment."
To the extent dividends paid by the Fund 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 buy 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 the 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 to you by
the Fund of such ordinary income will be subject to regular federal and,
possibly, 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 you
received them 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 Fund shares and whether you receive the
distributions in cash or in additional shares.
Redemptions and exchanges of Fund shares are taxable events on which you may
realize a gain or loss. Any loss incurred on a 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 the 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, including the
portion of the dividends on an average basis which constitutes taxable income or
interest income that is a tax preference item under the federal alternative
minimum tax. If you have not held Fund shares 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 includible in the tax base for determining the
extent to which any social security or railroad retirement benefits you receive
will be subject to regular federal income tax. You are required to disclose the
receipt of tax-exempt interest on your federal income tax returns.
Interest on indebtedness incurred by you (directly or indirectly) to purchase or
carry Fund 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 advisor 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. The Appendices to this prospectus discuss the
tax treatment of the State Funds with respect to distributions from each
respective Fund to investors in such states. Generally, individual shareholders
of the Funds are afforded tax-exempt treatment at the state level for
distributions derived from municipal securities of their state of residency. In
some states, shareholders of the High Yield Fund also may be afforded tax-exempt
treatment at the state level on distributions from that Fund to the extent they
are derived from tax-exempt securities issued by that state or its
municipalities.
Pursuant to federal law, interest received directly from U.S. government
obligations and from obligations of the U.S. territories is generally exempt
from income taxation by all states and their municipal subdivisions. Each
state's treatment of dividends paid from the interest earned on direct federal
and U.S. territorial obligations is discussed under "Appendices - State Tax
Treatment."
You should consult your tax advisor 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.
Glossary
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
CD - Certificate of deposit
Class I and Class II - The Fund offers two classes of shares, designated "Class
I" and "Class II." The two classes have proportionate interests in the Fund's
portfolio. They differ, however, primarily in their sales charge structures and
Rule 12b-1 plans.
Code - Internal Revenue Code of 1986, as amended
Contingency Period - For Class I shares, the 12 month period during which a
Contingent Deferred Sales Charge may apply. For Class II shares, the contingency
period is 18 months. Regardless of when during the month you purchased shares,
they will age one month on the last day of that month and each following month.
Contingent Deferred Sales Charge (CDSC) - A sales charge of 1% that may apply if
you sell your shares within the Contingency Period.
Distributors - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Trustees."
Eligible Governmental Authority - Any state or local government or any
instrumentality, department, authority or agency thereof that has determined the
Fund is a legally permissible investment and that can only buy shares of the
Fund without paying sales charges.
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., the Fund's
shareholder servicing and transfer agent.
IRS - Internal Revenue Service
Letter - Letter of Intent
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.
NASD - National Association of Securities Dealers, Inc.
Net Asset Value (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NSCC - National Securities Clearing Corporation
Offering Price - The public offering price is based on the Net Asset Value per
share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 4.25% for Class I and 1% for Class II.
REIT - Real Estate Investment Trust
Resources - Franklin Resources, Inc.
SAI - Statement of Additional Information
SEC - U.S. Securities and Exchange Commission
Securities Dealer - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the 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
We/Our/Us - Unless the context indicates a different meaning, these terms refer
to the Fund and/or Investor Services, Distributors, or another wholly owned
subsidiary of Resources.
Appendices
Description of Ratings
MUNICIPAL BOND RATINGS
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: Municipal bonds rated BBB are regarded as having an adequate capacity to
pay principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
BB, B, CCC, CC: Municipal bonds rated BB, B, CCC and CC are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of the
obligations. BB indicates the lowest degree of speculation and CC the highest
degree of speculation. While 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.
MUNICIPAL NOTE RATINGS
S&P
Until June 29, 1984, S&P used the same rating symbols for notes and bonds. After
June 29, 1984, for new municipal note issues due in three years or less, the
ratings below will usually be assigned. Notes maturing beyond three years will
most likely receive a bond rating of the type recited above.
SP-1: Issues carrying this designation have a very strong or strong capacity to
pay principal and interest. Issues determined to possess overwhelming safety
characteristics will be given a "plus" (+) designation.
SP-2: Issues carrying this designation have a satisfactory capacity to pay
principal and interest.
COMMERCIAL PAPER RATINGS
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.
State Tax Treatment
The following information on the state income tax treatment of dividends from
the State Funds is based upon correspondence and sources believed to be
reliable. Except where otherwise noted, the information pertains to individual
state income taxation only. You may be subject to local taxes on dividends or
the value of your shares. Corporations, trusts, estates and other entities may
be subject to other taxes and should consult with their tax advisors or their
state department of revenue or other tax administrator. For some investors, a
portion of the dividend income may be subject to the federal and/or state
alternative minimum tax.
ARIZONA
Section 43-1021(4) of the Arizona Income Tax Code states that interest on
obligations of the state of Arizona or its political subdivisions is exempt from
personal and corporate income tax. Sections 43-1022(6) and 43-1122(6) provide
similar tax-exempt treatment for interest on obligations of the U.S. or its
territories (including Puerto Rico, Guam and the Virgin Islands). Pursuant to
State Income Tax Ruling Number 84-10-5, Arizona does not tax dividend income
from regulated investment companies, such as the Arizona Fund, to the extent
that such income is derived from such exempt obligations. Dividends paid from
interest earned on indirect U.S. government obligations (GNMAs, FNMAs, etc.),
repurchase agreements collateralized by U.S. government obligations or
obligations from other states and their political subdivisions are fully
taxable. To the extent that such taxable investments are made by the Fund for
temporary or defensive purposes, the distributions will be taxable on a pro rata
basis.
Any distributions of net short-term and net long-term capital gain earned by the
Fund are included in each shareholder's Arizona taxable income as dividend
income and long-term capital gain respectively, and are taxed at ordinary income
tax rates.
COLORADO
Sections 39-22-104 and 39-22-304 of the Colorado Revised Statutes state that
interest on obligations of the state of Colorado or its political subdivisions
and direct obligations of the U.S. or its possessions is exempt from personal
and corporate income tax. The Colorado Department of Revenue has advised that
distributions from a regulated investment company, such as the Colorado Fund,
will also be exempt from personal and corporate income tax if the Fund invests
in such exempt obligations. The state of Colorado has confirmed that this
exclusion also applies to territorial obligations of the U.S. (including Puerto
Rico, Guam and the Virgin Islands). Dividends paid from interest earned on
indirect U.S. government obligations (GNMAs, FNMAs, etc.), repurchase agreements
collateralized by U.S. government obligations or obligations of other states and
their political subdivisions do not qualify for this exemption. To the extent
that such taxable investments are made by the Fund for temporary or defensive
purposes, the distributions will be taxable on a pro rata basis.
Any distributions of net short-term and net long-term capital gain earned by the
Fund are included in each shareholder's Colorado taxable income as dividend
income and long-term capital gain respectively, and are taxed at ordinary income
tax rates.
CONNECTICUT
Section 12-701(a)(20) of the Connecticut General Statutes states that interest
income from obligations issued by or on behalf of the state of Connecticut, its
political subdivisions, public instrumentalities, state or local authority,
district, or a similar public entity created under the laws of the state of
Connecticut and direct obligations of the U.S. or its territories (including
Puerto Rico, Guam and the Virgin Islands) is exempt from state personal income
tax. Dividends paid by a regulated investment company, such as the Connecticut
Fund, which are derived from such exempt obligations will be exempt from state
personal income tax to the extent of such obligations. Corporate shareholders
are generally subject to Connecticut corporation income taxes on distributions
from the Fund. Section 12-701(a)(20) of the Connecticut General Statutes also
states that a fund is qualified to pay exempt dividends derived from exempt U.S.
government obligations to its shareholders if, at the close of each quarter of
its taxable year, at least 50% of the value of its total assets consists of
exempt U.S. government obligations. Dividends paid from interest earned on
indirect U.S. government obligations (GNMAs, FNMAs, etc.), repurchase agreements
collateralized by U.S. government securities or obligations of other states and
their political subdivisions do not qualify for this exemption. It is not
anticipated that the Fund will invest 50% or more of the value of its assets in
qualifying U.S. government obligations and, therefore, will not be able to pass
through tax-exempt income derived from such obligations.
Any distributions of net short-term and long-term capital gain earned by the
Fund are included in each shareholder's Connecticut taxable income as dividend
income and long-term capital gain, respectively, and are taxed at ordinary
income tax rates.
INDIANA
Corporate taxpayers may be subject to several separate Indiana income taxes on
income derived from sources within Indiana. Generally corporations are subject
to the higher of the adjusted gross income tax or the gross income tax, plus a
supplemental net income tax. Individuals, estates and trusts resident in Indiana
are generally subject only to the adjusted gross income tax.
Gross Income Tax: Information Bulletins 19 and 79 issued by the Indiana
Department of Revenue provide that the proportionate share of dividends received
from a regulated investment company, such as the Indiana Fund, derived from
investments in direct obligations of the U.S. or its possessions (including
Puerto Rico, Guam and the Virgin Islands), will be exempt from the Indiana Gross
Income Tax An exemption is also provided under Indiana law for exempt interest
dividends derived from interest on obligations of the State of Indiana or its
political subdivisions.
Adjusted Gross Income Tax: All of the obligations referred to in the foregoing
Bulletins are exempt from the Indiana Adjusted Gross Income Tax.
For all taxpayers, dividends paid from interest earned on indirect U.S.
Government obligations (GNMAs, FNMAs, etc.) and repurchase agreements
collateralized by U.S. Government obligations, to the extent that such
investments are made by the Fund for temporary or defensive purposes, will be
taxable on a pro rata basis. The Fund will file all appropriate certification
documents with the Indiana Department of Revenue indicating the exempt portion
of distributions to shareholders.
Any distributions of net short-term and net long-term capital gain earned by the
Fund are included in the shareholder's Indiana taxable income as dividend income
and long-term capital gain, respectively, and are taxed at ordinary income tax
rates.
MICHIGAN
Section 206.30(1) of the Michigan Compiled Laws generally provides that taxable
income, for purposes of the Michigan individual income tax, is determined by
reference to federal adjusted gross income, with certain modifications. Interest
and dividends derived from obligations or securities of states other than
Michigan (less related expenses) must be added back in determining Michigan
taxable income. Interest and dividends derived from obligations or securities of
Michigan (and its political subdivisions) are exempt and are not, therefore,
added back in determining Michigan taxable income. Further, income derived from
obligations of the U.S. government that the state is prohibited by law from
subjecting to a net income tax is subtracted in determining Michigan taxable
income. This includes direct obligations of the U.S. government, its agencies,
instrumentalities, or possessions (including Puerto Rico, Guam and the Virgin
Islands). Revenue Administrative Bulletin 1986-3, states that a regulated
investment company, such as the Michigan Fund, which invests in tax-free
municipal obligations of the state of Michigan and its political and
governmental subdivisions is permitted to pass-through the exemption of such
interest to its shareholders to the extent that such interest qualifies as an
exempt-interest dividend of a regulated investment company. The exempt nature of
interest from obligations of the U.S. and its territories and possessions may
also be passed-through to shareholders. Dividends paid from interest earned on
indirect U.S. government obligations (GNMAs, FNMAs, etc.), 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 will generally be included in each shareholder's Michigan taxable
income as dividend income and long-term capital gain respectively, and taxed at
ordinary income tax rates.
Section 205.133 of the Michigan Compiled Laws exempts from the intangible
personal property tax obligations of the state of Michigan and its political
subdivisions and obligations of the U.S. and its possessions, agencies and
instrumentalities. Pursuant to Revenue Administrative Bulletin 1986-3, an owner
of a share of a regulated investment company, such as the Michigan Fund, will be
considered the owner of a pro-rata share of the assets of such regulated
investment company. It further provides that yield (for intangibles tax
purposes) is determined with respect to shares of the Michigan Fund by excluding
from gross dividends or interest the pro rata share of the interest or dividends
received from such exempt obligations held by the Fund. According to the
instructions to the 1995 Michigan Form c-6606, capital gains from a regulated
investment company that are reinvested in additional shares of the Fund are
exempt from intangibles taxes, whereas capital gains distributed in cash are
taxable.
You should consult your tax advisor with respect to the applicability of other
state and local intangible property or income taxes to your shares in the Fund
and to distribution and redemption proceeds received from the Fund.
NEW JERSEY
Section 54A:6-14.1 of the New Jersey Statutes provides that distributions paid
by qualified investment funds, such as the New Jersey Fund, are not included in
gross income for purposes of the New Jersey gross income tax to the extent the
distributions are attributable to interest or gain from obligations issued by or
on behalf of the state of New Jersey or its political subdivisions, or
obligations free from state or local taxation by any act of the state of New
Jersey or laws of the U.S. (including obligations of the District of Columbia,
Puerto Rico, Guam and the Virgin Islands). To qualify, the Fund must invest at
least 80% of its assets (excluding financial options, futures, forward
contracts, or other similar financial instruments related to interest-bearing
obligations, obligations issued at a discount or bond indexes related thereto,
cash and cash items) in such exempt obligations and have no investments other
than interest-bearing or discounted obligations, cash or cash items, including
receivables, and financial options, futures, forward contracts or other similar
financial instruments related to interest-bearing obligations, obligations
issued at a discount or bond indexes related thereto. Dividends paid from
interest earned on indirect U.S. government obligations (GNMAs, FNMAs, etc.),
repurchase agreements collateralized by U.S. government obligations or
obligations of other states and their political subdivisions are fully taxable.
To the extent that such taxable investments are made by the Fund for temporary
or defensive purposes, the distributions will be taxable on a pro rata basis.
The Fund will file all appropriate certification documents with the New Jersey
Department of Revenue to qualify to distribute exempt interest dividends to
shareholders.
Any distributions of net short-term and net long-term capital gain earned by the
Fund from taxable obligations are included in each shareholder's New Jersey
taxable income as dividend income and long-term capital gain, respectively, and
are taxed at ordinary income tax rates.
OREGON
Section 316.683 of the Oregon Revised Statutes and Oregon Administrative Rule
150-316.680(B) provide that the state exempt-interest dividends received by
residents of the state paid by a regulated investment company, such as the
Oregon Fund, are exempt from Oregon personal income tax. State exempt-interest
dividends are dividends from interest earned on exempt obligations of the U.S.,
its territories (including Puerto Rico, Guam and the Virgin Islands), and
possessions of any U.S. authority, commission, or instrumentality, or on state
and local obligations of Oregon. Corporate shareholders are generally subject to
the Oregon corporation income tax on distributions from the Fund. Dividends paid
from interest earned on indirect U.S. government obligations (GNMAs, FNMAs,
etc.), repurchase agreements collateralized by U.S. government obligations or
obligations of other states and their political subdivisions are fully taxable.
To the extent that such taxable investments are made by the Fund for temporary
or defensive purposes, the distributions will be taxable on a pro rata basis.
Any distributions of net short-term and net long-term capital gain earned by the
Fund are included in each shareholder's Oregon taxable income as dividend income
and long-term capital gain respectively, and are taxed at ordinary income tax
rates.
PENNSYLVANIA
Section 303 of the Tax Reform Code of Pennsylvania states that interest income
derived from obligations which are statutorily free from state or local taxation
under the laws of the Commonwealth of Pennsylvania or under the laws of the U.S.
is exempt from state personal income tax. Such exempt obligations include
obligations issued by the Commonwealth of Pennsylvania, any public authority,
commission, board or other state agency, any political subdivision of the state
or its public authority, and certain obligations of the U.S. or its territories
(including Puerto Rico, Guam and the Virgin Islands). Section 301 of the Code of
Pennsylvania states that interest derived by an investment trust, such as the
Pennsylvania Fund, from such exempt obligations is not subject to state,
personal or corporate net income tax. Fund distributions and the value of Fund
shares, however, are generally included in the tax base in determining the
corporation capital stock or foreign franchise tax. Distributions paid from
interest earned on indirect U.S. government obligations (GNMAs, FNMAs, etc.),
repurchase agreements collateralized by U.S. government obligations or
obligations of other states and their political subdivisions are fully taxable.
To the extent that such taxable investments are made by the Fund for temporary
or defensive purposes, the distributions will be taxable on a pro rata basis.
Distributions paid by the Fund are also generally exempt from the Philadelphia
School District Investment Income Tax.
Shareholders of the Fund who are subject to the Pennsylvania personal property
tax in their county of residence will be exempt from county personal property
tax to the extent that the portfolio of the Fund consists of such exempt
obligations on the annual assessment date of January 1. Information regarding
the portion of the value of the shares, if any, which is subject to the
Pennsylvania personal property tax will be provided to shareholders of the Fund.
Any distributions of net short-term and long-term capital gain earned by the
Fund are included in each shareholder's Pennsylvania taxable income as dividend
income and long-term capital gain respectively, and are taxed at ordinary income
tax rates.
PUERTO RICO
For U.S. citizens and residents, exempt-interest dividends received from the
Puerto Rico Fund are generally exempt from U.S. federal and state personal
income taxation in all states which impose an income tax, pursuant to 26 USC
section 103 and 31 USC section 3124. For Puerto Rico taxpayers, exempt-interest
dividends to the extent derived from Puerto Rico, Guam and Virgin Island
obligations will generally be exempt from Puerto Rico taxation pursuant to a
ruling dated May 24, 1996.
Special Factors Affecting Each State Fund
Some of the economic factors that may affect each State Fund are summarized
below. The information is based primarily on information from municipal credit
reports, public documents relating to the securities offerings of state issuers
and historically reliable sources. This information has not been independently
verified by the Trust, nor is it intended to be comprehensive. More information
about each state is included in the SAI.
ARIZONA
Although Arizona's population growth slowed in the 1990's as compared to the
1980's, its population has continued to increase and its growth in employment
still exceeds the national average. Employment in Arizona continues to shift
from agriculture and mining towards manufacturing (11%), trade (24%), services
(28%) and government (17.6%). The shift away from farming, which uses about 80%
of the state's water, will likely result in more water for municipal uses.
Affordable housing and competitive wage rates are expected to continue
attracting business to the state.
Gross state debt levels remain moderate, but tax cuts in the 1980's have made it
more difficult for the state to balance its budget. Income and property tax cuts
in fiscal 1996 and 1997 have created additional budget concerns, especially if
the economy slows down. State financial operations, however, are expected to
remain sound.
COLORADO
While Colorado suffered through a sharp economic downturn in the mid-to-late
1980's when it was largely dependent on the energy sector, in the 1990's the
state has seen strong population growth and diversification of its economy. A
strong housing market and job growth in some sectors have mitigated the expected
job losses in construction and the defense industry. While the unemployment rate
for the nation was 6.1% in 1994, Colorado's unemployment rate was considerably
lower at 4.2%.
Wage and salary employment expanded 1.1%, 5.2% and 6.1% in 1992, 1993 and 1994,
respectively, while real personal income grew more than 7% in each of those
years. Colorado has a diversified employment base consisting of services
(27.7%), trade (24.8%), government (16.0%) and manufacturing (10.9%). While
personal income is not expected to increase as quickly as it has in recent
years, personal income growth is still strong by national standards.
CONNECTICUT
Connecticut is the highest income state in the nation, with per capita personal
income levels of 135% of the national average. The state is slowly recovering
from the longest (1989-1993) and one of the most severe recessions in the
country.
The state's unemployment rate has remained below national levels in recent
years, and employment growth is expected to continue to improve modestly. The
construction, trade and service sectors are expected to lead the state's
recovery, somewhat offsetting downsizing in the insurance, defense
manufacturing, finance and real estate industries. Employment growth is not
expected to reach prerecession levels until the end of the decade.
Financial recovery from the recent recession continues, in part due to fiscal
reforms such as conservative budget forecasting. A personal income tax and
reduced sales tax initiated in 1992 have also help to restore fiscal balance. As
of April 1996, revenues for fiscal 1996 were expected to be higher than
budgeted, due primarily to increases in personal income and sales taxes.
The state's ratio of tax-supported debt to personal income is now among the
highest of the states. Connecticut's high debts are expected to limit its
financial flexibility in the future.
INDIANA
Indiana has a cyclical tax and employment base and strong operating balances.
During the early to mid-1980's its dependence on durable manufacturing,
particularly in the steel and automobile sectors, led to a volatile economy. The
restructuring of these industries during the past ten years, however, is
expected to reduce Indiana's vulnerability to a manufacturing-based recession.
Still, manufacturing accounted for about 23% of employment in 1995, the highest
percentage of employment in the manufacturing sector of all of the states.
During the last three years, the state has seen good growth in income and
employment, with the state's manufacturing sector experiencing positive growth.
The capital spending and business investment by the manufacturing sector have
fostered growth in the trade and service sectors. Airport expansion projects and
the construction of the $1 billion United Airlines maintenance facility have
contributed to the emergence of Indiana as a transportation and distribution
hub. The state has also become a low-cost alternative for professional service
and back office operations.
MICHIGAN
While Michigan's economy is traditionally based on heavy manufacturing, growth
in the services and trade sectors over the last decade has led to a more
diversified economy. Michigan's economy is still closely linked to the
manufacturing industry. However, in 1991, about 23% of total jobs in Michigan
were in the manufacturing sector versus 17% nationally. The state's economy
continues to rely on national economic trends, especially the demand for durable
goods.
A weakened demand for capital goods, a slowdown in private investment, and
weakness in the market for automobile and transportation goods resulted in poor
economic performance and considerable job losses for Michigan during the
recession. Since the recession, however, the state economy has shown a very
strong recovery. Employment growth in the service sector has led to an
unemployment rate below the national average for the first time in almost 20
years, and more employment growth is expected in the service-related industries.
While the decline in jobs in automobile (from 10.8% of total jobs in 1979 to
6.9% in 1989) and other durable goods manufacturing has been offset by job
growth in other areas, per capita income dropped from 108% of the U.S. figure in
1977 to 99% in 1994.
NEW JERSEY
While New Jersey has one of the most diverse economies in the nation, its
recovery from the recent recession has been slower than the national average.
The recession hit especially hard in New Jersey, with layoffs in manufacturing
and construction leading to an unemployment rate 1% above the national average
in 1992. Since the recession, the economy has improved, although job and income
growth continue to lag the rest of the nation. Growth has been strongest in the
service sector, and manufacturing jobs have continued to decline.
Corporate mergers and subsequent downsizing, especially in the commercial
banking industry, are expected to restrain economic growth in New Jersey.
Because New Jersey has lower taxes and business costs than New York City,
however, companies still find it an attractive location to base their central
operations. In addition, New Jersey's well-developed transportation
infrastructure and educational institutions are expected to contribute to the
state's long-term stability.
OREGON
Since 1987, Oregon's economy has outperformed the nation's, with total jobs
increasing 19% in 1994. The service sector has led job creation, accounting for
77% of total job growth in the past year. Because service jobs are lower paying
than manufacturing, however, income growth has not kept pace with employment
increases. Rural areas of Oregon report much higher unemployment rates than the
metropolitan areas.
Migration from other states and the increasing importance of high technology
manufacturing and Pacific Rim trade have helped drive economic growth and
diversification away from the timber and wood products sector. An increasing
pool of skilled labor and comparatively cheap land has increased the interest of
businesses in relocating to Oregon, primarily high-tech and computer chip
companies. The state's comparatively strong economy and low cost of living have
also contributed to its population growth, which is increasing 2% annually.
PENNSYLVANIA
The national economy's strong growth in 1994 fueled Pennsylvania's full recovery
from the recent recession. The core manufacturing sector grew at a level in 1994
that has not been experienced since the late 1980's and it has struggled to make
itself more competitive in the global economy. As the national economy slows
again, however, a reduced demand for manufactured goods is expected to lead to
more employment losses in the state. In addition, rollbacks in defense
expenditures and foreign competition continue to impact that sector. While the
service sector is expected to add new jobs, a decline in manufacturing jobs and
low population growth are expected to limit job growth in Pennsylvania overall.
Although the state has the lowest energy and labor costs in the Northeast, it so
far has not been able to capitalize on these advantages.
PUERTO RICO
Despite long-term economic progress, Puerto Rico continues to suffer from high
unemployment and poverty. While its economic base continues to grow, income
levels are below the poorest of the states and unemployment rates consistently
exceed those on the mainland.
Manufacturing constitutes 42% of the island's GDP and 16% of employment.
Pharmaceuticals, machinery and metal products are the most significant
contributors to manufacturing income, followed by food products and apparel.
Puerto Rico is uniquely susceptible to outside influences which affect its
economic development. Its lack of domestic energy sources forces it to rely on
fuel imports for generating power, so its economy is vulnerable to fluctuations
in the price of petroleum.
Puerto Rico is also vulnerable to changes in U.S. policy. For example, in 1993
Congress restricted corporations' ability to take advantage of Section 936 of
the Code, and in 1995 proposed to eliminate it. This Code section gives certain
U.S. corporations tax credits to offset some or all of their tax liability on
earnings from Puerto Rican operations. Section 936 has been a major force behind
the development of manufacturing in Puerto Rico, and the changes or possible
elimination of it are likely to negatively impact the island's economy. Another
example is the recent passage of the North American Free Trade Agreement
(NAFTA), which is likely to result in increased competition for Puerto Rican
labor-intensive industries like textiles and apparel.
Instructions and Important Notice
Substitute W-9 Instructions Information
General. Backup withholding is not an additional tax. Rather, the tax liability
of persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained from the IRS.
Obtaining A Number. If you do not have a Social Security Number Taxpayer
Identification Number or you do not know your SSN TIN, you must obtain Form SS-5
or Form SS-4 from your local Social Security or IRS office and apply for one. If
you have checked the "Awaiting TIN" box and signed the certification,
withholding will apply to payments relating to your account unless you provide a
certified TIN within 60 days.
What SSN/TIN to Give. Please refer to the following guidelines:
ACCOUNT TYPE GIVE SSN OF ACCOUNT TYPE GIVE EMPLOYER ID # OF
oIndividual Individual oTrust, Estate, or Trust, Estate, or
Pension Plan Trust Pension Plan Trust
oJoint Owner who oCorporation, Corporation,
Individual will be Partnership Partnership, or
paying tax or other other organization
of first organization
named
individual
oUnif. Gift/ Minor oBroker nominee Broker nominee
Transfer to
Minor
oSole Owner of business
Proprietor
oLegal Ward, Minor, or
Guardian Incompetent
Exempt Recipients. Please provide your TIN and check the "Exempt Recipient" box
if you are an exempt recipient. Exempt recipients include:
A corporation
A financial institution
An organization exempt from tax
under section 501(a), or an individual retirement plan
A registered dealer in securities or commodities registered in the U.S.
or a U.S. possession
A real estate investment trust
A common trust fund operated by
a bank under section 584(a)
An exempt charitable remainder trust
or a non-exempt trust described in section 4947(a)(1)
An entity registered at all times under
the Investment Company Act of 1940
IRS Penalties. If you do not supply us with your SSN/TIN, you will be subject to
an IRS $50 penalty unless your failure is due to reasonable cause and not
willful neglect. If you fail to report certain income on your federal income tax
return, you will be treated as negligent and subject to an IRS 20% penalty on
any underpayment of tax attributable to such negligence, unless there was
reasonable cause for the resulting underpayment and you acted in good faith. If
you falsify information on this form or make any other false statement resulting
in no backup withholding on an account which should be subject to backup
withholding, you may be subject to an IRS $500 penalty and certain criminal
penalties including fines and imprisonment.
20.21/150 (07/96)
Substitute W-8 Instructions Information
Exempt Foreign Person. Check the "Exempt Foreign Person" box if you qualify as a
non-resident alien or foreign entity that is not subject to certain U.S.
information return reporting or to backup withholding rules. Dividends paid to
your account may be subject to withholding of up to 30%. You are an "Exempt
Foreign Person" if you are not (1) a citizen or resident of the U.S., or (2) a
U.S. corporation, partnership, estate, or trust. In the case of an individual,
an "Exempt Foreign Person" is one who has been physically present in the U.S.
for less than 31 days during the current calendar year. An individual who is
physically present in the U.S. for at least 31 days during the current calendar
year will still be treated as an "Exempt Foreign Person," provided that the
total number of days physically present in the current calendar year and the two
preceding calendar years does not exceed 183 days (counting all of the days in
the current calendar year, only one-third of the days in the first preceding
calendar year and only one-sixth of the days in the second preceding calendar
year). In addition, lawful permanent residents or green card holders may not be
treated as "Exempt Foreign Persons." If you are an individual or an entity, you
must not now be, or at this time expect to be, engaged in a U.S. trade or
business with respect to which any gain derived from transactions effected by
the Fund/Payer during the calendar year is effectively connected to the U.S. (or
your transactions are exempt from U.S.
taxes under a tax treaty).
Permanent Address. The Shareholder Application must contain your permanent
address if you are an "Exempt Foreign Person." If you are an individual, provide
your permanent address. If you are a partnership or corporation, provide the
address of your principal office. If you are an estate or trust, provide the
address of your permanent residence or the principal office of any fiduciary.
Notice of Change in Status. If you become a U.S. citizen or resident after you
have provided certification of your foreign status, or if you cease to be an
"Exempt Foreign Person," you must notify the Fund/Payer within 30 days of your
change in status. Reporting will then begin on the account(s) listed, and backup
withholding may also begin unless you certify to the Fund/Payer that (1) the tax
payer identification number you have given is correct, and (2) the Internal
Revenue Service has not notified you that you are subject to backup withholding
because you failed to report certain interest or dividend income. You may use
Form W-9, "Payer's Request for Taxpayer Identification Number and
Certification," to make these certifications. If an account is no longer active,
you do not have to notify a Fund/Payer or broker of your change in status unless
you also have another account with the same Fund/Payer that is still active. If
you receive interest from more than one Fund/Payer or have dealings with more
than one broker or barter exchange, file a certificate with each. If you have
more than one account with the same Fund/Payer, the Fund/Payer may require you
to file a separate certificate for each account.
When to File. File these certifications with the Fund before a payment is made
to you, unless you have already done this in either of the two preceding
calendar years.
How Often You Must File. This certificate generally remains in effect for three
calendar years. A Fund/Payer or broker, however, may require that a new
certificate be filed each time a payment is made. On joint accounts for which
each joint owner is a foreign person, each must provide a certification of
foreign status.
20.21/150 (07/96)
Franklin Funds
Automatic Investment Plan
777 Mariners Island Blvd., P.O. Box 7777, San Mateo, CA 94403-7777
The Franklin Automatic Investment Plan gives you the convenience of
automatically investing in a Fund on a monthly basis. Shares are purchased at
the applicable offering price, as indicated in the Prospectus, next calculated
after receipt of funds from your bank. There is no additional charge for this
service by the Fund or Franklin/Templeton Investor Services, Inc.
Your monthly investments will be made by electronic funds transfer (EFT) from
your checking account if your bank is a member of an Automated Clearing House
(ACH). Otherwise, they will be made by checks prepared by our bank. Your
signature below is the authorizing signature for each transfer or check. This
service is subject to the rules for the bank account, ACH and the Fund. Franklin
may correct any transfer error by a debit or credit to your bank account and/or
Fund account.
You may sign up for the Automatic Investment Plan at the time you open a new
account or any time after you have established an account at Franklin. If the
Automatic Investment Plan is initiated at the time you open your account, the
Fund's minimum initial investment amount is reduced and the account may be
opened with an investment of $25 or more. Existing account holders may choose
any amount, starting with the $25 minimum subsequent amount, for investment in
their Fund account from their bank account. All you need to do is complete the
application below and attach a voided, unsigned check which shows your bank
account number in magnetic coding. Please allow up to six weeks for the Plan to
begin.
Changing or Discontinuing the Plan
When Franklin/Templeton Investor Services, Inc. is advised by you to stop your
Automatic Investment Plan, no investments will be processed until written notice
is received to initiate the Plan again. Franklin will need ten days written or
verbal notice to stop an Automatic Investment Plan prior to an upcoming pay
date. Ten days written notice is required if you are changing bank information
other than the dollar amount. If a check or transfer is returned to Franklin for
any reason, including stop payment, insufficient funds or account closed, your
Automatic Investment Plan will be discontinued. Franklin may also change or
terminate the service by written notice to you.
Exchanges
If you exchange shares from one Franklin fund to another, the Automatic
Investment Plan does not transfer to the new account, but Franklin will
automatically send you a Plan application. Or, you may notify us by telephone if
the Plan is to be transferred and credited to a fund other than that listed on
the original application.
Retirement Accounts
When using the Automatic Investment Plan for Franklin Templeton Trust Company
retirement accounts, all purchases will be credited as a contribution for the
year in which they are received. Please be sure to monitor the amount of money
credited to your retirement account to avoid making an excess contribution.
20.24/101 A (07/96)
Automatic Investment Plan Application:
Name(s)
(Please print as shown on Franklin account registration.)
Address
Telephone
Bank's Name
Branch Address
Name(s) on Bank Account
Checking Account No.
Please attach a voided check.
[Franklin Use Only: ABA No. ]
Please invest my Automatic investments for $ per month in:
Franklin Fund Name
Franklin Fund Account No.
Preferred Monthly Date of Checking Account Debit:
1st bank business day on or after the: 5th or 20th
Signature(s) Date
All registered owners must sign.
If you have any questions, please call a Shareholder Services
representative, toll free, at 1-800/632-2301.
Automatic Investment Plan Revision -
Complete only if you are revising existing Automatic Investment Plan: (and
complete section above)
Bank Change Amount Change $
(Attach new voided check) (Indicate new amount)
Other
Note: Please give Franklin ten days written notice to change bank information
other than the dollar amount.
Please Return this Form to:
Franklin/Templeton Investor Services, Inc., Attn: AUTOMATIC INVESTMENT PLAN
Dept., 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, CA 94403-7777.
20.24/101 A (07/96)
Franklin Templeton
Telephone Redemption Authorization Agreement
You may use Franklin Templeton's telephone redemption privilege to redeem
uncertificated Franklin Templeton Fund shares for up to $50,000 (or your
shareholder account balance, whichever is less) per day, per fund account in
accordance with the terms of the Funds' prospectus.
The telephone redemption privilege is available only to shareholders who
specifically request it. If you would like to add this redemption privilege to
the other telephone transaction privileges now automatically available to
Franklin Templeton Fund shareholders, please sign and return this authorization
to Franklin/Templeton Investor Services, Inc. ("Investor Services"), transfer
agent and shareholder servicing agent for the Franklin Templeton Funds.
Shareholder Authorization: I/We request the telephone redemption privilege under
the terms described below and in the prospectus for each investment company in
Franklin Templeton (a "Franklin Templeton Fund" or a "Fund"), now open or opened
at a later date, holding shares registered as follows:
Print name(s) as shown in registration (called "Shareholder")
Account number(s)
I/We authorize each Fund and Investor Services to honor and act upon telephone
requests, given as provided in this agreement, to redeem shares from any
Shareholder account.
Signature(s) of all registered owners and date
Printed name (and title/capacity, if applicable)
Verification Procedures: I/We understand and agree that: (1) each Fund and
Investor Services will employ reasonable procedures to confirm that redemption
instructions communicated by telephone are genuine and that if these
confirmation procedures are not followed, the Fund or Investor Services may be
liable for any losses due to unauthorized or fraudulent telephone instructions;
(2) the confirmation procedures will include the recording of telephone calls
requesting redemptions, 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 the
sending of confirmation statements to the address of record each time a
redemption is initiated by telephone; and (3) as long as the Fund and Investor
Services follow the confirmation procedures in acting on instructions
communicated by telephone which were reasonably believed to be genuine at the
time of receipt, neither they nor their parent or affiliates will be liable for
any loss, damages or expenses caused by an unauthorized or fraudulent redemption
request.
Jointly Owned/Co-Trustee Accounts: Each of us signing this agreement as either
joint owners or co-trustees authorize each Fund and Investor Services to honor
telephone redemption requests given by ANY ONE of the signers or our investment
representative of record, if any, ACTING ALONE.
20.21/140 (07/96)
Appointment of Attorney-in-Fact: In order to issue telephone redemption requests
acting alone, each of us individually makes the following appointment: I hereby
appoint the other joint owner(s)/co-trustee(s) as my agent(s)
(attorney[s]-in-fact) with full power and authority to individually act for me
in any lawful way with respect to the issuance of instructions to a Fund or
Investor Services in accordance with the telephone redemption privilege we have
requested by signing this agreement. This appointment shall not be affected by
my subsequent disability or incompetency and shall remain in effect until it is
revoked by either written notice from any one of us delivered to a Fund or
Investor Services by registered mail, return receipt requested, or by a Fund or
Investor Services upon receipt of any information that causes a Fund or Investor
Services to believe in good faith that there is or that there may be a dispute
among any of us with respect to the Franklin Templeton Fund account(s) covered
by this agreement. Each of us agrees to notify the Fund or Investor Services
immediately upon the death of any of the undersigned.
Corporate/Partnership/Trust/Retirement Accounts: The Shareholder and each of us
signing this agreement on behalf of the Shareholder represent and warrant to
each Franklin Templeton Fund and Investor Services that the Shareholder has the
authority to enter into this agreement and that each of us are duly authorized
to execute this agreement on behalf of the Shareholder. The Shareholder agrees
that its election of the telephone redemption privilege means that a Fund or
Investor Services may honor a telephone redemption request given by ANY
officer/partner/member/administrator or agent of Shareholder ACTING ALONE.
Restricted Accounts: Telephone redemptions and dividend option changes may not
be accepted on Franklin Templeton Trust Company retirement accounts.
Please Return this Form to:
Franklin/Templeton Investor Services, Inc.
Attn: D/P REVISIONS Dept.
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777.
20.21/140 (07/96)
This page intentionally left blank.
Franklin Templeton Group of Funds
Literature Request ~ Call 1-800/DIAL BEN (1-800/342-5236) today for a free
descriptive brochure and prospectus on any of the funds listed below. The
prospectus contains more complete information, including fees, charges and
expenses, and should be read carefully before investing or sending money.
International Growth
Franklin Global Health Care Fund
Franklin International Equity Fund
Franklin Templeton Japan Fund
Templeton Developing Markets Trust
Templeton Foreign Fund
Templeton Global Infrastructure Fund
Templeton Global
Opportunities Trust
Templeton Global Real Estate Fund
Templeton Global Smaller
Companies Fund
Templeton Greater European Fund
Templeton Growth Fund
Templeton Latin America Fund
Templeton Pacific Growth Fund
Templeton World Fund
International Growth
and Income
Franklin Global Utilities Fund
Franklin Templeton German
Government Bond Fund
Franklin Templeton
Global Currency Fund
Templeton Global Bond Fund
Templeton Growth and Income Fund
International Income
Franklin Global Government
Income Fund
Franklin Templeton Hard
Currency Fund
Franklin Templeton High
Income Currency Fund
Templeton Americas
Government Securities Fund
Growth
Franklin Blue Chip Fund
Franklin California Growth Fund
Franklin DynaTech Fund
Franklin Equity Fund
Franklin Gold Fund
Franklin Growth Fund
Franklin MidCap Growth Fund
Franklin Small Cap Growth Fund
Growth and Income
Franklin Balance Sheet
Investment Fund
Franklin Convertible Securities Fund
Franklin Equity Income Fund
Franklin Income Fund
Franklin MicroCap Value Fund
Franklin Natural Resources Fund
Franklin Premier Return Fund
Franklin Real Estate Securities Fund
Franklin Rising Dividends Fund
Franklin Strategic Income Fund
Franklin Utilities Fund
Franklin Value Fund
Templeton American Trust, Inc.
Income
Franklin Adjustable Rate
Securities Fund
Franklin Adjustable U.S.
Government Securities Fund
Franklin AGE High Income Fund
Franklin Investment
Grade Income Fund
Franklin Short-Intermediate U.S.
Government Securities Fund
Franklin U.S. Government
Securities Fund
Franklin Money Fund
Franklin Federal Money Fund
For Non-U.S. Investors:
Franklin Tax-Advantaged
High Yield Securities Fund
Franklin Tax-Advantaged
International Bond Fund
Franklin Tax-Advantaged U.S.
Government Securities Fund
For Corporations:
Franklin Corporate Qualified
Dividend Fund
Franklin Funds Seeking
Tax-Free Income
Federal Intermediate-Term
Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund
Puerto Rico Tax-Free Income Fund
Tax-Exempt Money Fund
Franklin State-Specific Funds Seeking Tax-Free Income
Alabama
Arizona*
Arkansas**
California*
Colorado
Connecticut
Florida*
Georgia
Hawaii**
Indiana
Kentucky
Louisiana
Maryland
Massachusetts***
Michigan*
Minnesota***
Missouri
New Jersey
New York*
North Carolina
Ohio***
Oregon
Pennsylvania
Tennessee**
Texas
Virginia
Washington**
Variable Annuities
ValuemarkSM
Franklin Templeton Valuemark
Income Plus (an immediate annuity)
*Two or more fund options available: long-term portfolio, intermediate-term
portfolio, a portfolio of insured municipal securities, and/or a high yield
portfolio (CA) and a money market portfolio (CA and NY).
**The fund may invest up to 100% of its assets in bonds that pay interest
subject to the federal alternative minimum tax.
***Portfolio of insured municipal securities.
FGF 07/96 TF3 P 07/96
Prospectus & Application
INVESTMENT STRATEGY
TAX-FREE INCOME
Franklin Federal Intermediate-Term
Tax-Free Income Fund
- -------------------------------------------------------------------------------
July 1, 1996
- --------------------------------------------------------------------------------
Tax-Free Trust
This prospectus contains information you should know before investing in the
Fund. Please keep it for future reference.
The Fund's SAI, dated July 1, 1996, as may be amended from time to time,
includes more information about the Fund's procedures and policies. It has been
filed with the SEC and is incorporated by reference into this prospectus. For a
free copy or a larger print version of this prospectus, call 1-800/DIAL BEN or
write the Fund at the address shown.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SEC OR ANY STATE SECURITIES COMMISSION NOR HAS THE SEC 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 DISTRIBUTORS.
This prospectus describes the Franklin Federal Intermediate-Term Tax-Free Income
Fund (the "Fund").
Franklin
Federal
Intermediate-Term Tax-Free
Income Fund
- --------------------------------------------------------------------------------
July 1, 1996
When reading this prospectus,
you will see terms that are
capitalized. This means the term
is explained in our glossary section.
Table of Contents
About the Fund
Expense Summary............................. 2
Financial Highlights........................ 3
How Does the Fund Invest Its Assets?........ 3
What Are the Fund's Potential Risks?........ 8
Who Manages the Fund?....................... 9
How Does the Fund Measure Performance?...... 11
How Is the Trust Organized?................. 11
About Your Account
How Do I Buy Shares?........................ 12
May I Exchange Shares for Shares of Another Fund? 17
How Do I Sell Shares?....................... 18
Transaction Procedures and Special Requirements 20
Services to Help You Manage Your Account.... 24
What Distributions Might I Receive From the Fund? 27
How Taxation Affects You and the Fund....... 28
Glossary
Useful Terms and Definitions................30
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN
About the Fund
Expense Summary
This table is designed to help you understand the costs of investing in the
Fund. It is based on the Fund's historical expenses for the fiscal year ended
February 29, 1996. Your actual expenses may vary.
Shareholder Transaction Expenses+
Maximum Sales Charge Imposed on Purchases
(as a percentage of Offering Price) 2.25%
Deferred Sales Charge NONE++
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees 0.63%*
Rule 12b-1 Fees 0.10%**
Other Expenses 0.12%
Total Fund Operating Expenses 0.85%*
------
- --------------------------------------------------------------------------------
+Many transactions may be processed through your Securities Dealer. Your dealer
may charge a fee for this service. ++There is no front-end sales charge if you
buy $1 million or more. A Contingent Deferred Sales Charge of 1% may apply,
however, if you sell the shares within one year. See "How Do I Sell Shares? -
Contingent Deferred Sales Charge" for details.
*Advisers has agreed in advance to limit its management fees and make certain
payments to reduce the Fund's expenses. With this reduction, management fees and
total Fund operating expenses were 0.43% and 0.65%, respectively. ** The
combination of front-end sales charge 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 the NASD's rules.
Example
Assume the Fund's annual return is 5% and its operating expenses are as
described above. For each $1,000 investment, you would pay the following
projected expenses if you sold your shares after the number of years shown.
1 Year 3 Years 5 Years 10 Years
$31* $49 $69 $125
*Assumes a Contingent Deferred Sales Charge will not apply.
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. The
Fund pays its operating expenses. These expenses are reflected in its Net Asset
Value or dividends and are not directly charged to your account.
Financial Highlights
This table summarizes the Fund's financial history. The information has been
audited by Coopers & Lybrand L.L.P., the Fund's independent auditors. Their
audit report covering each of the periods appears in the financial statements in
the Trust's Annual Report to Shareholders for the fiscal year ended February 29,
1996.
Period Ended Feb. 29 1993* 1994 1995 1996
- --------------------------------------------------------------------------------
Per Share Operating Performance
Net asset value at beginning of period $10.00 $10.54 $10.8 $10.48
Net investment income .14 .52 .54 .55
Net realized & unrealized gain (loss)
on securities .499 .289 (.331) .468
Total from investment operations .639 .809 .209 1.018
Distributions from net investment income (.099) (.549) (.529) (.548)
Total distributions (.099) (.549) (.529) (.548)
Net asset value at end of period $10.54 $10.80 $10.48 $10.95
Total return+ 14.77%** 7.82% (.20)% 9.93%
Ratios/supplemental data
Net assets at end of period (in 000's) $9,192 $67,603 $73,977 $85,967
Ratio of expenses to average net assets++ --% .30% .56% .65%
Ratio of net investment
income to average net assets 5.49%** 4.93% 5.25% 5.12%
Portfolio turnover rate 22.54% 28.76% 38.46% 3.35%
*For the period September 21, 1992 (effective date of registration) to February
28, 1993.
**Annualized.
+Total return measures the change in value of an investment over the periods
indicated. It is not annualized, except where indicated. It does not include the
maximum front-end sales charge or the Contingent Deferred Sales Charge and
assumes reinvestment of dividends and capital gains, if any, at Net Asset Value.
++During the periods indicated, Advisers agreed in advance to limit its
management fees and to make payment of certain operating expenses of the Fund.
Had such action not been taken, the ratio of expenses to average net assets
would have been as follows:
Ratio of Expenses
to Average Net Assets
---------------------
1993* 1.60%**
1994 0.89
1995 0.84
1996 0.85
How Does the Fund Invest Its Assets?
The Fund's Investment Objective
The Fund seeks to provide investors with as high a level of income exempt from
federal income taxes, including the individual alternative minimum tax, as is
consistent with prudent investing, while seeking preservation of shareholders'
capital. The Fund's investment objective is a fundamental policy of the Fund and
may not be changed without shareholder approval. The Fund intends to invest
primarily in a portfolio of investment grade obligations with a dollar weighted
average portfolio maturity of more than three years but not more than ten years.
Of course, there is no assurance that the Fund's objective will be achieved.
The Fund will attempt to invest 100% and, as a matter of fundamental policy,
will invest at least 80% of its total assets in securities that pay interest
exempt from federal income taxes, including the alternative minimum tax. The SEC
appears to require that 80% of the Fund's net assets must be invested in
securities exempt from federal taxation. The Fund will follow that policy not
withstanding its fundamental policy. It is possible, although not anticipated,
that up to 20% of the Fund's total assets may be in federally taxable
obligations.
The Fund may invest, without percentage limitations, in securities having, at
the time of purchase, one of the four highest ratings of Moody's Investors
Service ("Moody's") (Aaa, Aa, A, Baa), Standard & Poor's Corporation ("S&P")
(AAA, AA, A, BBB), or Fitch Investors Service, Inc. ("Fitch") (AAA, AA, A, BBB),
or in securities that are unrated if, in the opinion of Advisers, such
securities are comparable in quality to those within the four highest ratings.
These are considered to be "investment grade" securities. Bonds rated in the
fourth highest ratings level are regarded as having an adequate capacity to pay
principal and interest but with greater vulnerability to adverse economic
conditions and some speculative characteristics. In the event the rating of an
issue held in the Fund's portfolio is lowered by the rating services, such
change will be considered by the Fund in its evaluation of the overall
investment merits of that security, but such change will not necessarily result
in an automatic sale of the security. A description of the ratings is contained
in the Appendix in the SAI.
Advisers considers the terms of an offering and various other factors when
determining whether securities are consistent with the Fund's investment
objective and policies and thereafter when determining the issuer's comparative
credit rating. When making these determinations, Advisers may (i) interview
representatives of the issuer at its offices, (ii) tour and inspect the physical
facilities of the issuer to evaluate the issuer and its operations, (iii)
perform analysis of the issuer's financial and credit position, including
comparisons of all appropriate ratios, and (iv) compare other similar securities
offerings to the issuer's proposed offering.
Under normal market conditions, the Fund will invest its assets as described
above. For temporary defensive purposes, however, the Fund may invest up to 100%
of its total assets in obligations that pay interest that may be subject to
federal income tax, including the alternative minimum tax. Also for temporary
defensive purposes, the Fund may invest up to 100% of its total assets in (i)
commercial paper rated at least A-1 by S&P, P-1 by Moody's or F-1 by Fitch or
(ii) obligations issued or guaranteed by the full faith and credit of the U.S.
government.
Types of Securities the Fund May Invest In
The term "municipal securities," as used in this prospectus, means obligations
issued by or on behalf of any state, territory or possession of the U.S. and the
District of Columbia, and their political subdivisions, agencies and
instrumentalities, the interest on which is exempt from federal income tax. An
opinion as to the tax-exempt status of a municipal security is generally
rendered to the issuer by the issuer's bond counsel at the time of issuance of
the security.
Municipal securities are used to raise money for various public purposes, such
as constructing public facilities and making loans to public institutions.
Certain types of municipal securities are issued to provide funding for
privately operated facilities.
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, including,
but not limited to, hospital revenue bonds, housing agency bonds, tax-exempt
industrial development revenue bonds, transportation bonds, or pollution control
revenue bonds. In these 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 and municipal securities markets, the
size of a particular offering, the maturity of the obligation, and the credit
rating of the issuer. Generally, municipal securities with longer maturities
produce higher current yields than municipal securities with shorter maturities.
Prices of longer term securities, however, typically fluctuate more than those
of short-term securities due to changes in interest rates, tax laws and other
general market conditions. 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 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 may subject you
to, or increase your liability under, the federal and state alternative minimum
tax. In addition, all distributions derived from interest exempt from regular
federal income tax may subject corporate shareholders to, or increase their
liability under, the federal alternative minimum tax, because these
distributions are included in the corporation's adjusted current earnings. In
states with a corporate franchise tax, distributions of the Fund may also be
fully taxable to corporate shareholders under their state franchise tax systems.
Consistent with the Fund's investment objective, the Fund may acquire private
activity bonds if, in Advisers' opinion, these bonds represent the most
attractive investment opportunity then available to the Fund. For the fiscal
year ended February 29, 1996, the Fund derived 12.14% of its income from bonds,
the interest on which constitutes a preference item subject to the federal
alternative minimum tax for certain investors.
Floating and Variable Rate Obligations. The Fund may buy floating rate and
variable rate obligations. These obligations bear interest at rates that are not
fixed, but that vary with changes in prevailing market rates on predesignated
dates. The Fund may also invest in variable or floating rate demand notes
("VRDNs"), which carry a demand feature that permits the Fund to tender the
obligation back to the issuer or a third party at par value plus accrued
interest prior to maturity, according to the terms of the obligation.
Frequently, VRDNs are secured by letters of credit or other credit support
arrangements. Although it is not a put option in the usual sense, such a demand
feature is sometimes known as a "put." The Fund will limit its purchase of
municipal securities that are floating rate and variable rate obligations to
those meeting the quality standards set forth in this prospectus.
When-Issued and Delayed Delivery Transactions. The Fund may buy and sell
municipal securities on a "when-issued" and "delayed delivery" basis. The price
is subject to market fluctuation, and the value at delivery may be more or less
than the purchase price. Although the Fund will generally buy municipal
securities on a when-issued basis with the intention of acquiring the
securities, it may sell the securities before the settlement date if it is
deemed advisable. When the Fund is the buyer in such a transaction, it will
maintain, in a segregated account with its custodian bank, cash or high-grade
marketable securities having an aggregate value equal to the amount of its
purchase commitments until payment is made. To the extent the Fund engages in
when-issued and delayed delivery transactions, it will do so for the purpose of
acquiring securities for the Fund's portfolio consistent with its investment
objective and policies and not for the purpose of investment leverage.
Callable Bonds. The Fund may buy and hold callable municipal bonds that contain
a provision in the indenture permitting the issuer to redeem the bonds prior to
their maturity dates at a specified price. This price typically reflects a
premium over the bonds' original issue price. These bonds generally have call
protection (that is, a period of time when the bonds may not be called) that
usually lasts for 5 to 10 years, after which time these 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 the
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 the bonds were redeemed. Notwithstanding the
call feature, any such investment would still be subject to the Fund's policy of
maintaining a dollar weighted average portfolio maturity between three and ten
years.
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 that 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 buy the
property. Once these lease payments are completed, the municipality gains
ownership of the property for a nominal sum. This lease format is generally not
subject to constitutional limitations on the issuance of state debt, and COPs
may enable a governmental issuer to increase government liabilities beyond
constitutional debt limits.
A feature that 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 Fund
believes that this risk is mitigated by its policy of investing only in COPs
rated within the four highest rating categories of Moody's, S&P, or Fitch, or in
unrated COPs believed by Advisers to be of comparable quality. Criteria
considered by the rating agencies and Advisers in assessing this risk include
the issuing municipality's credit rating, how essential the leased property is
to the municipality and the term of the lease compared to the useful life of the
leased property. The Board reviews the COPs held in the Fund's portfolio to
assure that they constitute liquid investments based on various factors reviewed
by Advisers and monitored by the Board. These factors include (a) the credit
quality of the securities and the extent to which they are rated or, if unrated,
comply with existing criteria and procedures followed to ensure that they are of
comparable quality to the ratings required for the 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 the Fund trade on the
same basis and with the same degree of dealer participation as other municipal
bonds of comparable credit rating or quality. While there is no limit as to the
amount of assets which the Fund may invest in COPs, as of February 29, 1996, the
Fund held 14.10% of the total face amount of the securities in its portfolio in
COPs and other municipal leases.
Other Investment Policies of the Fund
Borrowing. The Fund may borrow from banks and pledge up to 5% of its total
assets for temporary or emergency purposes. Although the Fund does not intend to
do so, consistent with procedures approved by the Board, the Fund may lend its
portfolio securities to qualified securities dealers or other institutional
investors, if the loans do not exceed 10% of the value of the Fund's total
assets at the time of the most recent loan.
Illiquid Investments. The Fund may not invest more than 10% of its net assets,
at the time of purchase, in illiquid securities. Illiquid securities are
generally securities that cannot be sold within seven days in the normal course
of business at approximately the amount at which the Fund has valued them.
Other Policies and Restrictions. The Fund has a number of additional investment
restrictions that limit its activities to some extent. Some of these
restrictions may only be changed with shareholder approval. For a list of these
restrictions and more information about the Fund's investment policies, please
see "How Does the Fund Invest Its Assets?" and "Investment Restrictions" in the
SAI.
What Are the Fund's Potential Risks?
The value of your shares will increase as the value of the securities owned by
the Fund increases and will decrease as the value of the Fund's investments
decrease. In this way, you participate in any change in the value of the
securities owned by the Fund. In addition to the factors that affect the value
of any particular security that the Fund owns, the value of Fund shares may also
change with movements in the bond market as a whole.
Credit and Market Risk. Credit risk is a function of the ability of an issuer of
a municipal security to make 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.
Interest Rate Risk. Changes in interest rates will affect the value of the
Fund's portfolio and its share price. Rising interest rates, which often occur
during times of inflation or a growing economy, are likely to have a negative
effect on the value of the Fund's shares. Interest rates have increased and
decreased in the past. These changes are unpredictable and may happen again in
the future.
Non-diversification Risk. As a non-diversified Fund, there are no restrictions
under the 1940 Act on the percentage of assets that may be invested at any time
in the securities of any one issuer. To the extent 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 intends, however, 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 has adopted an investment restriction, which may not
be changed without shareholder approval, prohibiting it from buying 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, with the exception of obligations of the U.S. government.
Who Manages the Fund?
The Board. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations.
Investment Manager. Advisers is the investment manager of the Fund and other
funds with aggregate assets of over $80 billion, including $43 billion in the
municipal securities market. It is wholly owned by Resources, a publicly owned
company engaged in the financial services industry through its subsidiaries.
Charles B. Johnson and Rupert H. Johnson, Jr. are the principal shareholders of
Resources.
Management Team. The team responsible for the day-to-day management of the
Fund's portfolio is: Mr. Kenny since 1994; Mr. Schubert since 1996; and Mr.
Jennings since inception.
Thomas Kenny
Senior Vice President of Advisers
Mr. Kenny has been responsible for portfolio recommendations and decisions of
all series of the Trust since August 1994. He is the Director of Franklin's
Municipal Bond Department. He holds a Master of Science degree in finance from
Golden Gate University and a Bachelor of Arts degree in business and economics
from the University of California at Santa Barbara. Mr. Kenny joined Franklin in
1986. He is a member of several municipal securities industry-related committees
and associations.
Robert Schubert
Portfolio Manager of Advisers
Mr. Schubert attended Farleigh Dickenson University and has been in the
securities industry since 1960. He joined Templeton in 1989 and Advisers in
1992. Prior to joining Templeton, he managed the bond department for First
Equity Corporation of Florida. He is a member of several securities
industry-related associations.
Andrew Jennings, Sr.
Vice President of Advisers
Mr. Jennings attended Villanova University in Philadelphia and has been in the
securities industry for over 35 years. Prior to joining Advisers in 1990, Mr.
Jennings was First Vice President and Manager of the Municipal Institutional
Bond Department at Dean Witter Reynolds, Inc. He is a member of several
municipal securities industry-related committees and associations.
Services Provided by Advisers. Advisers manages the Fund's assets and makes its
investment decisions. Advisers also provides certain administrative services and
facilities for the Fund and performs similar services for other funds. Please
see "Investment Advisory and Other Services" and "Miscellaneous Information" in
the SAI for information on securities transactions and a summary of the Fund's
Code of Ethics.
Management Fees. During the fiscal year ended February 29, 1996, management fees
and total operating expenses, before any advance waiver, totaled 0.63% and 0.85%
of the average net assets of the Fund. Under an agreement by Advisers to limit
its fees, the Fund paid management fees totaling 0.43% and operating expenses
totaling 0.65%. Advisers may end this arrangement at any time upon notice to the
Board.
Portfolio Transactions. Advisers tries to obtain the best execution on all
transactions. If Advisers believes more than one broker or dealer can provide
the best execution, it may consider research and related services and the sale
of Fund shares when selecting a broker or dealer. Please see "How Does the Fund
Buy Securities For Its Portfolio?" in the SAI for more information.
The Rule 12b-1 Plan
The Fund has a distribution plan or "rule 12b-1 plan" under which it may
reimburse Distributors or others for activities primarily intended to sell
shares of the Fund. These expenses may include, among others, printing
prospectuses and reports used for sales purposes, preparing and distributing
sales literature and advertisements, a prorated portion of Distributors'
overhead expenses, and distribution or service fees paid to Securities Dealers
or others who have executed a servicing agreement with the Fund, Distributors or
its affiliates.
Payments by the Fund under the plan may not exceed 0.10% per year of the Fund's
average daily net assets of the Fund. All distribution expenses over this amount
will be borne by those who have incurred them. For more information, please see
"The Fund's Underwriter" in the SAI.
How Does the Fund Measure Performance?
From time to time, the Fund advertises its performance. The more commonly used
measures of performance are total return, current yield and current distribution
rate. The Fund may also advertise its taxable-equivalent yield and distribution
rate. Performance figures usually assume that the maximum sales charge is paid,
but certain figures may not include the sales charge.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield shows the
income per share earned by the Fund. The current distribution rate shows the
dividends or distributions paid to shareholders by the Fund. This rate is
usually computed by annualizing the dividends paid per share during a certain
period and dividing that amount by the current Offering Price. Unlike current
yield, the current distribution rate may include income distributions from
sources other than dividends and interest. The taxable-equivalent yield and
distribution rate show the before-tax yield or distribution rate that would have
to be earned from a taxable investment to equal the Fund's yield or distribution
rate, assuming one or more tax rates.
The Fund's investment results will vary. Performance figures are always based on
past performance and do not indicate future results. For a more detailed
description of how the Fund calculates its performance figures, please see "How
Does the Fund Measure Performance?" in the SAI. The Trust's Annual Report to
Shareholders also includes performance information.
How Is the Trust Organized?
The Fund is a nondiversified series of the Franklin Tax-Free Trust (the
"Trust"), 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. Shares of each series of
the Trust have equal and exclusive rights to dividends and distributions
declared by that series and the net assets of the series in the event of
liquidation or dissolution. Shares of the Fund are considered Class I shares for
redemption, exchange and other purposes. In the future, additional series and
classes of shares may be offered.
The Trust has noncumulative voting rights. This gives holders of more than 50%
of the shares voting the ability to elect all of the members of the Board. If
this happens, holders of the remaining shares voting will not be able to elect
anyone to the Board.
The Trust does not intend to hold annual shareholder meetings. It may hold a
special meeting of a series, however, for matters requiring shareholder approval
under the 1940 Act. A meeting may also be called by the Board in its discretion
or by shareholders holding at least 10% of the outstanding shares. The 1940 Act
requires that we help you communicate with other shareholders in connection with
electing or removing members of the Board.
About Your Account
How Do I Buy Shares?
Opening Your Account
To open your account, contact your investment representative or complete and
sign the enclosed shareholder application and return it to the Fund with your
check.
Minimum
Investments*
- --------------------------------------------------------------------------------
To Open Your Account $100
To Add to Your Account $ 25
*We may refuse any order to buy shares. Currently, the Fund does not allow
investments by Market Timers.
Sales Charge Reductions and Waivers
If you qualify to buy shares under one of the sales charge reduction or waiver
cate-gories described below, please include a written statement with each
purchase order explaining which privilege applies. If you don't include this
statement, we cannot guarantee that you will receive the sales charge reduction
or waiver.
Quantity Discounts. The sales charge you pay depends on the dollar amount you
invest, as shown in the table below.
Total Sales Charge Amount Paid
as a Percentage of to Dealer as a
----------------------- Percentage of
Amount of Purchase Offering Net Amount Offering
at Offering Price Price Invested Price
- --------------------------------------------------------------------------------
Under $100,000 2.25% 2.30% 2.00%
$100,000 but less than $250,000 1.75% 1.78% 1.50%
$250,000 but less than $500,000 1.25% 1.26% 1.00%
$500,000 but less than $1,000,000 1.00% 1.01% 0.85%
$1,000,000 or more* None None None
*If you buy $1 million or more, a Contingent Deferred Sales Charge may be
imposed. Please see "How Do I Sell Shares? Contingent Deferred Sales Charge."
Securities Dealers should also see "Other Payments to Securities Dealers" below
for a discussion of payments Distributors may make out of its own resources for
certain purchases.
Cumulative Quantity Discounts. To determine if you may pay a reduced sales
charge, you may add to the amount of your current purchase 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. If you are the sole owner of a
company, you may also add any company accounts, including retirement plan
accounts.
Letter of Intent. You may buy 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.
By completing the Letter of Intent section of the shareholder application, you
acknowledge and agree to the following:
o You authorize Distributors to reserve 5% of your total intended purchase in
Fund shares registered in your name until you fulfill your Letter.
o You give Distributors a security interest in the reserved shares and appoint
Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the Letter.
o Although you may exchange your shares, you may not sell reserved shares until
you complete the Letter or pay the higher sales charge.
Your periodic statements will include the reserved shares in the total shares
you own. We will pay or reinvest dividend and capital gain distributions on the
reserved shares as you direct.
If you would like more information about the Letter of Intent privilege, please
see "How Do I Buy, Sell and Exchange Shares? - Letter of Intent" in the SAI or
call Shareholder Services.
Group Purchases. If you are a member of a qualified group, you may buy Fund
shares at the reduced sales charge that applies to the group as a whole. The
sales charge is based on the combined dollar value of the group members'
existing investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include sales and other Franklin Templeton Fund materials in
publications and mailings to its members at reduced or no cost to Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
o Meets other uniform criteria that allow Distributors to achieve cost savings
in distributing shares.
Sales Charge Waivers. The Fund's sales charges (front-end and contingent
deferred) will not apply if you are buying shares with money from the following
sources.
For waiver categories 1 or 2 below: (i) the distributions or payments must be
reinvested within 365 days of their payment date, and (ii) Class II
distributions may be reinvested in either Class I or Class II shares. Class I
distributions may only be reinvested in Class I shares.
1. Dividend and capital gain distributions from any Franklin Templeton Fund or a
REIT sponsored or advised by Franklin Properties, Inc.
2. Annuity payments received under either an annuity option or from death
benefit proceeds, only if the annuity contract offers as an investment option
the Franklin Valuemark Funds, Templeton Variable Annuity Fund, the Templeton
Variable Products Series Fund, or the Franklin Government Securities Trust. You
should contact your tax advisor for information on any tax consequences that may
apply.
3. Redemptions from any Franklin Templeton Fund if you:
o Originally paid a sales charge on the shares,
o Reinvest the money within 365 days of the redemption date, and
o Reinvest the money in the same class of shares.
An exchange is not a redemption for this privilege. The Contingent Deferred
Sales Charge will not be waived if the shares reinvested were subject to a
Contingent Deferred Sales Charge when sold. We will credit your account for any
Contingent Deferred Sales Charge paid, but a new Contingency Period will begin.
If you immediately placed your redemption proceeds in a Franklin Bank CD, you
may reinvest them as described above. The proceeds must be reinvested within 365
days from the date the CD matures, including any rollover.
4. Redemptions from other mutual funds
If you sold shares of a fund that is not a Franklin Templeton Fund within the
past 60 days, you may invest the proceeds without any sales charge if (a) the
investment objectives were similar to the Fund's, and (b) your shares in that
fund were subject to any front-end or contingent deferred sales charges at the
time of purchase. You must provide a copy of the statement showing your
redemption.
The Fund's sales charges will also not apply to purchases by:
5. Trust companies and bank trust departments agreeing to invest at least $1
million in Franklin Templeton Funds over a 13 month period of assets held in a
fiduciary, agency, advisory, custodial or similar capacity and over which the
trust companies and bank trust departments or other plan fiduciaries or
participants, in the case of certain retirement plans, have full or shared
investment discretion. We will accept orders for these accounts by mail
accompanied by a check or by telephone or other means of electronic data
transfer directly from the bank or trust company, with payment by federal funds
received by the close of business on the next business day following the order.
6. An Eligible Governmental Authority. Please consult your legal and investment
advisors to determine if an investment in the Fund is suitable for you and the
effect, if any, of payments by the Fund on arbitrage rebate calculations.
7. Broker-dealers who have entered into a supplemental agreement with
Distributors for clients who are participating in comprehensive fee programs.
These programs, sometimes known as wrap fee programs, are sponsored by the
broker-dealer and either advised by the broker-dealer or by another registered
investment advisor affiliated with that broker.
8. Registered Securities Dealers and their affiliates, for their investment
accounts only
9. Current employees of Securities Dealers and their affiliates and their family
members, as allowed by the internal policies of their employer
10. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family members,
consistent with our then-current policies
11. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
12. Accounts managed by the Franklin Templeton Group
13. Certain unit investment trusts and their holders reinvesting distributions
from the trusts
Other Payments to Securities Dealers
The payments below apply to Securities Dealers who initiate and are responsible
for certain purchases made without a sales charge. A Securities Dealer may only
receive one of the following payments for each qualifying purchase. The payments
described below are paid by Distributors or one of its affiliates, at its own
expense, and not by the Fund or its shareholders.
1. Securities Dealers will receive up to 0.75% of the purchase price for
purchases of $1 million or more.
2. Securities Dealers may receive up to 1% of the purchase price for purchases
made under waiver category 5 above.
3. Securities Dealers may receive up to 0.25% of the purchase price for
investments by an Eligible Governmental Authority.
Please see "How Do I Buy, Sell and Exchange Shares - Other Payments to
Securities Dealers" in the SAI for any breakpoints that may apply.
Securities Dealers may receive additional compensation from Distributors or an
affiliated company in connection with selling shares of the Franklin Templeton
Funds. Compensation may include financial assistance for conferences,
shareholder services, automation, sales or training programs, or promotional
activities. Registered representatives and their families may be paid for travel
expenses, including lodging, in connection with business meetings or seminars.
In some cases, this compensation may only be available to Securities Dealers
whose representatives have sold or are expected to sell significant amounts of
shares. 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 NASD.
May I Exchange Shares for Shares of Another Fund?
We offer a wide variety of funds. If you would like, you can move money from
your Fund account to an existing or new account in another Franklin Templeton
Fund (an "exchange"). Because it is technically a sale and a purchase of shares,
an exchange is a taxable transaction.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund and its rules and
requirements for exchanges. For example, some Franklin Templeton Funds do not
accept exchanges and others may have different investment minimums.
Method Steps to Follow
- --------------------------------------------------------------------------------
By Mail 1. Send us written instructions signed by all account
owners
2. Include any outstanding share certificates for the
shares you're exchanging
- --------------------------------------------------------------------------------
By Phone Call Shareholder Services or TeleFACTS(R)
If you do not want the ability to exchange by phone,
please let us know.
- --------------------------------------------------------------------------------
Through Your Dealer Call your investment representative
- --------------------------------------------------------------------------------
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
Will Sales Charges Apply to My Exchange?
You generally will not pay a front-end sales charge on exchanges. If you have
held your shares less than six months, however, you will pay the percentage
difference between the sales charge you previously paid and the applicable sales
charge of the new fund. If you have never paid a sales charge on your shares
because they have always been held in a money fund, you will pay the Fund's
applicable sales charge no matter how long you have held your shares. These
charges may not apply if you qualify to buy shares without a sales charge.
Contingent Deferred Sales Charge. We will not impose a Contingent Deferred Sales
Charge when you exchange shares. Any shares subject to a Contingent Deferred
Sales Charge at the time of exchange, however, will remain so in the new fund.
For accounts with shares subject to a Contingent Deferred Sales Charge, shares
are exchanged into the new fund in the order they were purchased. If you
exchange shares into one of our money funds, the time your shares are held in
that fund will not count towards the completion of any Contingency Period. For
more information about the Contingent Deferred Sales Charge, please see that
section under "How Do I Sell Shares?"
Exchange Restrictions
Please be aware that the following restrictions apply to exchanges:
o You may only exchange shares within the same class.
o The accounts must be identically registered. You may exchange shares from a
Fund account requiring two or more signatures into an identically registered
money fund account requiring only one signature for all transactions. Please
notify us in writing if you do not want this option to be available on your
account(s). Additional procedures may apply. Please see "Transaction Procedures
and Special Requirements."
o The new fund must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Currently, the Fund does not allow investments by Market Timers.
Because excessive trading can hurt Fund performance and shareholders, we may
refuse exchange purchases if (i) we believe the Fund would be harmed or unable
to invest effectively, or (ii) the Fund receives or anticipates simultaneous
orders that may significantly affect the Fund.
How Do I Sell Shares?
You may sell (redeem) your shares at any time.
Method Steps to Follow
- --------------------------------------------------------------------------------
By Mail 1. Send us written instructions signed by all account owners
2. Include any outstanding share certificates for the shares you
are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may need to
send additional documents. Accounts under court jurisdiction
may have additional requirements.
- --------------------------------------------------------------------------------
Method Steps to Follow
- --------------------------------------------------------------------------------
By Phone Call Shareholder Services
(Only available if you have completed and sent to us the telephone redemption
agreement included with this prospectus)
Telephone requests will be accepted:
o If the request is $50,000 or less. Institutional accounts may
exceed $50,000 by completing a separate agreement. Call
Institutional Services to receive a copy.
o If there are no share certificates issued for the shares you
want to sell or you have already returned them to the Fund
o Unless the address on your account was changed by phone within
the last 30 days
- --------------------------------------------------------------------------------
Through Your Dealer Call your investment representative.
- --------------------------------------------------------------------------------
We will send your redemption check within seven days after we receive your
request in proper form. We will make the check payable to all registered owners
on the account and send it to the address of record. We are not able to receive
or pay out cash in the form of currency.
If you sell shares you just purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
Contingent Deferred Sales Charge
A Contingent Deferred Sales Charge may apply if you sell all or a part of an
investment of $1 million or more within the Contingency Period. The charge is 1%
of the value of the shares sold or the Net Asset Value at the time of purchase,
whichever is less. Distributors keeps the charge to recover payments made to
Securities Dealers.
We will first redeem shares not subject to the charge in the following order:
1) A calculated number of shares equal to the capital appreciation on shares
held less than the Contingency Period,
2) Shares purchased with reinvested dividends and capital gain distributions,
and
3) Shares held longer than the Contingency Period.
We then redeem shares subject to the charge in the order they were purchased.
Unless otherwise specified, when you request a dollar amount, we will redeem
additional shares to cover any Contingent Deferred Sales Charge. For requests to
sell a certain number of shares, we will deduct the amount of the Contingent
Deferred Sales Charge, if any, from the sale proceeds.
Waivers. We waive the Contingent Deferred Sales Charge for:
o Exchanges
o Account fees
o Sales of shares purchased pursuant to a sales charge waiver
o Redemptions by the Fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before February 1,
1995
o Redemptions through a systematic withdrawal plan set up after February 1,
1995, up to 1% a month of an account's Net Asset Value (3% quarterly, 6%
semiannually or 12% annually). For example, if you maintain an annual balance of
$1 million, you can withdraw up to $120,000 annually through a systematic
withdrawal plan free of charge.
Transaction Procedures and Special Requirements
How and When Shares Are Priced
The Fund is open for business each day the Exchange is open. We determine the
Net Asset Value per share as of the scheduled close of the Exchange, generally
1:00 p.m. Pacific time. You can find the prior day's closing Net Asset Value and
Offering Price of the Fund in many newspapers.
To calculate Net Asset Value per share, the Fund's assets are valued and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of shares outstanding. The Fund's assets are valued as
described under "How Are Fund Shares Valued?" in the SAI.
The Price We Use When You Buy or Sell Shares
You buy shares at the Offering Price, unless you qualify to buy shares at a
reduced sales charge or with no sales charge. The Offering Price is based on the
Net Asset Value per share and includes the maximum sales charge. We calculate it
to two decimal places using standard rounding criteria. You sell shares at Net
Asset Value.
We will use the Net Asset Value next calculated after we receive your
transaction request in proper form. If you buy or sell shares through your
Securities Dealer, however, we will use the Net Asset Value next calculated
after we receive the request from your dealer.
Proper Form
An order to buy shares is in proper form when we receive your signed shareholder
application and check. Written requests to sell or exchange shares are in proper
form when we receive written instructions signed by all registered owners, with
a signature guarantee if necessary. We must also receive any outstanding share
certificates for those shares.
Written Instructions
Written instructions must be signed by all registered owners. To avoid any delay
in processing your transaction, they should include:
o Your name,
o The Fund's name,
o A description of the request,
o For exchanges, the name of the fund you're exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the evening if
preferred.
Signature Guarantees
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered owners,
3) The proceeds are not being sent to the address of record, preauthorized bank
account, or preauthorized brokerage firm account,
4) We receive instructions from someone other than the registered owners,
5) We believe a signature guarantee would protect us against potential claims
based on the instructions received.
A signature guarantee verifies the authenticity of your signature and may be
obtained from certain banks, brokers or other eligible guarantors. You should
verify that the institution is an eligible guarantor prior to signing. A
notarized signature is not sufficient.
Share Certificates
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate is
lost, stolen or destroyed, you may have to pay an insurance premium of up to 2%
of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form. In this case, you should send the certificate and assignment
form in separate envelopes.
Telephone Transactions
You may initiate many transactions by phone. Please refer to the sections of
this prospectus that discuss the transaction you would like to make or call
Shareholder Services.
We may only be liable for losses resulting from unauthorized transactions if we
do not follow reasonable procedures designed to verify the identity of the
caller. When you call, we will request personal or other information, and may
also record calls. For your protection, we may delay a transaction or not
implement one if we are not reasonably satisfied that telephone instructions are
genuine. If this occurs, we will not be liable for any loss.
If our lines are busy or you are otherwise unable to reach us by phone, you may
wish to ask your investment representative for assistance or send written
instructions to us, as described elsewhere in this prospectus. If you are unable
to execute a transaction by telephone, we will not be liable for any loss.
Account Registrations and Required Documents
When you open an account, you need to tell us how you want your shares
registered. How you register your account will affect your ownership rights and
ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
Joint Ownership. If you open an account with two or more owners, we register the
account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of survivorship"
is shown as "Jt Ten" on your account statement. For any account with two or more
owners, all owners must sign instructions to process transactions and changes to
the account. Even if the law in your state says otherwise, you will not be able
to change owners on the account unless all owners agree in writing. If you would
like another person or owner to sign for you, please send us a current power of
attorney.
Gifts and Transfers to Minors. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this form
of registration, a minor may not be named as an account owner.
Trusts. If you register your account as a trust, you should have a valid written
trust document to avoid future disputes or possible court action over who owns
the account.
Required Documents. For corporate, partnership and trust accounts, please send
us the following documents when you open your account. This will help avoid
delays in processing your transactions while we verify who may sign on the
account.
Type of Account Documents Required
- --------------------------------------------------------------------------------
Corporation Corporate Resolution
- --------------------------------------------------------------------------------
Partnership 1. The pages from the partnership agreement that identify the
general partners, or
2. A certification for a partnership agreement
- --------------------------------------------------------------------------------
Trust 1. The pages from the trust document that identify the
trustees, or
2. A certification for trust
- --------------------------------------------------------------------------------
Street or Nominee Accounts. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the shares
to the street or nominee name account of another Securities Dealer. Both dealers
must have an agreement with Distributors or we will not process the transfer.
Contact your Securities Dealer to initiate the transfer. We will process the
transfer after we receive authorization in proper form from your delivering
Securities Dealer. Accounts may be transferred electronically through the NSCC.
For accounts registered in street or nominee name, we may take instructions
directly from the Securities Dealer or your nominee.
Electronic Instructions. If there is a Securities Dealer or other representative
of record on your account, you authorize the use and execution of electronic
instructions. We can accept electronic instructions directly from your dealer or
representative without further inquiry. Electronic instructions may be processed
through the services of the NSCC, which currently include the NSCC's
"Networking," "Fund/SERV," and "ACATS" systems, or through Franklin/Templeton's
PCTrades II(TM) System.
Tax Identification Number
We must have your correct Social Security or tax identification number on a
signed shareholder application or applicable tax form. Federal law requires us
to withhold 31% of your taxable distributions and sale proceeds if (i) you have
not furnished a certified correct taxpayer identification number, (ii) you have
not certified that withholding does not apply, (iii) the IRS or a Securities
Dealer notifies the Fund that the number you gave us is incorrect, or (iv) you
are subject to backup withholding.
We may refuse to open an account if you fail to provide the required tax
identification number and certifications. We may also close your account if the
IRS notifies us that your tax identification number is incorrect. If you
complete an "awaiting TIN" certification, we must receive a correct tax
identification number within 60 days of your initial purchase to keep your
account open.
Keeping Your Account Open
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $50. We will only do this
if the value of your account fell below this amount because you voluntarily sold
your shares and your account has been inactive (except for the reinvestment of
distributions) for at least six months. Before we close your account, we will
notify you and give you 30 days to increase the value of your account to $100.
Services to Help You Manage Your Account
Automatic Investment Plan
Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can 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
included with this prospectus or contact your investment representative. 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
discontinue the program at any time by notifying Investor Services by mail or
phone.
Automatic Payroll Deduction
You may have money transferred from your paycheck to the Fund to buy additional
shares. Your investments will continue automatically until you instruct the Fund
and your employer to discontinue the plan. To process your investment, we must
receive both the check and payroll deduction information in required form. Due
to different procedures used by employers to handle payroll deductions, there
may be a delay between the time of the payroll deduction and the time we receive
the money.
Systematic Withdrawal Plan
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or annual
basis. The value of your account must be at least $5,000 and the minimum payment
amount for each withdrawal must be at least $50.
If you would like to establish a systematic withdrawal plan, please complete the
systematic withdrawal plan section of the shareholder application included with
this prospectus and indicate how you would like to receive your payments. You
may choose to direct your payments to buy the same class of shares of another
Franklin Templeton Fund or have the money sent directly to you, to another
person, or to a checking account. If you choose to have the money sent to a
checking account, please see "Electronic Fund
Transfers" below.
You will generally receive your payment by the fifth business day of the month
in which a payment is scheduled. When you sell your shares under a systematic
withdrawal plan, it is a taxable transaction.
Because of the Fund's front-end sales charge, you may not want to set up a
systematic withdrawal plan if you plan to buy shares on a regular basis. Shares
sold under the plan may also be subject to a Contingent Deferred Sales Charge.
Please see "Contingent Deferred Sales Charge" under "How Do I Sell Shares?"
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us in writing at
least seven business days before the end of the month preceding a scheduled
payment. Please see "How Do I Buy, Sell and Exchange Shares? - Systematic
Withdrawal Plan" in the SAI for more information.
Electronic Fund Transfers
You may choose to have dividend and capital gain distributions from the Fund or
payments under a systematic withdrawal plan sent directly to a checking account.
If the checking account is with a bank that is a member of the Automated
Clearing House, the payments may be made automatically by electronic funds
transfer. If you choose this option, please allow at least fifteen days for
initial processing. We will send any payments made during that time to the
address of record on your account.
TeleFACTS(R)
From a touch-tone phone, you may call our TeleFACTS system (day or night) at
1-800/247-1753 to:
o obtain information about your account;
o obtain price and performance information about any Franklin Templeton Fund;
o exchange shares between identically registered Franklin accounts; and
o request duplicate statements and deposit slips.
You will need the Fund's code number to use TeleFACTS. The Fund's code is 174.
Statements and Reports to Shareholders
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your account,
including additional purchases and dividend reinvestments. Please verify the
accuracy of your statements when you receive them.
o Financial reports of the Fund will be sent every six months. To reduce Fund
expenses, we attempt to identify related shareholders within a household and
send only one copy of a report. Call Fund Information if you would like an
additional free copy of the Fund's financial reports or an interim quarterly
report.
Institutional Accounts
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. For further information, call Institutional
Services.
Availability of These Services
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, the Fund may not be able to offer these services directly to
you. Please contact your investment representative.
What If I Have Questions About My Account? If you have any questions about your
account, you may write to Investor Services at 777 Mariners Island Blvd., P.O.
Box 7777, San Mateo, California 94403-7777. The Fund, Distributors and Advisers
are also located at this address. You may also contact us by phone at one of the
numbers listed below.
Hours of Operation (Pacific time)
Department Name Telephone No. (Monday through Friday)
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with high
quality service. You will hear a regular beeping tone if your call is being
recorded.
What Distributions Might I Receive from the Fund?
The Fund declares dividends from its net investment income daily and pays them
monthly on or about the last day of the month. The daily allocation of net
investment income begins on the day after we receive your money or settlement of
a wire order trade and continues to accrue through the day we receive your
request to sell your shares or the settlement of a wire order trade.
Capital gains, if any, may be distributed twice a year, usually once in December
and once after the end of the Fund's fiscal year.
Dividend payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. The Fund does not pay "interest" or guarantee any
fixed rate of return on an investment in its shares.
Distribution Options
You may receive your distributions from the Fund in any of these ways:
1. Buy additional shares of the Fund - You may buy 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. Buy shares of other Franklin Templeton Funds - You may direct your
distributions to buy 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 receive dividends, or both dividend
and capital gain distributions in cash. If you have the money sent to another
person or to a checking account, you may need a signature guarantee. If you send
the money to a checking account, please see "Electronic Fund Transfers" under
"Services to Help You Manage Your Account."
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 you do not select an option, we will
automatically reinvest dividend and capital gain distributions in the Fund. You
may change your distribution option at any time by notifying us by mail or
phone. Please allow at least seven days prior to the reinvestment date for us 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 more information on tax matters
relating to the Fund and its shareholders, see "Additional Information on
Distributions and Taxes" in the SAI.
Each series of the Trust is treated as a separate entity for federal income tax
purposes. The Fund intends to continue to qualify as a regulated investment
company under Subchapter M of the Code. By distributing all of its income and
meeting certain other requirements relating to the sources of its income and
diversification of its assets, the Fund will not be liable for federal income or
excise taxes.
By meeting certain requirements of the Code, the Fund 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 to you. In addition, to the extent that
exempt-interest dividends are derived from interest on obligations of your state
of residence or such state's political subdivisions, from interest on direct
obligations of the federal government, or from interest on U.S. territorial
obligations (including of Puerto Rico, the U.S. Virgin Islands or Guam), they
may be exempt from personal income tax in such state.
To the extent dividends are derived from taxable income from temporary
investments (including the discount from certain stripped obligations or their
coupons or income from securities loans or other taxable transactions), from the
excess of net short-term capital gain over net long-term capital loss, or from
ordinary income derived from the sale or disposition of bonds purchased with
market discount after April 30, 1993, they are treated as ordinary income
whether you have elected to receive them in cash or in additional shares.
From time to time, the Fund may buy 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 the 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 to you by
the Fund of such ordinary income will be subject to regular federal income tax
in your hands. In any fiscal year, the Fund may elect not to distribute to you
its taxable ordinary income and, instead, to pay federal income or excise taxes
on this income at the Fund level. The amount of such distributions, if any, is
expected to be small.
Pursuant to the Code, certain distributions which are declared in October,
November or December but which, for operational reasons, may not be paid to you
until the following January, will be treated, for tax purposes, as if you
received them 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 Fund shares and whether you receive the
distributions in cash or in additional shares.
Redemptions and exchanges of Fund shares are taxable events on which you may
realize a gain or loss. Any loss incurred on the sale or exchange of Fund
shares, held for six months or less, will be treated as a long-term capital loss
to the extent of capital gain dividends received with respect to such shares.
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, including the
portion of the dividends on an average basis which constitutes taxable income or
interest income that is a tax preference item under the federal alternative
minimum tax. If you have not held Fund shares 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 any social security or railroad retirement benefits you receive
will be subject to regular federal income tax. You are required to disclose the
receipt of tax-exempt interest on your federal income tax returns.
Interest on indebtedness incurred by you (directly or indirectly) to buy or
carry Fund shares may not be fully deductible for federal income tax purposes.
You should consult your tax advisor with respect to the applicability of state
and local intangible property or income taxes to your shares in the Fund and to
distributions and redemption proceeds received from the Fund. For example,
distributions attributable to interest received from, or capital gain derived
from the disposition of, obligations of a given state or its political
subdivisions may be exempt from income taxes in that state.
If you are not a U.S. person for purposes of federal income taxation, you should
consult with your financial or tax advisor 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.
Glossary
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
CD - Certificate of deposit
Class I and Class II - Certain funds in the Franklin Templeton Funds offer two
classes of shares, designated "Class I" and "Class II." The two classes have
proportionate interests in the same portfolio of investment securities. They
differ, however, primarily in their sales charge structures and rule 12b-1
plans. Because the Fund's sales charge structure and rule 12b-1 plan are similar
to those of Class I shares, shares of the Fund are considered Class I shares for
redemption, exchange and other purposes.
Code - Internal Revenue Code of 1986, as amended
Contingency Period - The 12 month period during which a Contingent Deferred
Sales Charge may apply. Regardless of when during the month you purchased
shares, they will age one month on the last day of that month and each following
month.
Contingent Deferred Sales Charge (CDSC) - A sales charge of 1% that may apply if
you sell your shares within one year.
Distributors - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Trustees."
Eligible Governmental Authority - Any state or local government or any
instrumentality, department, authority or agency thereof that has determined the
Fund is a legally permissible investment and that can only buy shares of the
Fund without paying sales charges.
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., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
Letter - Letter of Intent
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.
NASD - National Association of Securities Dealers, Inc.
Net Asset Value (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NSCC - National Securities Clearing Corporation
Offering Price - The public offering price is based on the Net Asset Value per
share and includes the 2.25% sales charge.
REIT - Real Estate Investment Trust
Resources - Franklin Resources, Inc.
SAI - Statement of Additional Information
SEC - U.S. Securities and Exchange Commission
Securities Dealer - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the 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
We/Our/Us - Unless the context indicates a different meaning, these terms refer
to the Fund and/or Investor Services, Distributors, or another wholly owned
subsidiary of Resources.
Franklin Templeton
Telephone Redemption Authorization Agreement
You may use Franklin Templeton's telephone redemption privilege to redeem
uncertificated Franklin Templeton Fund shares for up to $50,000 (or your
shareholder account balance, whichever is less) per day, per fund account in
accordance with the terms of the Funds' prospectus.
The telephone redemption privilege is available only to shareholders who
specifically request it. If you would like to add this redemption privilege to
the other telephone transaction privileges now automatically available to
Franklin Templeton Fund shareholders, please sign and return this authorization
to Franklin/Templeton Investor Services, Inc. ("Investor Services"), transfer
agent and shareholder servicing agent for the Franklin Templeton Funds.
Shareholder Authorization: I/We request the telephone redemption privilege under
the terms described below and in the prospectus for each investment company in
Franklin Templeton (a "Franklin Templeton Fund" or a "Fund"), now open or opened
at a later date, holding shares registered as follows:
- --------------------------------------------------------------------------------
Print name(s) as shown in registration (called "Shareholder")
- --------------------------------------------------------------------------------
Account number(s)
I/We authorize each Fund and Investor Services to honor and act upon telephone
requests, given as provided in this agreement, to redeem shares from any
Shareholder account.
- -------------------------------- ---------------------------------------
Signature(s) of all registered
owners and date
- -------------------------------- ---------------------------------------
Printed name (and title/capacity,
if applicable)
Verification Procedures: I/We understand and agree that: (1) each Fund and
Investor Services will employ reasonable procedures to confirm that redemption
instructions communicated by telephone are genuine and that if these
confirmation procedures are not followed, the Fund or Investor Services may be
liable for any losses due to unauthorized or fraudulent telephone instructions;
(2) the confirmation procedures will include the recording of telephone calls
requesting redemptions, 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 the
sending of confirmation statements to the address of record each time a
redemption is initiated by telephone; and (3) as long as the Fund and Investor
Services follow the confirmation procedures in acting on instructions
communicated by telephone which were reasonably believed to be genuine at the
time of receipt, neither they nor their parent or affiliates will be liable for
any loss, damages or expenses caused by an unauthorized or fraudulent redemption
request. Jointly Owned/Co-Trustee Accounts: Each of us signing this agreement as
either joint owners or co-trustees authorize each Fund and Investor Services to
honor telephone redemption requests given by ANY ONE of the signers or our
investment representative of record, if any, ACTING ALONE.
Appointment of Attorney-in-Fact: In order to issue telephone redemption requests
acting alone, each of us individually makes the following appointment: I hereby
appoint the other joint owner(s)/co-trustee(s) as my agent(s)
(attorney[s]-in-fact) with full power and authority to individually act for me
in any lawful way with respect to the issuance of instructions to a Fund or
Investor Services in accordance with the telephone redemption privilege we have
requested by signing this agreement. This appointment shall not be affected by
my subsequent disability or incompetency and shall remain in effect until it is
revoked by either written notice from any one of us delivered to a Fund or
Investor Services by registered mail, return receipt requested, or by a Fund or
Investor Services upon receipt of any information that causes a Fund or Investor
Services to believe in good faith that there is or that there may be a dispute
among any of us with respect to the Franklin Templeton Fund account(s) covered
by this agreement. Each of us agrees to notify the Fund or Investor Services
immediately upon the death of any of the undersigned.
Corporate/Partnership/Trust/Retirement Accounts: The Shareholder and each of us
signing this agreement on behalf of the Shareholder represent and warrant to
each Franklin Templeton Fund and Investor Services that the Shareholder has the
authority to enter into this agreement and that each of us are duly authorized
to execute this agreement on behalf of the Shareholder. The Shareholder agrees
that its election of the telephone redemption privilege means that a Fund or
Investor Services may honor a telephone redemption request given by ANY
officer/partner/member/administrator or agent of Shareholder ACTING ALONE.
Restricted Accounts: Telephone redemptions and dividend option changes may not
be accepted on Franklin Templeton Trust Company retirement accounts.
Please Return this Form to:
Franklin/Templeton Investor Services, Inc.
Attn: D/P REVISIONS Dept.
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777.
Instructions and Important Notice
Substitute W-9 Instructions Information
General. Backup withholding is not an additional tax. Rather, the tax liability
of persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained from the IRS.
Obtaining A Number. If you do not have a Social Security Number Taxpayer
Identification Number or you do not know your SSN TIN, you must obtain Form SS-5
or Form SS-4 from your local Social Security or IRS office and apply for one. If
you have checked the "Awaiting TIN" box and signed the certification,
withholding will apply to payments relating to your account unless you provide a
certified TIN within 60 days.
What SSN/TIN to Give. Please refer to the following guidelines:
Account Type Give SSN of Account Type Give Employer ID # of
- --------------------------------------------------------------------------------
Individual Individual Trust, Estate, or Trust, Estate, or
Pension Plan Trust Pension Plan Trust
- --------------------------------------------------------------------------------
Joint Individual Owner who will Corporation, Corporation,
be paying tax Partnership, Partnership, or
or first named or other other organization
individual Organization
- --------------------------------------------------------------------------------
Unif. Gift/ Minor Broker nominee Broker nominee
Transfer to Minor
- --------------------------------------------------------------------------------
Sole Proprietor Owner of business
- --------------------------------------------------------------------------------
Legal Guardian Ward, Minor, or
Incompetent
- --------------------------------------------------------------------------------
Exempt Recipients. Please provide your TIN and check the "Exempt Recipient" box
if you are an exempt recipient. Exempt recipients include:
A corporation
A financial institution
An organization exempt from tax
under section 501(a), or an individual retirement plan
A registered dealer in securities or commodities registered in the U.S.
or a U.S. possession
A real estate investment trust
A common trust fund operated by
a bank under section 584(a)
An exempt charitable remainder trust
or a non-exempt trust described in section 4947(a)(1)
An entity registered at all times under
the Investment Company Act of 1940
IRS Penalties. If you do not supply us with your SSN/TIN, you will be subject to
an IRS $50 penalty unless your failure is due to reasonable cause and not
willful neglect. If you fail to report certain income on your federal income tax
return, you will be treated as negligent and subject to an IRS 20% penalty on
any underpayment of tax attributable to such negligence, unless there was
reasonable cause for the resulting underpayment and you acted in good faith. If
you falsify information on this form or make any other false statement resulting
in no backup withholding on an account which should be subject to backup
withholding, you may be subject to an IRS $500 penalty and certain criminal
penalties including fines and imprisonment. 20.21/150 (07/96)
Substitute W-8 Instructions Information
Exempt Foreign Person. Check the "Exempt Foreign Person" box if you qualify as a
non-resident alien or foreign entity that is not subject to certain U.S.
information return reporting or to backup withholding rules. Dividends paid to
your account may be subject to withholding of up to 30%. You are an "Exempt
Foreign Person" if you are not (1) a citizen or resident of the U.S., or (2) a
U.S. corporation, partnership, estate, or trust. In the case of an individual,
an "Exempt Foreign Person" is one who has been physically present in the U.S.
for less than 31 days during the current calendar year. An individual who is
physically present in the U.S. for at least 31 days during the current calendar
year will still be treated as an "Exempt Foreign Person," provided that the
total number of days physically present in the current calendar year and the two
preceding calendar years does not exceed 183 days (counting all of the days in
the current calendar year, only one-third of the days in the first preceding
calendar year and only one-sixth of the days in the second preceding calendar
year). In addition, lawful permanent residents or green card holders may not be
treated as "Exempt Foreign Persons." If you are an individual or an entity, you
must not now be, or at this time expect to be, engaged in a U.S. trade or
business with respect to which any gain derived from transactions effected by
the Fund/Payer during the calendar year is effectively connected to the U.S. (or
your transactions are exempt from U.S. taxes under a tax treaty).
Permanent Address. The Shareholder Application must contain your permanent
address if you are an "Exempt Foreign Person." If you are an individual, provide
your permanent address. If you are a partnership or corporation, provide the
address of your principal office. If you are an estate or trust, provide the
address of your permanent residence or the principal office of any fiduciary.
Notice of Change in Status. If you become a U.S. citizen or resident after you
have provided certification of your foreign status, or if you cease to be an
"Exempt Foreign Person," you must notify the Fund/Payer within 30 days of your
change in status. Reporting will then begin on the account(s) listed, and backup
withholding may also begin unless you certify to the Fund/Payer that (1) the tax
payer identification number you have given is correct, and (2) the Internal
Revenue Service has not notified you that you are subject to backup withholding
because you failed to report certain interest or dividend income. You may use
Form W-9, "Payer's Request for Taxpayer Identification Number and
Certification," to make these certifications. If an account is no longer active,
you do not have to notify a Fund/Payer or broker of your change in status unless
you also have another account with the same Fund/Payer that is still active. If
you receive interest from more than one Fund/Payer or have dealings with more
than one broker or barter exchange, file a certificate with each. If you have
more than one account with the same Fund/Payer, the Fund/Payer may require you
to file a separate certificate for each account.
When to File. File these certifications with the Fund before a payment is made
to you, unless you have already done this in either of the two preceding
calendar years.
How Often You Must File. This certificate generally remains in effect for three
calendar years. A Fund/Payer or broker, however, may require that a new
certificate be filed each time a payment is made. On joint accounts for which
each joint owner is a foreign person, each must provide a certification of
foreign status.
Franklin Funds
Automatic Investment Plan
777 Mariners Island Blvd., P.O. Box 7777, San Mateo, CA 94403-7777
================================================================================
================================================================================
The Franklin Automatic Investment Plan gives you the convenience of
automatically investing in a Fund on a monthly basis. Shares are purchased at
the applicable offering price, as indicated in the Prospectus, next calculated
after receipt of funds from your bank. There is no additional charge for this
service by the Fund or Franklin/Templeton Investor Services, Inc.
Your monthly investments will be made by electronic funds transfer (EFT) from
your checking account if your bank is a member of an Automated Clearing House
(ACH). Otherwise, they will be made by checks prepared by our bank. Your
signature below is the authorizing signature for each transfer or check. This
service is subject to the rules for the bank account, ACH and the Fund. Franklin
may correct any transfer error by a debit or credit to your bank account and/or
Fund account.
You may sign up for the Automatic Investment Plan at the time you open a new
account or any time after you have established an account at Franklin. If the
Automatic Investment Plan is initiated at the time you open your account, the
Fund's minimum initial investment amount is reduced and the account may be
opened with an investment of $25 or more. Existing account holders may choose
any amount, starting with the $25 minimum subsequent amount, for investment in
their Fund account from their bank account. All you need to do is complete the
application below and attach a voided, unsigned check which shows your bank
account number in magnetic coding. Please allow up to six weeks for the Plan to
begin.
Changing or Discontinuing the Plan
When Franklin/Templeton Investor Services, Inc. is advised by you to stop your
Automatic Investment Plan, no investments will be processed until written notice
is received to initiate the Plan again. Franklin will need ten days written or
verbal notice to stop an Automatic Investment Plan prior to an upcoming pay
date. Ten days written notice is required if you are changing bank information
other than the dollar amount. If a check or transfer is returned to Franklin for
any reason, including stop payment, insufficient funds or account closed, your
Automatic Investment Plan will be discontinued. Franklin may also change or
terminate the service by written notice to you.
Exchanges
If you exchange shares from one Franklin fund to another, the Automatic
Investment Plan does not transfer to the new account, but Franklin will
automatically send you a Plan application. Or, you may notify us by telephone if
the Plan is to be transferred and credited to a fund other than that listed on
the original application.
Retirement Accounts
When using the Automatic Investment Plan for Franklin Templeton Trust Company
retirement accounts, all purchases will be credited as a contribution for the
year in which they are received. Please be sure to monitor the amount of money
credited to your retirement account to avoid making an excess contribution.
20.24/101 A (07/96) Automatic Investment Plan Application:
Name(s)-------------------------------------------------------------
(Please print as shown on Franklin account registration.)
- --------------------------------------------------------------------
Address
- --------------------------------------------------------------------
Telephone
- --------------------------------------------------------------------
Bank's Name
- --------------------------------------------------------------------
Branch Address
- --------------------------------------------------------------------
Name(s) on Bank Account
- --------------------------------------------------------------------
Checking Account No.
Please attach a voided check.
[Franklin Use Only: ABA No.]----------------------------------------
Please invest my Automatic investments for $ --------- per month in:
Franklin Fund Name--------------------------------------------------
Franklin Fund Account No.-------------------------------------------
Preferred Monthly Date of Checking Account Debit:
1st bank business day on or after the: 5th or 20th
Signature(s) ------------------------------------- Date-------------
All registered owners must sign.
If you have any questions, please call a Shareholder Services
representative, toll free, at 1-800/632-2301.
Automatic Investment Plan Revision -
Complete only if you are revising existing Automatic Investment Plan: (and
complete section above)
Bank Change---------------------------------Amount Change $----------
(Attach new voided check) (Indicate new amount)
Other
- ---------------------------------------------------------------------
Note: Please give Franklin ten days written notice to change bank information
other than the dollar amount.
Please Return this Form to:
Franklin/Templeton Investor Services, Inc., Attn: AUTOMATIC INVESTMENT PLAN
Dept., 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, CA 94403-7777.
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Franklin Templeton Group of Funds
Literature Request ~ Call 1-800/DIAL BEN (1-800/342-5236) today for a free
descriptive brochure and prospectus on any of the funds listed below. The
prospectus contains more complete information, including fees, charges and
expenses, and should be read carefully before investing or sending money.
International Growth
Franklin Global Health Care Fund
Franklin International Equity Fund
Franklin Templeton Japan Fund
Templeton Developing Markets Trust
Templeton Foreign Fund
Templeton Global Infrastructure Fund
Templeton Global
Opportunities Trust
Templeton Global Real Estate Fund
Templeton Global Smaller
Companies Fund
Templeton Greater European Fund
Templeton Growth Fund
Templeton Latin America Fund
Templeton Pacific Growth Fund
Templeton World Fund
International Growth
and Income
Franklin Global Utilities Fund
Franklin Templeton German
Government Bond Fund
Franklin Templeton
Global Currency Fund
Templeton Global Bond Fund
Templeton Growth and Income Fund
International Income
Franklin Global Government
Income Fund
Franklin Templeton Hard
Currency Fund
Franklin Templeton High
Income Currency Fund
Templeton Americas
Government Securities Fund
Growth
Franklin Blue Chip Fund
Franklin California Growth Fund
Franklin DynaTech Fund
Franklin Equity Fund
Franklin Gold Fund
Franklin Growth Fund
Franklin MidCap Growth Fund
Franklin Small Cap Growth Fund
Growth and Income
Franklin Balance Sheet
Investment Fund
Franklin Convertible Securities Fund
Franklin Equity Income Fund
Franklin Income Fund
Franklin MicroCap Value Fund
Franklin Natural Resources Fund
Franklin Premier Return Fund
Franklin Real Estate Securities Fund Franklin Rising Dividends Fund Franklin
Strategic Income Fund Franklin Utilities Fund Franklin Value Fund Templeton
American Trust, Inc.
Income
Franklin Adjustable Rate
Securities Fund
Franklin Adjustable U.S.
Government Securities Fund
Franklin AGE High Income Fund
Franklin Investment
Grade Income Fund
Franklin Short-Intermediate U.S.
Government Securities Fund
Franklin U.S. Government
Securities Fund
Franklin Money Fund
Franklin Federal Money Fund
For Non-U.S. Investors:
Franklin Tax-Advantaged
High Yield Securities Fund
Franklin Tax-Advantaged
International Bond Fund
Franklin Tax-Advantaged U.S.
Government Securities Fund
For Corporations:
Franklin Corporate Qualified
Dividend Fund
Franklin Funds Seeking
Tax-Free Income
Federal Intermediate-Term
Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund
Puerto Rico Tax-Free Income Fund
Tax-Exempt Money Fund
Franklin State-Specific Funds Seeking Tax-Free Income
Alabama
Arizona*
Arkansas**
California*
Colorado
Connecticut
Florida*
Georgia
Hawaii**
Indiana
Kentucky
Louisiana
Maryland
Massachusetts***
Michigan *
Minnesota***
Missouri
New Jersey
New York*
North Carolina
Ohio***
Oregon
Pennsylvania
Tennessee**
Texas
Virginia
Washington**
Variable Annuities
Franklin ValuemarkSM
Franklin Templeton Valuemark
Income Plus (an immediate annuity)
*Two or more fund options available: long-term portfolio, intermediate-term
portfolio, a portfolio of insured municipal securities, and/or a high yield
portfolio (CA) and a money market portfolio (CA and NY). **The fund may invest
up to 100% of its assets in bonds that pay interest subject to the federal
alternative minimum tax.
***Portfolio of insured municipal securities.
FGF 07/96 FITTF P 07/96
FRANKLIN
TAX-FREE
TRUST
STATEMENT OF
ADDITIONAL INFORMATION
JULY 1, 1996
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777 1-800/DIAL BEN
CONTENTS PAGE
How Does the Fund Invest Its Assets? 2
Investment Restrictions........... 5
Officers and Trustees............. 6
Investment Advisory and Other Services 9
How Does the Fund Buy Securities
For Its Portfolio?............... 11
How Do I Buy, Sell and Exchange Shares? 11
How Are Fund Shares Valued?....... 14
Additional Information on
Distributions and Taxes.......... 14
The Fund's Underwriter............ 15
How Does the Fund
Measure Performance?............. 19
Miscellaneous Information......... 22
Financial Statements.............. 25
Useful Terms and Definitions...... 25
Appendices
Description of Ratings........... 26
Special Factors Affecting Each Fund 28
The Franklin Tax-Free Trust (the "Trust") is an open-end management investment
company with 28 separate series. This SAI describes the seven series listed
below.
Five of the series offer two classes of shares:
Franklin Arizona Insured Tax-Free Income Fund -
Class I
Franklin Florida Insured Tax-Free Income Fund -
Class I
Franklin Insured Tax-Free Income Fund -
Class I & Class II
Franklin Massachusetts Insured Tax-Free Income Fund -
Class I & Class II
Franklin Michigan Insured Tax-Free Income Fund -
Class I& Class II
Franklin Minnesota Insured Tax-Free Income Fund -
Class I & Class II
Franklin Ohio Insured Tax-Free Income Fund -
Class I & Class II
Each Fund may, separately or collectively, be referred to as the "Fund" or
"Funds," or individually by the state or investment policy in its name.
Each Fund seeks to provide investors with as high a level of income exempt from
federal income taxes as is consistent with prudent investing, while seeking
preservation of shareholders' capital. Each State Fund also seeks to provide a
maximum level of income that is exempt from the personal income taxes, if any,
for resident shareholders of the named state. The state of Florida currently
does not impose a state personal income tax. The investment objective of each
Fund is a fundamental policy. The Arizona and Florida Funds are nondiversified.
The other Funds are diversified.
The Insured Fund invests in a diversified portfolio of municipal securities from
different states. The other Funds invest primarily in municipal securities
issued by the Fund's respective state and that state's political subdivisions,
agencies, and instrumentalities. All Funds invest in municipal securities
covered by insurance policies providing for the scheduled payment of principal
and interest, in securities backed by the full faith and credit of the U.S.
government, in municipal securities secured by such U.S. government obligations
and in short-term obligations of issuers with the highest ratings from Moody's
Investors Service ("Moody's"), Standard & Poor's Corporation ("S&P") or Fitch
Investors Service, Inc. ("Fitch"). All insured securities not insured by the
issuer will be insured by a qualified municipal bond insurer.
The Prospectus, dated July 1, 1996, as may be amended from time to time,
contains the basic information you should know before investing in the Fund. For
a free copy, call 1-800/DIAL BEN or write the Fund at the address shown.
THIS SAI IS NOT A PROSPECTUS. IT CONTAINS INFORMATION IN ADDITION TO AND IN MORE
DETAIL THAN SET FORTH IN THE PROSPECTUS. THIS SAI IS INTENDED TO PROVIDE YOU
WITH ADDITIONAL INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF THE FUND,
AND SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS.
TF1 SAI 06/96
HOW DOES THE FUND INVEST ITS ASSETS?
DESCRIPTION OF MUNICIPAL AND OTHER SECURITIES
Tax Anticipation Notes. These 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. These 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. These are normally issued to provide interim financing
until long-term financing can be arranged. Long-term bonds then provide the
money for the repayment of the notes.
Construction Loan Notes. These 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. These typically represent a short-term obligation
(270 days or less) issued by a municipality to meet working capital needs.
Municipal Bonds that 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. These are bonds that pay
tax-exempt interest and are, in most cases, revenue bonds. They 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 these bonds is solely dependent on the ability of the
facility's user to meet its financial obligations and the pledge, if any, of the
real and personal property so financed as security for payment.
Variable or Floating Rate Demand Notes ("VRDNs"). As stated in the Prospectus,
VRDNs are tax-exempt obligations that contain a floating or variable interest
rate and a right of demand, which may be unconditional, to receive payment of
the unpaid principal balance plus accrued interest upon a short notice period
(generally up to 30 days) prior to specified dates, either from the issuer or by
drawing on a bank letter of credit, a guarantee or insurance issued with respect
to the instrument. The interest rates are adjustable, at intervals ranging from
daily up to monthly, and are calculated to maintain the market value of the VRDN
at approximately its par value on the adjustment date.
When-Issued Purchases. Municipal bonds are frequently offered on a "when-issued"
basis. When so offered, the price, which is generally expressed in yield terms,
is fixed at the time the commitment to buy is made, but delivery and payment for
the when-issued securities take place at a later date. During the period between
purchase and settlement, no payment is made by the Fund to the issuer and no
interest accrues to the Fund. To the extent that assets of the Fund are held in
cash pending the settlement of a purchase of securities, the Fund would earn no
income; however, it is each Fund's intention to be fully invested to the extent
practicable and subject to its investment policies. While when-issued securities
may be sold prior to the settlement date, each Fund intends to buy such
securities with the purpose of actually acquiring them, unless a sale appears
desirable for investment reasons. At the time the Fund makes the commitment to
buy a municipal bond on a when-issued basis, it will record the transaction and
reflect the value of the security in determining its net asset value. The Fund
believes that its net asset value or income will not be adversely affected by
its purchase of municipal bonds on a when-issued basis. The Fund will establish
a segregated account in which it will maintain cash and marketable securities
equal in value to its commitments for when-issued securities.
Stripped Municipal Securities. Municipal securities may also be sold in
"stripped" form. Stripped municipal securities represent separate ownership of
interest and principal payments on municipal obligations.
Callable Bonds. There are municipal bonds issued with provisions that 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 Advisers, each Fund believes it
has reduced the risk of adverse impact on net asset value based on calls of
callable bonds. Advisers may dispose of such bonds in the years prior to their
call date, if Advisers believes such bonds are at their maximum premium
potential. In pricing such bonds in each Fund's portfolio, each callable bond is
marked-to-market daily based on the bond's call date. Thus, the call of some or
all of a Fund's callable bonds may have an impact on such Fund's net asset
value. In light of each Fund's pricing policies and because each Fund follows
certain amortization procedures required by the IRS, a Fund is not expected to
suffer any material adverse impact related to the value at which a Fund has
carried the bonds in connection with calls of bonds purchased at a premium.
Notwithstanding such policies, however, the reinvestment of the proceeds of any
called bond may be in bonds that pay a higher or lower rate of return than the
called bonds; and, as with any investment strategy, there is no guarantee that a
call may not have a more substantial impact than anticipated or that the Fund's
objective will be achieved.
Zero-Coupon Securities. 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 semiannually at the
rate fixed at the time of issuance, the value of such securities is generally
more volatile than other fixed-income securities. Since zero-coupon bondholders
do not receive interest payments, zero-coupon securities fall more dramatically
than bonds paying interest on a current basis when interest rates rise. When
interest rates fall, zero-coupon securities rise more rapidly in value, because
the bonds reflect a fixed rate of return.
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 that the Fund may buy
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.
Escrow-Secured Bonds or Defeased Bonds. These are created when an issuer refunds
in advance of maturity (or pre-refunds) an outstanding bond issue that 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 buy high grade, interest
bearing debt securities that 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. The Fund will purchase escrow secured bonds
without additional insurance only where the escrow is invested in U.S.
government securities backed by the full faith and credit of the U.S.
government.
U.S. Government Obligations. These 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. 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 that 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 Funds' objectives and policies.
Loans of Portfolio Securities. Consistent with procedures approved by the Board
and subject to the following conditions, the Fund may lend its portfolio
securities to qualified securities dealers or other institutional investors, if
the loans do not exceed 10% of the value of the Fund's total assets at the time
of the most recent loan. The borrower must deposit with the Fund's custodian
bank collateral with an initial market value of at least 102% of the initial
market value of the securities loaned, including any accrued interest, with the
value of the collateral and loaned securities marked-to-market daily to maintain
collateral coverage of at least 102%. This collateral shall consist of cash. The
lending of securities is a common practice in the securities industry. The Fund
may engage in security loan arrangements with the primary objective of
increasing the Fund's income either through investing the cash collateral in
short-term interest bearing obligations or by receiving a loan premium from the
borrower. Under the securities loan agreement, the Fund continues to be entitled
to all dividends or interest on any loaned securities. As with any extension of
credit, there are risks of delay in recovery and loss of rights in the
collateral should the borrower of the security fail financially. While such
securities are on loan, the borrower will pay the Fund any income accruing
thereon, and the Fund may invest the cash collateral in portfolio securities,
thereby earning additional income. The Fund will not lend its portfolio
securities if the loans are not permitted by the laws or regulations of any
state in which its shares are qualified for sale. Loans are typically subject to
termination by the Fund in the normal settlement time or by the borrower on one
day's notice. Borrowed securities must be returned when the loan is terminated.
Any gain or loss in the market price of the borrowed securities that occurs
during the term of the loan inures to the Fund and its shareholders. The Fund
may pay reasonable finders', borrowers', administrative and custodial fees in
connection with a loan of its securities.
INSURANCE
Except for certain temporary short-term investments or U.S. government
guaranteed securities, the investment in municipal securities by the Fund is
covered by insurance policies providing for the scheduled payment of principal
and interest thereon. Depending on market conditions, and under current
portfolio insurance restrictions, it is expected that municipal securities will
comprise a major portion of the portfolio of the Fund.
As described in the Prospectus, the Fund will receive payments of insurance for
any installment of interest and principal due for payment but which shall be
unpaid by reason of nonpayment by the issuer. The term "due for payment," in
reference to the principal of a security, means its stated maturity date or the
date on which it shall have been called for mandatory sinking fund redemption
and does not refer to any earlier date on which payment is due by reason of a
call for redemption (other than by mandatory sinking fund redemption),
acceleration or other advancement of maturity. When referring to interest on a
security, the term means the stated date for payment of interest. When, however,
the interest on the security shall have been determined, as provided in the
underlying documentation relating to such security, to be subject to federal
income taxation, due for payment, when referring to the principal of such
security, also means the date on which it has been called for mandatory
redemption as a result of such determination of taxability. When referring to
interest on such security, the term means the accrued interest at the rate
provided in such documentation to the date on which it has been called for
mandatory redemption, together with any applicable redemption premium. The
insurance feature insures the scheduled payment of interest and principal and
does not guarantee the market value of the insured municipal securities nor the
value of the shares of the Funds.
As stated in the Prospectus, each insured municipal security in the Funds'
portfolio will be covered by either a "New Issue Insurance Policy" obtained by
the issuer of the security at the time of its original issuance, a "Secondary
Insurance Policy", or a "Portfolio Insurance Policy" issued by a qualified
municipal bond insurer.
Under the provisions of the Portfolio Insurance Policy, the insurer
unconditionally and irrevocably agrees to pay to the appointed trustee or its
successor and its agent (the "Trustee") that portion of the principal of and
interest on the securities that shall become due for payment but shall be unpaid
by reason of nonpayment by the issuer. The insurer will make such payments to
the Trustee on the date such principal or interest becomes due for payment or on
the business day next following the day on which the insurer shall have received
notice of nonpayment, whichever is later. The Trustee will disburse to the Fund
the face amount of principal and interest that is then due for payment but is
unpaid by reason of nonpayment by the issuer, but only upon receipt by the
Trustee of (i) evidence of the Fund's right to receive payment of the principal
or interest due for payment and (ii) evidence, including any appropriate
instruments of assignment, that all of the rights to payment of such principal
or interest due for payment shall thereupon vest in the insurer. Upon such
disbursement, the insurer shall become the owner of the security, appurtenant
coupon or right to payment of principal or interest on such security and shall
be fully subrogated to all of the Fund's rights thereunder, including the right
to payment thereof.
The portfolio insurance of the Fund may affect the value of the Fund's shares
under certain circumstances. As discussed in the Prospectus, unless a Secondary
Market Insurance Policy is purchased with respect to the portfolio security, the
Funds intend to hold any defaulted securities or securities for which there is a
significant risk of default in its portfolio until the default has been cured or
the principal and interest are paid by the issuer or the insurer. In such
circumstances, the Board has instructed Advisers to consider in its evaluation
of these securities the value of the insurance for the interest and principal
payments, as well as the market value of the portfolio securities, the market
value of securities of similar issuers whose securities carry similar interest
rates, and the discounted present value of the interest and principal payments
to be received from the insurance company. Absent any unusual or unforeseen
circumstances as a result of the Portfolio Insurance Policy, Advisers would
likely recommend that the Fund value the defaulted securities, or securities for
which there is a significant risk of default, at the same price as securities of
a similar nature that are not in default. A defaulted security covered by a
Secondary Market Policy would be valued at market.
Bond insurers are often referred to as "monolines" in that they only write
financial guarantees, as opposed to "multiline" insurers who write several
different types of insurance policies, such as life, auto and home insurance,
and are exposed to many types of risk. Additionally, bond insurers are not
exposed to "run risk" (which occurs when too many policyholders rush to cash in
their policies), because they only guarantee payment when due. Also, in order to
maintain triple-A status by recognized national securities rating agencies
(which is required by the Insured Fund), the bond insurers invest their assets
mainly in high quality municipal and corporate bonds rated double-A or better
and U.S. government obligations.
Neither the Fund nor Advisers makes any representations as to the ability of any
insurance company to meet its obligation to the Fund if called upon to do so.
INVESTMENT RESTRICTIONS
Each Fund has adopted the following restrictions as fundamental policies. These
restrictions may not be changed without the approval of a majority of the
outstanding voting securities of the Fund. Under the 1940 Act, this means the
approval of (i) more than 50% of the outstanding shares of the Fund or (ii) 67%
or more of the shares of the Fund present at a shareholder meeting if more than
50% of the outstanding shares of the Fund are represented at the meeting in
person or by proxy, whichever is less. A Fund may not:
1. Borrow money or mortgage or pledge any of its assets, except that
borrowings (and a pledge of assets therefore) for temporary or emergency
purposes may be made from banks in any amount up to 5% of the total asset
value.
2. Buy any securities on "margin" or sell any securities "short," except
that it may use such short-term credits as are necessary for the clearance
of transactions.
3. Make loans, except through the purchase of readily marketable debt
securities which are either publicly distributed or customarily purchased
by institutional investors. Although such loans are not presently intended,
this prohibition will not preclude a Fund from loaning portfolio securities
to broker/dealers or other institutional investors if at least 102% cash
collateral is pledged and maintained by the borrower; provided such
portfolio security loans may not be made if, as a result, the aggregate of
such loans exceeds 10% of the value of the Fund's total assets at the time
of the most recent loan.
4. Act as underwriter of securities issued by other persons, except insofar
as the Fund may be technically deemed an underwriter under the federal
securities laws in connection with the disposition of portfolio securities.
5. Purchase the securities of any issuer which would result in owning more
than 10% of the voting securities of such issuer, except with respect to
the Trust's non-diversified Funds, which Funds will not purchase a
security, if as a result: i) more than 25% of its total assets would be
invested in the securities of a single issuer or ii) with respect to 50% of
its total assets, more than 5% of its assets would be invested in the
securities of a single issuer.
6. Purchase securities from or sell to the Trust's officers and trustees,
or any firm of which any officer or trustee is a member, as principal, or
retain securities of any issuer if, to the knowledge of the Trust, one or
more of the Trust's officers, trustees, or investment adviser own
beneficially more than 1/2 of 1% of the securities of such issuer and all
such officers and trustees together own beneficially more than 5% of such
securities.
7. Acquire, lease or hold real estate, except such as may be necessary or
advisable for the maintenance of its offices and provided that this
limitation shall not prohibit the purchase of municipal and other debt
securities secured by real estate or interests therein.
8. Invest in commodities and commodity contracts, puts, calls, straddles,
spreads or any combination thereof, or interests in oil, gas, or other
mineral exploration or development programs, except that it may purchase,
hold and dispose of "obligations with puts attached" in accordance with its
investment policies.
9. Invest in companies for the purpose of exercising control or management.
10. Purchase securities of other investment companies, except in connection
with a merger, consolidation, acquisition or reorganization, except to the
extent permitted by exemptions which may be granted under the 1940 Act,
which allows the Funds to invest in shares of one or more investment
companies, of the type generally referred to as money market funds, managed
by Franklin Advisers, Inc. or its affiliates.
11. In the case of the Arizona and Florida Funds, purchase securities, in
private placements or in other transactions, for which there are legal or
contractual restrictions on resale.
12. Invest more than 25% of its assets in securities of any industry;
although for purposes of this limitation, tax-exempt securities and U.S.
government obligations are not considered to be part of any industry.
If a percentage restriction is met at the time of investment, a later increase
or decrease in the percentage due to a change in value of portfolio securities
or the amount of assets will not be considered a violation of any of the
foregoing restrictions.
To the extent that the state of Minnesota requires dividends to be derived
exclusively from interest on obligations of the state of Minnesota or of the
U.S. and its territories in order to be tax-exempt, the Fund will attempt to
meet such requirements. The policy followed by the Fund of attempting to meet
this state requirement in order to distribute tax-exempt income is not a
fundamental policy with respect to the Fund and may be changed without
notification to shareholders. If, due to unusual market or political conditions,
investments in securities as described above would be advisable, in Advisers'
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.
OFFICERS AND TRUSTEES
The Board has the responsibility for the overall management of the Trust,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of the Trust who are responsible for
administering the Trust's day-to-day operations. The affiliations of the
officers and Board members and their principal occupations for the past five
years are shown below. Members of the Board who are considered "interested
persons" of the Trust under the 1940 Act are indicated by an asterisk (*).
Positions and Offices Principal Occupation
Name, Age and Address with the Trust During Past Five Years
Frank H. Abbott, III (75) Trustee
1045 Sansome St.
San Francisco, CA 94111
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 (64) Trustee
General Host Corporation
Metro Center, 1 Station Place
Stamford, CT 06904-2045
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) Trustee
Park Avenue at Morris County
P. O. Box 1945
Morristown, NJ 07962-1945
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) Trustee
111 New Montgomery St., #402
San Francisco, CA 94105
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) Chairman of the
777 Mariners Island Blvd. Board and Trustee
San Mateo, CA 94404
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) President and
777 Mariners Island Blvd. Trustee
San Mateo, CA 94404
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 (67) Trustee
20833 Stevens Creek Blvd.
Suite 102
Cupertino, CA 95014
General Partner, Peregrine Associates and Miller & LaHaye, which are General
Partners of Peregrine Ventures and Peregrine Ventures II (venture capital
firms); Chairman of the Board and Director, Quarterdeck Office Systems, Inc.;
Director, FischerImaging Corporation; and director or trustee or managing
general partner, as the case may be, of 26 of the investment companies in the
Franklin Group of Funds.
Gordon S. Macklin (68) Trustee
8212 Burning Tree Road
Bethesda, MD 20817
Chairman, White River Corporation (information services); Director, Fund
American Enterprises Holdings, Inc., MCI Communications, Inc., MedImmune, Inc.
(biotechnology), InfoVest Corporation (information services), Fusion Systems
Corporation (industrial technology), and Source One Mortgage Services
Corporation (information services); 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) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
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) Vice President -
777 Mariners Island Blvd. Financial Re-
San Mateo, CA 94404 porting 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 (63) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
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 (36) Vice President
777 Mariners Island Blvd. and Chief
San Mateo, CA 94404 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) Vice President
777 Mariners Island Blvd. and Secretary
San Mateo, CA 94404
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 (33) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Senior Vice President, Franklin Advisers, Inc. and officer of eight of the
investment companies in the Franklin Group of Funds
Diomedes Loo-Tam (57) Treasurer and
777 Mariners Island Blvd. Principal Account-
San Mateo, CA 94404 ing Officer
Employee of Franklin Advisers, Inc.; and officer of 37 of the investment
companies in the Franklin Group of Funds.
Edward V. McVey (58) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
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 table above shows the officers and Board members who are affiliated with
Distributors and Advisers. Nonaffiliated members of the Board are currently paid
$1,300 per month plus $1,300 per meeting attended. As shown above, some of the
nonaffiliated Board members also serve as directors, trustees or managing
general partners of other investment companies in the Franklin Templeton Group
of Funds. They may receive fees from these funds for their services. The
following table provides the total fees paid to nonaffiliated Board members by
the Trust and by other funds in the Franklin Templeton Group of Funds.
<TABLE>
<CAPTION>
Total Fees Number of
Received from Boards in the
Total Fees the Franklin Franklin Templeton
Received Templeton Group Group of Funds on
Name from the Trust* of Funds** Which Each Serves***
<S> <C> <C> <C>
Frank H. Abbott, III.............. $31,200 $162,420 31
Harris J. Ashton.................. $31,200 $327,925 56
S. Joseph Fortunato............... $31,200 $344,745 58
David W. Garbellano............... $31,200 $146,100 30
Frank W.T. LaHaye................. $29,900 $143,200 26
Gordon S. Macklin................. $31,200 $321,525 53
*For the fiscal year ended February 29, 1996.
**For the calendar year ended December 31, 1995.
</TABLE>
***We base the number of boards on the number of registered investment companies
in the Franklin Templeton Group of Funds. This number does not include the total
number of series or funds within each investment company for which the Board
members are responsible. The Franklin Templeton Group of Funds currently
includes 61 registered investment companies, with approximately 165 U.S. based
funds or series.
Nonaffiliated members of the Board are reimbursed for expenses incurred in
connection with attending board meetings, paid pro rata by each fund in the
Franklin Templeton Group of Funds for which they serve as director, trustee or
managing general partner. No officer or Board member received any other
compensation directly from the Fund. Certain officers or Board members who are
shareholders of Resources may be deemed to receive indirect remuneration by
virtue of their participation, if any, in the fees paid to its subsidiaries.
As of June 3, 1996, the officers and Board members, as a group, owned of record
and beneficially approximately 46,248 shares of the Insured Fund, or less than
1% of its total outstanding shares. Many of the Board members also own shares in
other funds in the Franklin Templeton Group of Funds. Charles B. Johnson and
Rupert H. Johnson, Jr. are brothers.
INVESTMENT ADVISORY AND OTHER SERVICES
Investment Manager and Services Provided. The Fund's investment manager is
Advisers. Advisers provides investment research and portfolio management
services, including the selection of securities for the Fund to buy, hold or
sell and the selection of brokers through whom the Fund's portfolio transactions
are executed. Advisers' extensive research activities include, as appropriate,
traveling to meet with issuers and to review project sites. Advisers' activities
are subject to the review and supervision of the Board to whom Advisers renders
periodic reports of the Fund's investment activities.
Advisers provides office space and furnishings, facilities and equipment
required for managing the business affairs of the Fund. Advisers also maintains
all internal bookkeeping, clerical, secretarial and administrative personnel and
services and provides certain telephone and other mechanical services. Advisers
is covered by fidelity insurance on its officers, directors and employees for
the protection of the Fund.
Advisers acts as investment manager or administrator to 36 U.S. registered
investment companies with 121 separate series. Advisers may give advice and take
action with respect to any of the other funds it manages, or for its own
account, that may differ from action taken by Advisers on behalf of the Fund.
Similarly, with respect to the Fund, Advisers is not obligated to recommend, buy
or sell, or to refrain from recommending, buying or selling any security that
Advisers and access persons, as defined by the 1940 Act, may buy or sell for its
or their own account or for the accounts of any other fund. Advisers is not
obligated to refrain from investing in securities held by the Fund or other
funds that it manages or administers. Of course, any transactions for the
accounts of Advisers and other access persons will be made in compliance with
the Fund's Code of Ethics.
Management Fees. Under its management agreement, the Fund pays Advisers a
management fee 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) of 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. The fee is computed
at the close of business on the last business day of each month. Each class will
pay its proportionate share of the management fee.
The management fee will be reduced as necessary to comply with the most
stringent limits on Fund expenses of any state where the Fund offers it shares.
Currently, the most restrictive limitation on a fund's allowable expenses for
each fiscal year, as a percentage of its average net assets, is 2.5% of the
first $30 million in assets, 2% of the next $70 million, and 1.5% of assets over
$100 million. Expense reductions have not been necessary based on state
requirements.
Advisers has agreed in advance to limit its management fees, and to make certain
payments to reduce the expenses of certain Funds. The table below shows the
management fees, before any advance waiver, and the management fees paid by each
Fund for the three fiscal years ended February 29, 1996.
Management Management
Fees (before Fees Paid
fee waiver) by the Fund
1996:
Arizona Insured Fund. $ 190,058 $ 0
Florida Insured Fund. 362,566 92,697
Insured Fund......... 7,882,310 7,882,310
Massachusetts Insured
Fund................ 1,580,640 1,580,640
Michigan Insured Fund 5,130,941 5,130,941
Minnesota Insured Fund 2,430,182 2,430,182
Ohio Insured Fund.... 3,268,575 3,268,575
1995:
Arizona Insured Fund. 102,744 0
Florida Insured Fund. 239,908 43,007
Insured Fund......... 7,903,871 7,903,871
Massachusetts Insured
Fund............... 1,540,886 1,540,886
Michigan Insured Fund 4,846,714 4,846,714
Minnesota Insured Fund 2,401,351 2,401,351
Ohio Insured Fund.... 3,181,729 3,181,729
1994:
Arizona Insured Fund. 43,672 0
Florida Insured Fund. 94,989 0
Insured Fund......... 7,938,004 7,938,004
Massachusetts Insured
Fund................ 1,592,310 1,592,310
Michigan Insured
Fund................ 4,738,911 4,738,911
Minnesota Insured
Fund................ 2,422,894 2,422,894
Ohio Insured Fund.... 3,143,227 3,143,227
Management Agreement. The management agreement is in effect until March 31,
1997. It may continue in effect for successive annual periods if its continuance
is specifically approved at least annually by a vote of the Board or by a vote
of the holders of a majority of the Fund's outstanding voting securities, and in
either event by a majority vote of the Board members who are not parties to the
management agreement or interested persons of any such party (other than as
members of the Board), cast in person at a meeting called for that purpose. The
management agreement may be terminated without penalty at any time by the Board
or by a vote of the holders of a majority of the Fund's outstanding voting
securities, or by Advisers on 30 days' written notice, and will automatically
terminate in the event of its assignment, as defined in the 1940 Act.
Shareholder Servicing Agent. Investor Services, a wholly-owned subsidiary of
Resources, is the Fund's shareholder servicing agent and acts as the Fund's
transfer agent and dividend-paying agent. Investor Services is compensated on
the basis of a fixed fee per account.
Custodians. 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.
Auditors. Coopers & Lybrand L.L.P., 333 Market Street, San Francisco, California
94105, are the Fund's independent auditors. During the fiscal year ended
February 29, 1996, their auditing services consisted of rendering an opinion on
the financial statements of the Trust included in the Trust's Annual Report to
Shareholders for the fiscal year ended February 29, 1996.
HOW DOES THE FUND BUY
SECURITIES FOR ITS PORTFOLIO?
Since most purchases by the Fund are principal transactions at net prices, the
Fund incurs little or no brokerage costs. The Fund deals directly with the
selling or buying 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 using the services of a broker. Purchases of
portfolio securities from underwriters will include a commission or concession
paid by the issuer to the underwriter, and purchases from dealers will include a
spread between the bid and ask prices. As a general rule, the Fund does not buy
bonds in underwritings where it is given no choice, or only limited choice, in
the designation of dealers to receive the commission. The Fund seeks to obtain
prompt execution of orders at the most favorable net price. Transactions may be
directed to dealers in return for research and statistical information, as well
as for special services provided by the dealers in the execution of orders.
It is not possible to place a dollar value on the special executions or on the
research services received by Advisers from dealers effecting transactions in
portfolio securities. The allocation of transactions in order to obtain
additional research services permits Advisers to supplement its own research and
analysis activities and to receive the views and information of individuals and
research staff of other securities firms. As long as it is lawful and
appropriate to do so, Advisers and its affiliates may use this research and data
in their investment advisory capacities with other clients. If the Fund's
officers are satisfied that the best execution is obtained, the sale of Fund
shares may also be considered a factor in the selection of broker-dealers to
execute the Fund's portfolio transactions.
If purchases or sales of securities of the Fund and one or more other investment
companies or clients supervised by Advisers are considered at or about the same
time, transactions in these securities will be allocated among the several
investment companies and clients in a manner deemed equitable to all by
Advisers, taking into account the respective sizes of the funds and the amount
of securities to be purchased or sold. In some cases this procedure could have a
detrimental effect on the price or volume of the security so far as the Fund is
concerned. In other cases it is possible that the ability to participate in
volume transactions and to negotiate lower brokerage commissions will be
beneficial to the Fund.
During the past three fiscal years ended February 29, 1996, the Fund paid no
brokerage commissions.
As of February 29, 1996, the Fund did not own securities of its regular
broker-dealers.
HOW DO I BUY, SELL AND EXCHANGE SHARES?
ADDITIONAL INFORMATION ON BUYING SHARES
The Fund continuously offers its shares through securities dealers who have an
agreement with Distributors. Securities dealers may at times receive the entire
sales charge. A securities dealer who receives 90% or more of the sales charge
may be deemed an underwriter under the Securities Act of 1933, as amended.
Securities laws of states where the Fund offers its shares may differ from
federal law. Banks and financial institutions that sell shares of the Fund may
be required by state law to register as securities dealers. Financial
institutions or their affiliated brokers may receive an agency transaction fee
in the percentages indicated in the table under "How Do I Buy Shares? - Purchase
Price of Fund Shares" in the Prospectus.
When you buy shares, if you submit a check or a draft that is returned unpaid to
the Fund we may impose a $10 charge against your account for each returned item.
Under agreements with certain banks in Taiwan, Republic of China, the Fund's
shares are available to these banks' trust accounts without a sales charge. The
banks may charge service fees to their customers who participate in the trusts.
A portion of these service fees may be paid to Distributors or one of its
affiliates to help defray expenses of maintaining a service office in Taiwan,
including expenses related to local literature fulfillment and communication
facilities.
Class I shares of the Fund may be offered to investors in Taiwan through
securities advisory firms known locally as Securities Investment Consulting
Enterprises. In conformity with local business practices in Taiwan, Class I
shares may be offered with the following schedule of sales charges:
Sales
SIZE OF PURCHASE - U.S. DOLLARS CHARGE
Up to $30,000................... 3%
$30,000 but less than $100,000.. 2%
$100,000 but less than $400,000. 1%
$400,000 or more................ 0%
Other Payments to Securities Dealers. Distributors will pay the following
commissions, out of its own resources, to securities dealers who initiate and
are responsible for purchases of Class I shares of $1 million or more: 0.75% on
sales of $1 million 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.
Letter of Intent. You may qualify for a reduced sales charge when you buy Class
I shares, as described in the Prospectus. At any time within 90 days after the
first investment that you want to qualify for a reduced sales charge, you may
file with the Fund a signed shareholder application with the Letter of Intent
section completed. After the Letter is filed, each additional investment will be
entitled to the sales charge applicable to the level of investment indicated on
the Letter. Sales charge reductions based on purchases in more than one Franklin
Templeton Fund will be effective only after notification to Distributors that
the investment qualifies for a discount. Your holdings in the Franklin Templeton
Funds, 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 on the
amount actually purchased (less redemptions) during the period. If you execute a
Letter prior to a change in the sales charge structure of the Fund, you may
complete the Letter at the lower of the new sales charge structure or the sales
charge structure in effect at the time the Letter was filed.
As mentioned in the Prospectus, five percent (5%) of the amount of the total
intended purchase will be reserved in Class I shares of the Fund registered in
your name until you fulfill the letter. If 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
total purchases, less redemptions, exceed the amount specified under the Letter
and is an amount that would qualify for a further quantity discount, a
retroactive price adjustment will be made by Distributors and the securities
dealer through whom purchases were made pursuant to the Letter (to reflect such
further quantity discount) on purchases made within 90 days before and on those
made after filing the Letter. The resulting difference in offering price will be
applied to the purchase of additional shares at the offering price applicable to
a single purchase or the dollar amount of the total purchases. If the 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 the purchases had
been made at a single time. Upon remittance, the reserved shares held for your
account will be deposited to an account in your name or delivered to you or as
you direct. If within 20 days after written request the difference in sales
charge is not paid, the redemption of an appropriate number of reserved shares
to realize the difference will be made. In the event of a total redemption of
the account 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.
ADDITIONAL INFORMATION ON EXCHANGING SHARES
If you request the exchange of the total value of your account, accrued but
unpaid income dividends and capital gain distributions will be reinvested in the
Fund at the net asset value on the date of the exchange, and then the entire
share balance will be exchanged into the new fund. Backup withholding and
information reporting may apply. Information regarding the possible tax
consequences of an exchange is included in the tax section in this SAI and in
the Prospectus.
If a substantial number of shareholders should, within a short period, sell
their shares of the Fund under the exchange privilege, the Fund might have to
sell portfolio securities it might otherwise hold and incur the additional costs
related to such transactions. On the other hand, increased use of the exchange
privilege may result in periodic large inflows of money. If this occurs, it is
the Fund's general policy to initially invest this money in short-term,
tax-exempt municipal securities, unless it is believed that attractive
investment opportunities consistent with the Fund's investment objective exist
immediately. This money will then be withdrawn from the short-term tax-exempt
municipal securities and invested in portfolio securities in as orderly a manner
as is possible when attractive investment opportunities arise.
The proceeds from the sale of shares of an investment company are generally not
available until the fifth business day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange until
that fifth business day. The sale of Fund shares to complete an exchange will be
effected at net asset value at the close of business on the day the request for
exchange is received in proper form. Please see "May I Exchange Shares for
Shares of Another Fund?" in the Prospectus.
ADDITIONAL INFORMATION ON SELLING SHARES
Systematic Withdrawal Plan. There are no service charges for establishing or
maintaining a systematic withdrawal plan. 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.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the Fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Because the amount
withdrawn under the plan may be more than your actual yield or income, part of
the payment may be a return of your investment.
The Fund may discontinue a systematic withdrawal plan by notifying you in
writing and will automatically discontinue a systematic withdrawal plan if all
shares in your account are withdrawn or if the Fund receives notification of the
shareholder's death or incapacity.
Through Your Securities Dealer. If you sell shares through your securities
dealer, it is your dealer's responsibility to transmit the order to the Fund in
a timely fashion. Any loss to you resulting from your dealer's failure to do so
must be settled between you and your securities dealer.
Redemptions in Kind. The Fund has committed itself to pay in cash (by check) all
requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the value
of the Fund's net assets at the beginning of the 90-day period. This commitment
is irrevocable without the prior approval of the SEC. In the case of redemption
requests in excess of these amounts, the Board reserves the right to make
payments in whole or in part in securities or other assets of the Fund, in case
of an emergency, or if the payment of such a redemption in cash would be
detrimental to the existing shareholders of the Fund. In these circumstances,
the securities distributed would be valued at the price used to compute the
Fund's net assets and you may incur brokerage fees in converting the securities
to cash. The Fund does not intend to redeem illiquid securities in kind. If this
happens, however, you may not be able to recover your investment in a timely
manner.
GENERAL INFORMATION
If dividend checks are returned to the Fund marked "unable to forward" by the
postal service, we will consider this a request by you to change your dividend
option to reinvest all distributions. The proceeds will be reinvested in
additional shares at net asset value until we receive new instructions.
If mail is returned as undeliverable or we are unable to locate you or verify
your current mailing address, we may deduct the costs of our efforts to find you
from your account. These costs may include a percentage of the account when a
search company charges a percentage fee in exchange for its location services.
All checks, drafts, wires and other payment mediums used to buy or sell shares
of the Fund must be denominated in U.S. dollars. We may, in our sole discretion,
either (a) reject any order to buy or sell shares denominated in any other
currency or (b) honor the transaction or make adjustments to your account for
the transaction as of a date and with a foreign currency exchange factor
determined by the drawee bank.
Special Services. The Franklin Templeton Institutional Services Department
provides specialized services, including recordkeeping, for institutional
investors. The cost of these services is not borne by the Fund.
Investor Services may pay certain financial institutions that maintain omnibus
accounts with the Fund on behalf of numerous beneficial owners for recordkeeping
operations performed with respect to such owners. For each beneficial owner in
the omnibus account, the Fund may reimburse Investor Services an amount not to
exceed the per account fee that the Fund normally pays Investor Services. These
financial institutions may also charge a fee for their services directly to
their clients.
HOW ARE FUND SHARES VALUED?
We calculate the net asset value per share 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 Fund is informed
that the Exchange observes the following holidays: New Year's Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
For the purpose of determining the aggregate net assets of the Fund, cash and
receivables are valued at their realizable amounts. Interest is recorded as
accrued. Over-the-counter portfolio securities are valued within the range of
the most recent quoted bid and ask prices. Portfolio securities that are traded
both in the over-the-counter market and on a stock exchange are valued according
to the broadest and most representative market as determined by Advisers.
Municipal securities generally trade in the over-the-counter market rather than
on a securities exchange.
Generally, trading in U.S. government securities and money market instruments is
substantially completed each day at various times before the scheduled close of
the Exchange. The value of these securities used in computing the net asset
value of each class is determined as of such times. Occasionally, events
affecting the values of these securities may occur between the times at which
they are determined and the scheduled close of the Exchange that will not be
reflected in the computation of the net asset value of each class. If events
materially affecting the values of these securities occur during this period,
the securities will be valued at their fair value as determined in good faith by
the Board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the Board. With the approval of the Board, the
Fund may utilize a pricing service, bank or securities dealer to perform any of
the above described functions.
ADDITIONAL INFORMATION ON
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
You may receive two types of distributions from the Fund:
1. Income dividends. The Fund receives income generally in the form of interest
and other income derived from its investments. This income, less the expenses
incurred in the Fund's operations, is its net investment income from which
income dividends may be distributed. Thus, the amount of dividends paid per
share may vary with each distribution.
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 that 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.
TAXES
As stated in the Prospectus, each Fund has elected to be treated as a regulated
investment company under Subchapter M of the Code. The Board reserves the right
not to maintain the qualification of the Fund as a regulated investment company
if it determines this course of action to be beneficial to shareholders. In that
case, the Fund will be subject to federal and possibly state corporate taxes on
its taxable income and gains, to the alternative minimum tax on a portion of its
tax-exempt income, and distributions (including its tax-exempt interest
dividends) to shareholders will be taxable to the extent of the Fund's available
earnings and profits.
The Code requires all funds to distribute at least 98% of their taxable ordinary
income earned during the calendar year and at least 98% of their capital gain
net income earned during the twelve-month period ending October 31 of each year
(in addition to amounts from the prior year that were neither distributed nor
taxed to the Fund) to shareholders by December 31 of each year in order to avoid
the imposition of a federal excise tax. Under these rules, certain distributions
which are declared in October, November or December but which, for operational
reasons, may not be paid to you until the following January, will be treated for
tax purposes as if paid by the Fund and received by you on December 31 of the
calendar year in which they are declared. The Fund intends as a matter of policy
to declare and pay such dividends, if any, in December to avoid the imposition
of this tax, but does not guarantee that the distributions will be sufficient to
avoid any or all federal excise taxes.
Redemptions and exchanges of Fund shares are taxable transactions for federal
and state income tax purposes. Gain or loss will be recognized in an amount
equal to the difference between your basis in the shares and the amount you
received, subject to the rules described below. If such shares are a capital
asset in your hands, gain or loss will be capital gain or loss and will be
long-term for federal income tax purposes if your shares have been held for more
than one year.
All or a portion of the sales charge incurred in buying shares of the Fund will
not be included in the federal tax basis of shares sold or exchanged within
ninety (90) days of their purchase (for purposes of determining gain or loss
with respect to such shares) if you reinvest the sale proceeds in the Fund or in
another fund in the Franklin Templeton Funds, and a sales charge which would
otherwise apply to the reinvestment is reduced or eliminated. Any portion of the
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. You should consult your
tax advisor concerning the tax rules applicable to the redemption or exchange of
a Fund's shares.
Since the Fund's income is derived from interest income and gain on the sale of
portfolio securities rather than dividend income, no portion of the Fund's
distributions will generally be eligible for the corporate dividends-received
deduction. None of the distributions paid by the Fund for the fiscal year ended
February 29, 1996, qualified for this deduction and it is not anticipated that
any of the current year's dividends will so qualify.
All or a portion of a loss you realize upon a redemption of shares will be
disallowed to the extent you buy other shares of the Fund (through reinvestment
of dividends or otherwise) within 30 days before or after the redemption. Any
loss disallowed under these rules will be added to your tax basis of the shares
purchased.
Many states grant tax-free status to dividends paid to shareholders of mutual
funds from interest income earned by a fund from direct obligations of the U.S.
government, subject in some states to minimum investment requirements that must
be met by a fund. Investments in GNMA/FNMA securities and repurchase agreements
collateralized by U.S. government securities do not generally qualify for
tax-free treatment. While it is not the primary investment objective of the Fund
to invest in such obligations, the Fund is authorized to so invest for temporary
or defensive purposes. To the extent that such investments are made, any
affected Fund will provide you with the percentage of any dividends paid which
may qualify for such tax-free treatment at the end of each calendar year. You
should consult with your tax advisor with respect to the application of your
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.
If you are defined in the Code as a "substantial user" (or related person) of
facilities financed by private activity bonds, you should consult your tax
advisor before buying shares of the Fund.
THE FUND'S UNDERWRITER
Pursuant to an underwriting agreement in effect until March 31, 1997,
Distributors acts as principal underwriter in a continuous public offering for
both classes of the Fund's shares. The underwriting agreement will continue in
effect for successive annual periods if its continuance is specifically approved
at least annually by a vote of the Board or by a vote of the holders of a
majority of the Fund's outstanding voting securities, and in either event by a
majority vote of the Board members who are not parties to the underwriting
agreement or interested persons of any such party (other than as members of the
Board), cast in person at a meeting called for that purpose. The underwriting
agreement terminates automatically in the event of its assignment and may be
terminated by either party on 90 days' written notice.
Distributors pays the expenses of the distribution of Fund shares, including
advertising expenses and the costs of printing sales material and prospectuses
used to offer shares to the public. The Fund pays the expenses of preparing and
printing amendments to its registration statements and prospectuses (other than
those necessitated by the activities of Distributors) and of sending
prospectuses to existing shareholders.
Until April 30, 1994, income dividends for Class I shares were reinvested at the
offering price 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, this reinvestment is at net asset value.
In connection with the offering of Fund shares, the following table sets forth
aggregate underwriting commissions, the net underwriting discounts and
commissions retained by Distributors, after allowances to dealers, and
compensation received by Distributors in connection with redemptions or
repurchases of Fund shares, for each of the three fiscal years ended February
29, 1996:
<TABLE>
<CAPTION>
Total Net Total Compensation
Commissions Underwriting Received In Connection
Received Commissions With Redemptions
by Distributors Retained & Repurchases*
1996
<S> <C> <C> <C>
Arizona Insured Fund........................ $ 354,716 $ 23,459 $ 0
Florida Insured Fund........................ 529,386 35,378 7,440
Insured Fund................................ 3,860,342 257,256 1,217
Massachusetts Insured Fund.................. 907,321 59,564 0
Michigan Insured Fund....................... 1,214,412 241,446 2,150
Minnesota Insured Fund...................... 1,213,674 77,132 0
Ohio Insured Fund........................... 2,230,958 138,652 0
1995
Arizona Insured Fund........................ 249,896 22,641 --
Florida Insured Fund........................ 508,390 47,307 --
Insured Fund................................ 4,263,865 241,510 --
Massachusetts Insured Fund.................. 876,196 50,875 --
Michigan Insured Fund....................... 3,669,978 200,793 --
Minnesota Insured Fund...................... 1,317,567 82,163 --
Ohio Insured Fund........................... 2,206,639 124,260 --
1994
Arizona Insured Fund........................ 399,345 12,622 --
Florida Insured Fund........................ 1,143,608 52,436 --
Insured Fund................................ 12,230,430 625,002 --
Massachusetts Insured Fund.................. 2,068,206 117,339 --
Michigan Insured Fund....................... 8,310,641 440,220 --
Minnesota Insured Fund...................... 3,123,021 221,914 --
Ohio Insured Fund........................... 5,867,852 277,540 --
*for the period from May 1, 1995 to February 29, 1996
</TABLE>
Distributors may be entitled to reimbursement under the Rule 12b-1 plan for each
class, as discussed below. Except as noted, Distributors received no other
compensation from the Fund for acting as underwriter.
THE RULE 12B-1 PLANS
Each class has adopted a distribution plan or "Rule 12b-1 plan" pursuant to Rule
12b-1 of the 1940 Act.
The Class I Plan. Under the Class I plan, each Fund, except the Arizona and
Florida Funds, may pay a maximum of 0.10% per year of Class I's average daily
net assets, payable quarterly, for expenses incurred in the promotion and
distribution of Class I shares. The Arizona and Florida Funds may each pay up to
a maximum of 0.15% per year of the Fund's average daily net assets for these
expenses.
In implementing the Class I plan, except the Arizona and Florida Funds, the
Board has determined that the annual fees payable under the plan will be equal
to the sum of: (i) the amount obtained by multiplying 0.10% by the average daily
net assets represented by Class I shares of the Fund that were acquired by
investors on or after May 1, 1994, the effective date of the plan ("New
Assets"), and (ii) the amount obtained by multiplying 0.05% by the average daily
net assets represented by Class I shares of the Fund that were acquired before
May 1, 1994 ("Old Assets"). These fees will be paid to the current securities
dealer of record on the account. In addition, until such time as the maximum
payment of 0.10% is reached on a yearly basis, up to an additional 0.02% will be
paid to Distributors under the plan. The payments made to Distributors will be
used by Distributors to defray other marketing expenses that have been incurred
in accordance with the plan, such as advertising.
The fee is a Class I expense. This means that all Class I shareholders, except
shareholders of the Arizona and Florida Funds, 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 the Fund to pay a full 0.10% on all assets at any time. The
approval of the Board would be required to change the calculation of the
payments to be made under the Class I plan.
The Class I plan does not permit unreimbursed expenses incurred in a particular
year to be carried over to or reimbursed in later years.
The Class II Plan. Under the Class II plan, the Fund pays Distributors up to
0.50% per year of Class II's average daily net assets, payable quarterly, for
distribution and related expenses. These fees may be used to compensate
Distributors or others for providing distribution and related services and
bearing certain Class II expenses. All distribution expenses over this amount
will be borne by those who have incurred them without reimbursement by the Fund.
Under the Class II plan, the Fund also pays an additional 0.15% per year of
Class II's average daily net assets, payable quarterly, as a servicing fee.
During the first year after a purchase of Class II shares, Distributors may keep
this portion of the Rule 12b-1 fees associated with the Class II purchase.
The Class I and Class II Plans. In addition to the payments that Distributors or
others are entitled to under each plan, each plan also provides that to the
extent the Fund, Advisers or Distributors or other parties on behalf of the
Fund, Advisers or Distributors make payments that are deemed to be for the
financing of any activity primarily intended to result in the sale of shares of
each class within the context of Rule 12b-1 under the 1940 Act, then such
payments shall be deemed to have been made pursuant to the plan. The terms and
provisions of each plan relating to required reports, term, and approval are
consistent with Rule 12b-1.
In no event shall the aggregate asset-based sales charges, which include
payments made under each plan, plus any other payments deemed to be made
pursuant to a plan, exceed the amount permitted to be paid pursuant to the Rules
of Fair Practice of the National Association of Securities Dealers, Inc.,
Article III, Section 26(d)4.
To the extent fees are for distribution or marketing functions, as distinguished
from administrative servicing or agency transactions, certain banks will not be
entitled to participate in the plans as a result of applicable federal law
prohibiting certain banks from engaging in the distribution of mutual fund
shares. These banking institutions, however, are permitted to receive fees under
the plans for administrative servicing or for agency transactions. If you are a
customer of a bank that is prohibited from providing these services, you would
be permitted to remain a shareholder of the Fund, and alternate means for
continuing the servicing would be sought. In this event, changes in the services
provided might occur and you might no longer be able to avail yourself of any
automatic investment or other services then being provided by the bank. It is
not expected that you would suffer any adverse financial consequences as a
result of any of these changes.
Each plan has been approved in accordance with the provisions of Rule 12b-1. The
plans are effective through March 31, 1997, and renewable annually by a vote of
the Board, including a majority vote of the Board members who are not interested
persons of the Fund and who have no direct or indirect financial interest in the
operation of the plans, cast in person at a meeting called for that purpose. It
is also required that the selection and nomination of such Board members be done
by the non-interested members of the Board. The plans and any related agreement
may be terminated at any time, without penalty, by vote of a majority of the
non-interested Board members on not more than 60 days' written notice, by
Distributors on not more than 60 days' written notice, by any act that
constitutes an assignment of the management agreement with Advisers, or the
underwriting agreement with Distributors, or by vote of a majority of the
outstanding shares of the class. Distributors or any dealer or other firm may
also terminate their respective distribution or service agreement at any time
upon written notice.
The plans and any related agreements may not be amended to increase materially
the amount to be spent for distribution expenses without approval by a majority
of the outstanding shares of the class, and all material amendments to the plans
or any related agreements shall be approved by a vote of the non-interested
members of the Board, cast in person at a meeting called for the purpose of
voting on any such amendment.
Distributors is required to report in writing to the Board at least quarterly on
the amounts and purpose of any payment made under the plans and any related
agreements, as well as to furnish the Board with such other information as may
reasonably be requested in order to enable the Board to make an informed
determination of whether the plans should be continued.
For the fiscal year ended February 29, 1996, Distributors' eligible expenditures
for advertising, printing, and payments to underwriters and broker-dealers
pursuant to the Class I and Class II plans and the amounts paid by the Fund to
Distributors were as follows:
Distributors' Amount
Eligible Expenses paid by Fund
Arizona Insured Fund........................... $ 35,726 $ 28,427
Florida Insured Fund........................... 70,252 52,944
Insured Fund Class II.......................... 84,196 16,915
Arizona Insured Fund........................... 35,726 28,427
Florida Insured Fund........................... 70,252 52,944
Insured Fund Class II.......................... 84,196 16,915
Massachusetts Insured Fund Class I............. 230,480 217,122
Massachusetts Insured Fund Class II........... 21,932 8,112
Michigan Insured Fund Class I................. 838,220 802,219
Michigan Insured Fund Class II................. 69,669 14,138
Minnesota Insured Fund Class I................. 368,476 347,521
Minnesota Insured Fund Class II............... 14,529 2,380
Ohio Insured Fund Class II.................... 65,223 12,888
Distribution fees paid by the following Funds, which equaled the eligible
expenditures by Distributors, were spent as follows:
<TABLE>
<CAPTION>
Rule 12b-1 Printing and Payments
Fees Paid Mailing of Payments to to Brokers
by Fund Advertising Prospectuses Underwriters or Dealers
<S> <C> <C> <C> <C> <C>
Insured Fund Class I............ 1,236,821 117,507 131,126 65,630 922,558
Ohio Insured Fund Class I....... 495,532 46,945 47,863 30,878 369,846
</TABLE>
HOW DOES THE FUND MEASURE PERFORMANCE?
Performance quotations are subject to SEC rules. These rules require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the Fund be accompanied by
certain standardized performance information computed as required by the SEC.
Current yield and average annual total return quotations used by the Fund are
based on the standardized methods of computing performance mandated by the SEC.
If a Rule 12b-1 plan is adopted, performance figures reflect fees from the date
of the plan's implementation. An explanation of these and other methods used by
the Fund to compute or express performance for each class follows. 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.
TOTAL RETURN
Average Annual Total Return. Average annual total return is determined by
finding the average annual 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, and income dividends and capital gain distributions are reinvested at
net asset value. The quotation assumes the account was completely redeemed at
the end of each 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.
The average annual total return for Class I shares for the indicated periods
ended on February 29, 1996, were as shown below.
<TABLE>
<CAPTION>
Aggregate Total Return
-----------------------------------
Inception
of the Fund One Year Five Year Ten-Year
<S> <C> <C> <C> <C>
Arizona Insured Fund..................... 04/30/93 6.94% -- % 4.82%*
Florida Insured Fund..................... 04/30/93 6.27 -- 3.60*
Insured Fund............................. 04/03/85 4.06 6.90 7.19
Massachusetts Insured Fund............... 04/03/85 4.20 6.93 6.62
Michigan Insured Fund.................... 04/03/85 4.25 6.89 7.06
Minnesota Insured Fund................... 04/03/85 3.44 6.47 6.74
Ohio Insured Fund........................ 04/03/85 4.03 6.83 7.02
*from inception
</TABLE>
These figures were calculated according to the SEC formula:
P(1+T)n = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the one-, five- or ten-year periods at the end of the one-, five-,
or ten-year periods (or fractional portion thereof)
Cumulative Total Return. The Fund may also quote the cumulative total return for
each class, in addition to the average annual total return. These quotations are
computed the same way, except the cumulative total return will be based on the
actual return for each class for a specified period rather than on the average
return over one-, five- and ten-year periods, or fractional portion thereof. The
cumulative total return for each class for the indicated periods ended on
February 29, 1996 were as follows:
<TABLE>
<CAPTION>
Cumulative Total Return
-----------------------------------
Inception
of the Fund One Year Five Year Ten-Year
<S> <C> <C> <C> <C>
Arizona Insured Fund..................... 04/30/93 6.94% -- % 14.29%*
Florida Insured Fund..................... 04/30/93 6.27 -- 10.57*
Insured Fund............................. 04/03/85 4.06 39.61 100.29
Insured Fund Class II.................... 05/01/95 5.26*
Massachusetts Insured Fund............... 04/03/85 4.20 39.78 89.78
Massachusetts Insured Fund Class II...... 05/01/95 5.34*
Michigan Insured Fund.................... 04/03/85 4.25 39.52 97.74
Michigan Insured Fund Class II........... 05/01/95 5.51*
Minnesota Insured Fund................... 04/03/85 3.44 36.84 91.94
Minnesota Insured Fund Class II.......... 05/01/95 4.61*
Ohio Insured Fund........................ 04/03/85 4.03 39.17 97.03
Ohio Insured Fund Class II............... 05/01/95 5.37*
*from inception
</TABLE>
YIELD
Current Yield. Current yield of each class shows the income per share earned by
the Fund. It is calculated by dividing the net investment income per share of
each class earned during a 30-day base period by the applicable maximum offering
price per share on the last day of the period and annualizing the result.
Expenses accrued for the period include any fees charged to all shareholders of
the class during the base period. The yield for each class for the 30-day period
ended on February 29, 1996 was as follows:
30-Day
Current Yield
Class I Class II
Arizona Insured Fund*... 4.98% --%
Florida Insured Fund*... 4.85 --
Insured Fund............ 4.30 3.86
Massachusetts Insured Fund 4.00 3.56
Michigan Insured Fund... 4.18 3.75
Minnesota Insured Fund. 4.13 3.70
Ohio Insured Fund....... 4.28 3.85
*includes expense waiver
These figures were obtained using the following SEC formula:
Yield = 2 [(a-b + 1)6 - 1]
cd
where:
a = interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that were
entitled to receive dividends
d = the maximum offering price per share on the last day of the period
Taxable-Equivalent Yield. The Fund may also quote a taxable-equivalent yield for
each class that shows the before-tax yield that would have to be earned from a
taxable investment to equal the yield for the class. Taxable-equivalent yield is
computed by dividing the portion of the class' yield that is tax-exempt by one
minus the highest applicable combined federal and state income tax rate and
adding the product to the portion of the class' yield that is not tax-exempt, if
any. The taxable-equivalent yield for each class for the 30-day period ended on
February 29, 1996 was as follows:
30-Day
Taxable-Equivalent Yield
Class I Class II
Fund Shares Shares
Arizona Insured Fund*.. 8.73% --%
Florida Insured Fund*.. 8.03 --
Insured Fund........... 7.12 6.39
Massachusetts Insured Fund 7.52 6.69
Michigan Insured Fund.. 7.24 6.49
Minnesota Insured Fund. 7.47 6.69
Ohio Insured Fund...... 7.66 6.89
*includes expense waiver
As of the date of this SAI, the state and the combined state and federal income
tax rates upon which the taxable-equivalent yield quotations are based were as
follows:
State Combined
State Tax Tax*
Arizona............... 5.60% 42.98%
Florida............... -- 39.60
Insured............... -- 39.60
Massachusetts......... 12.00 46.85
Michigan.............. 4.40 42.26
Minnesota............. 8.50 44.73
Ohio.................. 7.50 44.13
*Based on the maximum combined state and 39.6% federal tax rate.
From time to time, as any changes to the rates become effective,
taxable-equivalent yield quotations advertised by the Fund will be updated to
reflect these changes. The Fund expects updates may be necessary as tax rates
are changed by federal, state and local governments. The advantage of tax-free
investments, like the Fund, will be enhanced by any tax rate increases.
Therefore, the details of specific tax increases may be used in sales material
for the Fund.
Quotations of taxable-equivalent yield by the Fund 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 taxable-equivalent yield, which are calculated according to a
formula prescribed by the SEC, are not indicative of the amounts which were or
will be paid to shareholders 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 usually computed by
annualizing the dividends paid per share by a class during a certain period and
dividing that amount by the current maximum offering price. The current
distribution rate differs from the current yield computation because it may
include distributions to shareholders from sources other than interest, such as
short-term capital gains, and is calculated over a different period of time. The
current distribution rate for each class for the 30-day period ended February
29, 1996 was as follows:
Fund Class I Class II
Arizona Insured Fund... 5.10%
Florida Insured Fund... 5.05
Insured Fund........... 5.53 5.12%
Massachusetts Insured Fund 5.42 4.98
Michigan Insured Fund.. 5.42 4.99
Minnesota Insured Fund. 5.30 4.88
Ohio Insured Fund...... 5.36 4.94
A taxable-equivalent distribution rate shows the taxable distribution rate
equivalent to the class' current distribution rate. The advertised
taxable-equivalent distribution rate will reflect the most current federal,
state and city tax rates available to the Fund. The taxable-equivalent
distribution rate for each class for the 30-day period ended February 29, 1996
was as follows:
Fund Class I Class II
Arizona Insured Fund... 9.07%
Florida Insured Fund... 8.36
Insured Fund........... 9.16 8.48%
Massachusetts Insured Fund 10.19 9.36
Michigan Insured Fund.. 9.39 8.65
Minnesota Insured Fund. 9.58 8.82
Ohio Insured Fund...... 9.59 8.84
VOLATILITY
Occasionally statistics may be used to show the Fund's volatility or risk.
Measures of volatility or risk are generally used to compare the Fund's net
asset value or performance to a market index. One measure of volatility is beta.
Beta is the volatility of a fund relative to the total market, as represented by
an index considered representative of the types of securities in which the fund
invests. A beta of more than 1.00 indicates volatility greater than the market
and a beta of less than 1.00 indicates volatility less than the market. Another
measure of volatility or risk is standard deviation. Standard deviation is used
to measure variability of net asset value or total return around an average over
a specified period of time. The idea is that greater volatility means greater
risk undertaken in achieving performance.
OTHER PERFORMANCE QUOTATIONS
For investors who are permitted to buy Class I shares without a sales charge,
sales literature about Class I may quote a current distribution rate, yield,
cumulative total return, average annual total return and other measures of
performance as described elsewhere in this SAI with the substitution of net
asset value for the public offering price.
The 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 the Fund may satisfy your
investment objective, advertisements and other materials about the Fund may
discuss certain measures of each class' performance as reported by various
financial publications. Materials may also compare performance (as calculated
above) to performance as reported by other investments, indices, and averages.
These comparisons may include, but are not limited to, the following examples:
a) Lipper Fixed-Income Fund Performance Analysis ranked the Arizona Insured Fund
number one in total return in the Arizona Municipal Debt Fund Category for its
one-year total return for the year ended December 31, 1995, with a total return
of 21.21%. There were 31 funds in the category.
b) Salomon Brothers Broad Bond Index or its component indices - measures yield,
price, and total return for Treasury, Agency, Corporate, and Mortgage bonds.
c) Lehman Brothers Aggregate Bond Index or its component indices - measures
yield, price and total return for Treasury, Agency, Corporate, Mortgage, and
Yankee bonds.
d) Lehman Brothers Municipal Bond Index (LBMBI) or its component indices -
measures yield, price and total return for the municipal bond market.
e) Bond Buyer 20-Bond Index - an index of municipal bond yields based upon
yields of 20 general obligation bonds maturing in 20 years.
f) Bond Buyer 30-Bond Index - an index of municipal bond yields based upon
yields of 20 revenue bonds maturing in 30 years.
g) Bond Buyer 40 Bond Index - an index based on the yields of 40 long-term
tax-exempt municipal bonds. Designed to be the basis for the Municipal Bond
Index in futures contracts.
h) Financial publications: The Wall Street Journal, Business Week, Financial
World, Forbes, Fortune, and Money magazines - provide performance statistics
over specified time periods.
i) Salomon Brothers Composite High Yield Index or its component indices -
measures yield, price and total return for the Long-Term High-Yield Index,
Intermediate-Term High-Yield Index, and Long-Term Utility High-Yield Index.
j) Historical data supplied by the research departments of First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch, Lehman
Brothers and Bloomberg, L.P.
k) Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income Fund
Performance Analysis - measure total return and average current yield for the
mutual fund industry and rank individual mutual fund performance over specified
time periods, assuming reinvestment of all distributions, exclusive of any
applicable sales charges.
l) Savings & Loan Historical Interest Rates - as published by the U.S. Savings &
Loan League Fact Book.
m) Consumer Price Index (or Cost of Living Index), published by the U.S. Bureau
of Labor Statistics - a statistical measure of change, over time, in the price
of goods and services in major expenditure groups.
From time to time, advertisements or information for the Fund may include a
discussion of certain attributes or benefits to be derived from an investment in
the Fund. The advertisements or information may include symbols, headlines, or
other material that highlights or summarizes the information discussed in more
detail in the communication.
Advertisements or information may also compare a class' performance to the
return on CDs or other investments. You should be aware, however, that an
investment in the Fund involves the risk of fluctuation of principal value, a
risk generally not present in an investment in a CD issued by a bank. For
example, as the general level of interest rates rise, the value of the Fund's
fixed-income investments, as well as the value of its shares that 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. CDs are frequently insured by an agency of the U.S.
government. An investment in the Fund is not insured by any federal, state or
private entity.
In assessing 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 the Fund will continue its performance as
compared to these other averages.
MISCELLANEOUS INFORMATION
Under current tax laws, municipal securities remain one of the few investments
offering the potential for tax-free income. In 1996, 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 1996.)
Franklin tax-free funds, however, offer tax relief through a professionally
managed portfolio of tax-free securities selected based on their yield, quality
and maturity. An investment in a Franklin tax-free fund can provide you with the
potential to earn income free of federal taxes and, depending on the fund, state
and local taxes as well, while supporting state and local public projects.
Franklin tax-free funds may also provide tax-free compounding, when dividends
are reinvested. An investment in Franklin's tax-free funds can grow more rapidly
than similar taxable investments.
Municipal securities are generally considered to be creditworthy, second in
quality only to securities issued or guaranteed by the U.S. government and its
agencies. The market price of such securities, however, may fluctuate. This
fluctuation will have a direct impact on the net asset value of an investment in
a Fund.
Currently, there are more mutual funds than there are stocks listed on the
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 your unique goals and needs, as well as the types of risks
associated with such investment.
The 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
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis in order to have
a projected amount available in the future to fund a child's college education.
(Projected college cost estimates are based upon current costs published by the
College Board.) Of course, an investment in the Fund cannot guarantee that these
goals will be met.
The Fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin, one of the
oldest mutual fund organizations, has managed mutual funds for over 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 $143
billion in assets under management for more than 4.1 million U.S. based mutual
fund shareholder and other accounts. The Franklin Templeton Group of Funds
offers 115 U.S. based mutual funds to the public. The 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
$43 billion in municipal bond assets for over three-quarters of a million
investors. According to Research and Ratings Review, Franklin's municipal
research team ranked number 2 out of 800 investment advisory firms surveyed by
TMS Holdings, Inc., as of March 31, 1996.
The Dalbar Surveys, Inc. broker-dealer survey has ranked Franklin number one in
service quality for five of the past eight years.
From time to time advertisements or sales material issued by the Fund may
discuss or be based upon information in a recent issue of the Special Report on
Tax Freedom Day published by the Tax Foundation, a Washington, D.C. based
nonprofit research and public education organization. The report illustrates,
among other things, the annual amount of time the average taxpayer works to
satisfy his or her tax obligations to the federal, state and local taxing
authorities.
Franklin had the first single-state municipal bond funds in California,
Massachusetts, Michigan, Minnesota and Ohio.
As of June 3, 1996, the principal shareholders of the Fund, beneficial or of
record, were as follows:
Fund, Name and Address Share Amount Percentage
ARIZONA INSURED FUND - CLASS I
Franklin Resources Inc............................. 256,874.284 6.6%
ATTN: Corporate Accounting
1147 Chess Dr.
Foster City, CA 94404-1102
NFSC FEBO # APJ-144622............................. 203,658.944 5.2%
Mosher Fam. Limited Partnership
A Partnership
Roland Mosher
6867 E. Cuarenta Court
Paradise Valley, AZ 85253
Fund, Name and Address Share Amount Percentage
MASSACHUSETTS INSURED FUND - CLASS II
Julian Soshnick & Martha Soshnick JT TEN........... 54,401.028 18.0%
67 Winthrop St.
Charlestown, MA 02129
Anthony H. Cincotta................................ 17,226.767 5.7%
13 Shipway Place
Charlestown, MA 02129-4301
Maurice Vaughn..................................... 22,381.975 7.4%
7971 Park Dr.
Fall Oaks, CA 95628
MINNESOTA INSURED FUND - CLASS II
Harlan Thomas Kemper & Caledonia Lambesis JT TEN... 8,319.468 6.0%
35153 Falcon Ave.
North Branch, MN 55056
Norman O. Holte.................................... 8,243.020 5.9%
5824 Columbus Ave.
Minneapolis, MN 55417
H. Kesley Page..................................... 7,576.034 5.5%
17717 Hwy 7
Minnetonka, MN 55345-4148
Helen B. Hursh..................................... 9,041.511 6.5%
345 Holly
Owatonna, MN 55060-3733
From time to time, the number of shares of the Funds held in the "street name"
accounts of various broker dealers for the benefit of their clients or in
centralized securities depositories may exceed 5% of the total shares
outstanding.
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
Fund's Agreement and Declaration of Trust, however, contains an express
disclaimer of shareholder liability for acts or obligations of the Fund. The
Declaration of Trust also provides for indemnification and reimbursement of
expenses out of the Fund's assets if you are held personally liable for
obligations of the Fund. The Declaration of Trust provides that the Fund shall,
upon request, assume the defense of any claim made against you for any act or
obligation of the Fund and satisfy any judgment thereon. All such rights are
limited to the assets of the Fund. The Declaration of Trust further provides
that the Fund may maintain appropriate insurance (for example, fidelity bonding
and errors and omissions insurance) for the protection of the Fund, its
shareholders, trustees, officers, employees and agents to cover possible tort
and other liabilities. Furthermore, the activities of the Fund as an investment
company, as distinguished from an operating company, would not likely give rise
to liabilities in excess of the Fund's total assets. Thus, the risk of you
incurring financial loss on account of shareholder liability is limited to the
unlikely circumstances in which both inadequate insurance exists and the Fund
itself is unable to meet its obligations.
In the event of disputes involving multiple claims of ownership or authority to
control your account, the Fund has the right (but has no obligation) to: (a)
freeze the account and require the written agreement of all persons deemed by
the Fund to have a potential property interest in the account, prior to
executing instructions regarding the account; (b) interplead disputed funds or
accounts with a court of competent jurisdiction; or (c) surrender ownership of
all or a portion of the account to the IRS in response to a Notice of Levy.
The portfolio insurance may affect the value of the Fund's shares under certain
circumstances. As discussed in the Prospectus, unless a Secondary Market
Insurance Policy is purchased with respect to the portfolio security, an Insured
Fund intends to hold any defaulted securities or securities for which there is a
significant risk of default in its portfolio until the default has been cured or
the principal and interest are paid by the issuer or the insurer. In such
circumstances, the Board of Trustees has instructed Advisers to consider, in its
evaluation of these securities, the value of the insurance guaranteeing the
interest and principal payments, as well as the market value of the portfolio
securities and the market value of securities of similar issuers whose
securities carry similar interest rates. Absent any unusual or unforeseen
circumstances, as a result of the Portfolio Insurance Policy, Advisers would
likely recommend that an Insured Fund value the defaulted securities, or
securities for which there is a significant risk of default, at the same price
as securities of a similar nature which are not in default. A defaulted security
covered by a Secondary Market Insurance Policy would likely be valued at market.
FINANCIAL STATEMENTS
The audited financial statements contained in the Annual Report to Shareholders
of the Trust, for the fiscal year ended February 29, 1996, including the
auditors' report, are incorporated herein by reference.
USEFUL TERMS AND DEFINITIONS
1940 Act - Investment Company Act of 1940, as amended
Advisers - Franklin Advisers, Inc., the Fund's investment manager
Board - The Board of Trustees of the Trust
CD - Certificate of deposit
Class I and Class II - The Fund offers two classes of shares, designated "Class
I" and "Class II." The two classes have proportionate interests in the Fund's
portfolio. They differ, however, primarily in their sales charge structures and
Rule 12b-1 plans.
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
Franklin Templeton Group of Funds - All U.S. registered mutual funds in the
Franklin Group of Funds(R) and the Templeton Group of Funds
Investor Services - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder services and transfer agent
IRS - Internal Revenue Service
Letter - Letter of Intent
Net Asset Value (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
Offering Price - The public offering price is based on the net asset value per
share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 4.25% for Class I and 1% for Class II.
Prospectus - The prospectus for the Fund dated July 1, 1996, as may be amended
from time to time
Resources - Franklin Resources, Inc.
SAI - Statement of Additional Information
SEC - U.S. Securities and Exchange Commission
Securities Dealer - A financial institution which, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
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
We/Our/Us - Unless a different meaning is indicated by the context, these terms
refer to the Fund and/or Investor Services, Distributors, or another
wholly-owned subsidiary of Resources.
APPENDICES
DESCRIPTION OF RATINGS
MUNICIPAL BOND RATINGS
Moody's
Aaa: Municipal bonds rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin, and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Municipal bonds rated Aa are judged to be high quality by all standards.
Together with the Aaa group, they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large, fluctuation of protective elements may be of
greater amplitude, or there may be other elements present which make the
long-term risks appear somewhat larger.
A: Municipal bonds rated A possess many favorable investment attributes and are
considered upper medium-grade obligations. Factors giving security to principal
and interest are considered adequate, but elements may be present which suggest
a susceptibility to impairment sometime in the future.
Baa: Municipal bonds 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: Municipal bonds 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: Municipal bonds rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Municipal bonds rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Municipal bonds rated Ca represent obligations which are speculative to a
high degree. Such issues are often in default or have other marked shortcomings.
C: Municipal bonds rated C are the lowest-rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Con.(-): Municipal bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon the
completion of construction or the elimination of the basis of the condition.
S&P
AAA: Municipal bonds rated AAA are the highest-grade obligations. They possess
the ultimate degree of protection as to principal and interest. In the market,
they move with interest rates and, hence, provide the maximum safety on all
counts.
AA: Municipal bonds rated AA also qualify as high-grade obligations, and in the
majority of instances differ from AAA issues only in a small degree. Here, too,
prices move with the long-term money market.
A: Municipal bonds rated A are regarded as upper medium-grade. They have
considerable investment strength but are not entirely free from adverse effects
of changes in economic and trade conditions. Interest and principal are regarded
as safe. They predominantly reflect money rates in their market behavior but
also, to some extent, economic conditions.
BBB: 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: Municipal bonds rated AAA are 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: Municipal bonds rated AA are considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong although not quite as strong as bonds rated AAA and not
significantly vulnerable to foreseeable future developments.
A: Municipal bonds rated A are considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB: Municipal bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an 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: Municipal bonds rated BB are considered speculative. The obligor's ability
to pay interest and repay principal may be affected over time by adverse
economic changes. However, business and financial alternatives can be identified
which could assist the obligor in satisfying its debt service requirements.
B: Municipal bonds rated B are considered highly speculative. While bonds in
this class are currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the obligor's
limited margin of safety and the need for reasonable business and economic
activity throughout the life of the issue.
CCC: Municipal bonds rated CCC have certain identifiable characteristics which,
if not remedied, may lead to default. The ability to meet obligations requires
an advantageous business and economic environment.
CC: Municipal bonds rated CC are minimally protected. Default in payment of
interest and/or principal seems probable over time.
C: Municipal bonds rated C are in imminent default in the payment of interest or
principal.
DDD, DD and D: Municipal bonds rated DDD, DD and D are in default on interest
and/or principal payments. Such bonds are extremely speculative and should be
valued on the basis of their ultimate recovery value in liquidation or
reorganization of the obligor. DDD represents the highest potential for recovery
while D represents the lowest potential for recovery.
Plus (+) or minus (-) signs are used with a rating symbol to indicate the
relative position of a credit within the rating category. Plus or minus are not
used for the AAA and the DDD, DD or D categories.
MUNICIPAL NOTE RATINGS
Moody's
Moody's ratings for state, municipal and other short-term obligations will be
designated Moody's Investment Grade ("MIG"). This distinction is in recognition
of the differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower are uppermost in importance in
short-term borrowing; factors of the first importance in long-term borrowing
risk are of lesser importance in the short run. Symbols used will be as follows:
MIG 1: Notes are of the best quality enjoying strong protection from established
cash flows of funds for their servicing or from established and broad-based
access to the market for refinancing, or both.
MIG 2: Notes are of high quality, with margins of protection ample, although not
so large as in the preceding group.
MIG 3: Notes are of favorable quality, with all security elements accounted for,
but lacking the undeniable strength of the preceding grades. Market access for
refinancing, in particular, is likely to be less well established.
MIG 4: Notes are of adequate quality, carrying specific risk but having
protection and not distinctly or predominantly speculative.
S&P
Until June 29, 1984, S&P used the same rating symbols for notes and bonds. After
June 29, 1984, for new municipal note issues due in three years or less, the
ratings below will usually be assigned. Notes maturing beyond three years will
most likely receive a bond rating of the type recited above.
SP-1: Issues carrying this designation have a very strong or strong capacity to
pay principal and interest. Issues determined to possess overwhelming safety
characteristics will be given a "plus" (+) designation.
SP-2: Issues carrying this designation have a satisfactory capacity to pay
principal and interest.
COMMERCIAL PAPER RATINGS
Moody's
Moody's commercial paper ratings, which are also applicable to municipal paper
investments permitted to be made by the Fund, are opinions of the ability of
issuers to repay punctually their promissory obligations not having an original
maturity in excess of nine months. Moody's employs the following designations,
all judged to be investment grade, to indicate the relative repayment capacity
of rated issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
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.
SPECIAL FACTORS AFFECTING EACH STATE FUND
The following information supplements the summaries of state economic factors in
the Prospectus. This information is based on historically reliable sources such
as S&P's Creditweek Municipal, but it has not been independently verified by the
Trust, nor is it intended to be complete.
ARIZONA
In the late 1980s Arizona lost 30,000 jobs in the construction sector, but the
25% increase in service sector jobs during that same time period more than made
up for these losses. Arizona experienced an overall job loss of 2.0% during the
1991-1992 national recession, but that job loss was short lived. Even during its
low point, the state economy fared better than that of the nation.
In 1970, Arizona retired its general obligation bonds and is now
constitutionally prohibited from issuing such debt. A significant amount of
state debt is supported by motor fuel taxes and highway user fees, and the state
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. The improving state economy in fiscal 1993 helped Arizona
regain an earlier level of liquidity, a comfortable 2.0% of expenditures. Fiscal
1994, with strong revenues growth, closed with 5.8% balance. The budget
stabilization fund expected to grow to 4.7% of general fund revenues in an even
strong fiscal 1995. A $200 million income tax cut in fiscal 1996 and a $200
million property tax cut for fiscal 1997 may cause concern, however, if the
economy cools.
FLORIDA
While per capita income growth was below the national average in 1990-1992,
strong growth in 1993 and 1994 moved Florida's per capita income slightly above
the national average. The state's overall outlook is stable, with moderate
(though rising) debt levels, a well managed financial program and steady
economic performance.
After several years of budget imbalances resulting from revenue shortfalls, the
state ended fiscal 1995 with a working capital reserve of $161.5 million and
$121 million in the newly established budget stabilization reserve. No tax
increases are anticipated in 1996. In Florida's most recent five year revenue
forecast, however, general fund expenditures are expected to grow at an average
annual rate of 7.9% through the end of the decade. If this is accurate, it is
predicted that a 2% annual increase in total general fund revenues will be
needed for the state to balance its budget in 2001 and maintain its current
spending levels.
Florida continues to have a relatively narrow tax base, with 70% of its total
revenues derived from the 6% sales and use tax. This reliance on sales taxes
creates vulnerability to recession and longer term slower growth in the taxable
base, as well as minimizes revenues from its tourist trade and seasonal
residents. A revenue limit applicable beginning in fiscal 1996 may also become
constraining, though the state is currently able to meet its needs.
MASSACHUSETTS
Despite continuing efforts to restore fiscal control, Massachusetts' debt
service remains among the highest in the nation. Annual general obligation debt
service is projected at $1.1 billion annually through fiscal 1998. The
commonwealth has an overall net debt of about $1900 per capita and annual debt
service of about 11% of budgetary revenue. With its current high overall debt
burden, it may soon have to choose between capital needs and/or its intent to
remain within its general obligation debt service target.
Fiscal recovery bonds were issued in fiscal 1991 to finance the deficit created
through several years of weak financial performance. Layoffs and programmatic
changes reduced expenses, and revenue projections have been on track for fiscal
years 1992-1995. Cash flow borrowing has declined steadily since 1991, and in
fiscal 1995, no commercial paper was issued. Only a small amount of commercial
paper is expected to be issued in fiscal 1996. Current service levels and
increased education expenditures are included in the 1996 budget.
Although the state has regained some control over its budget, continuing
expenditure pressures will present fiscal challenges. Pressure to increase
borrowing is building to fund routine infrastructure needs and a costly tunnel
and megaplex convention center and stadium. Expenditures for a new Aid to
Families with Dependent Children program, while expected to be on track with the
budget for 1996, may pressure the state in future years. Education reform
spending is also likely to require additional funding by the end of the decade,
and the state's unfunded pension liability is estimated at $9.6 billion over 35
years. In addition, the state may incur a liability of up to $1.2 billion if
plaintiff banks successfully challenge the inclusion of income from tax-exempt
obligations in the measure of the bank excise tax. Overall, however, the outlook
is positive, and the state has effective financial management.
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
that 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, although a state-levied property tax and the
reinstatement of local property tax levies at lower levels will also provide
revenue. The state expects that the budget stabilization fund balance will
increase to $1.1 billion at the close of fiscal 1995 from $779 million at 1994
fiscal year end.
Michigan's debt burden is moderate, with all ratios below the national median.
The state's economic health will continue to be tied to the auto industry,
however, which is often very cyclical.
MINNESOTA
Minnesota's debt burden is relatively moderate, with overall per capita debt at
$1,400. The state adopted a financial management reform program which includes a
debt management policy under which targeted levels for total outstanding general
obligation debt are established, based upon general fund revenues and personal
income levels. The state has consistently been able to meet its targeted levels.
During fiscal 1993, Minnesota had close to $1.8 billion in outstanding general
obligation bonds. On a per capita basis, this represented approximately $378 or
1.8% of personal income.
Original forecasts for fiscal 1993 estimated that Minnesota's budget reserve
fund would be reduced to its lowest level since 1987, but strong economic growth
and spending cuts, enabled the state to improve the balance of its reserve
account from $260 million in February 1993 to $360 million in July 1993. To
protect against future economic uncertainty, Minnesota's legislature now
requires across-the- board spending cuts, up to 1%, before the state's reserve
account may be used. In addition, as part of the state's financial management
reform program, mandatory spending growth limits have been enacted for some of
the state's fastest growing programs, although expenditures for health and
education remain high.
Fiscal reform measures to limit spending growth for ongoing programs were
continued in the 1994-1995 biennium, leaving the state with a $1.2 million
general fund surplus for June 30, 1995. Fiscal 1996 revenues estimate growth in
general fund revenues and lower than expected demands in social services.
Funding levels for state school aid are expected to increase by almost $800
million in 1996-1997. Per capita income in 1994 was 103% of the U.S. average.
OHIO
Despite the recent economic recession, timely fiscal action has allowed Ohio to
balance its budget, notwithstanding mid-year budget imbalances in fiscal years
1991-1993. Lower than expected tax revenues and pressure to spend on human
service programs, due to the recession, resulted in an estimated deficit of $590
million in fiscal 1993. At fiscal year-end 1993, however, Ohio's budgetary
balance was a positive $111 million, as a result of expenditure reductions,
revenue enhancements and the use of reserve funds, although $21 million was
transferred to the state's budget stabilization reserve fund.
Financial operations continued to show improvement in fiscal 1994. The state
achieved an operating surplus and the budget stabilization fund balance was
increased to $280 million. Fiscal 1995 ended with tax receipts 2.9% ahead of
estimates and total spending below estimates. The state ended the biennium with
a general revenue fund balance of $928 million. The 1995-1997 budget is based on
reasonable revenue assumptions and no drawdown of available reserves. General
revenue spending will increase, with 28.5% going to education and 9.5% to human
services. Revenues and expenditures met target levels for the first six months
of fiscal 1996.
The state's current direct debt levels are relatively moderate, representing, on
a per capita basis, $489 or 2.3% of personal income. Debt service payments to
cover general obligations and lease obligations constitute approximately 5% of
the state's budget.
FRANKLIN
TAX-FREE
TRUST
STATEMENT OF
ADDITIONAL INFORMATION
777 Mariners Island Blvd., P.O. Box 7777 JULY 1, 1996
San Mateo, CA 94403-7777 1-800/DIAL BEN
CONTENTS PAGE
How Does the Fund Invest Its Assets? 2
Investment Restrictions 4
Officers and Trustees 5
Investment Advisory and Other Services 8
How Does the Fund Buy
Securities For Its Portfolio? 10
How Do I Buy, Sell and Exchange Shares? 10
How Are Fund Shares Valued? 13
Additional Information on
Distributions and Taxes 13
The Fund's Underwriter 15
How Does the Fund
Measure Performance? 18
Miscellaneous Information 22
Financial Statements 25
Useful Terms and Definitions 25
Appendices
Description of Ratings 26
Special Factors Affecting Each Fund 29
The Franklin Tax-Free Trust (the "Trust") is an open-end management investment
company with 28 separate series. This SAI describes the ten series listed below.
Nine of the series offer two classes of shares.
Franklin Alabama Tax-Free Income Fund -
Class I & Class II
Franklin Florida Tax-Free Income Fund -
Class I & Class II
Franklin Georgia Tax-Free Income Fund -
Class I & Class II
Franklin Kentucky Tax-Free Income Fund -
Class I
Franklin Louisiana Tax-Free Income Fund -
Class I & Class II
Franklin Maryland Tax-Free Income Fund -
Class I & Class II
Franklin Missouri Tax-Free Income Fund -
Class I & Class II
Franklin North Carolina Tax-Free Income Fund -
Class I & Class II
Franklin Texas Tax-Free Income Fund -
Class I & Class II
Franklin Virginia Tax-Free Income Fund -
Class I & Class II
Each Fund may, separately or collectively, be referred to as the "Fund" or
"Funds," or individually by the state in its name.
Each Fund seeks to provide investors with as high a level of income exempt from
federal income taxes as is consistent with prudent investing, while seeking
preservation of shareholders' capital. Each Fund also seeks to provide a maximum
level of income that is exempt from the personal income taxes, if any, for
resident shareholders of the named state. The investment objective of each Fund
is a fundamental policy. The Maryland Fund is non-diversified. The other Funds
are diversified.
Each Fund invests primarily in municipal securities issued by its respective
state and that state's political subdivisions, agencies, and instrumentalities.
The Prospectus, dated July 1, 1996, as may be amended from time to time,
contains the basic information you should know before investing in the Fund. For
a free copy, call 1-800/DIAL BEN or write the Fund at the address shown.
THIS SAI IS NOT A PROSPECTUS. IT CONTAINS INFORMATION IN ADDITION TO AND IN MORE
DETAIL THAN SET FORTH IN THE PROSPECTUS. THIS SAI IS INTENDED TO PROVIDE YOU
WITH ADDITIONAL INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF THE FUND,
AND SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS.
TF2 SAI 07/96
How Does the Fund Invest Its Assets?
DESCRIPTION OF MUNICIPAL AND OTHER SECURITIES
Tax Anticipation Notes. These 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. These 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. These are normally issued to provide interim financing
until long-term financing can be arranged. Long-term bonds then provide the
money for the repayment of the notes.
Construction Loan Notes. These 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. These typically represent a short-term obligation
(270 days or less) issued by a municipality to meet working capital needs.
Municipal Bonds that 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. These are bonds that pay
tax-exempt interest and are, in most cases, revenue bonds. They 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 these bonds is solely dependent on the ability of the
facility's user to meet its financial obligations and the pledge, if any, of the
real and personal property so financed as security for payment.
Variable or Floating Rate Demand Notes ("VRDNs"). As stated in the Prospectus,
VRDNs are tax-exempt obligations that contain a floating or variable interest
rate and a right of demand, which may be unconditional, to receive payment of
the unpaid principal balance plus accrued interest upon a short notice period
(generally up to 30 days) prior to specified dates, either from the issuer or by
drawing on a bank letter of credit, a guarantee or insurance issued with respect
to the instrument. The interest rates are adjustable, at intervals ranging from
daily up to monthly, and are calculated to maintain the market value of the VRDN
at approximately its par value on the adjustment date.
When-Issued Purchases. Municipal bonds are frequently offered on a "when-issued"
basis. When so offered, the price, which is generally expressed in yield terms,
is fixed at the time the commitment to buy is made, but delivery and payment for
the when-issued securities take place at a later date. During the period between
purchase and settlement, no payment is made by the Fund to the issuer and no
interest accrues to the Fund. To the extent that assets of the Fund are held in
cash pending the settlement of a purchase of securities, the Fund would earn no
income; however, it is each Fund's intention to be fully invested to the extent
practicable and subject to its investment policies. While when-issued securities
may be sold prior to the settlement date, each Fund intends to buy such
securities with the purpose of actually acquiring them, unless a sale appears
desirable for investment reasons. At the time the Fund makes the commitment to
buy a municipal bond on a when-issued basis, it will record the transaction and
reflect the value of the security in determining its net asset value. The Fund
believes that its net asset value or income will not be adversely affected by
its purchase of municipal bonds on a when-issued basis. The Fund will establish
a segregated account in which it will maintain cash and marketable securities
equal in value to its commitments for when-issued securities.
Stripped Municipal Securities. Municipal securities may also be sold in
"stripped" form. Stripped municipal securities represent separate ownership of
interest and principal payments on municipal obligations.
Callable Bonds. There are municipal bonds issued with provisions that 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 Advisers, each Fund believes it
has reduced the risk of adverse impact on net asset value based on calls of
callable bonds. Advisers may dispose of such bonds in the years prior to their
call date, if it believes such bonds are at their maximum premium potential. In
pricing such bonds in each Fund's portfolio, each callable bond is
marked-to-market daily based on the bond's call date. Thus, the call of some or
all of a Fund's callable bonds may have an impact on such Fund's net asset
value. In light of each Fund's pricing policies and because each Fund follows
certain amortization procedures required by the IRS, a Fund is not expected to
suffer any material adverse impact related to the value at which a Fund has
carried the bonds in connection with calls of bonds purchased at a premium.
Notwithstanding such policies, however, the reinvestment of the proceeds of any
called bond may be in bonds that pay a higher or lower rate of return than the
called bonds; and, as with any investment strategy, there is no guarantee that a
call may not have a more substantial impact than anticipated or that the Fund's
objective will be achieved.
Zero-Coupon Securities. 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 semiannually at the
rate fixed at the time of issuance, the value of such securities is generally
more volatile than other fixed-income securities. Since zero-coupon bondholders
do not receive interest payments, zero-coupon securities fall more dramatically
than bonds paying interest on a current basis when interest rates rise. When
interest rates fall, zero-coupon securities rise more rapidly in value, because
the bonds reflect a fixed rate of return.
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 that a Fund may buy 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.
Escrow-Secured Bonds or Defeased Bonds. These are created when an issuer refunds
in advance of maturity (or pre-refunds) an outstanding bond issue that 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 buy high grade, interest
bearing debt securities that 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 Moody's Investors Service ("Moody's"), Standard & Poors Corporation
("S&P") and Fitch Investors Service, Inc. ("Fitch").
U.S. Government Obligations. These 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. 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 that 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 Funds' objectives and policies.
Loans of Portfolio Securities. Consistent with procedures approved by the Board
and subject to the following conditions, the Fund may lend its portfolio
securities to qualified securities dealers or other institutional investors, if
the loans do not exceed 10% of the value of the Fund's total assets at the time
of the most recent loan. The borrower must deposit with the Fund's custodian
bank collateral with an initial market value of at least 102% of the initial
market value of the securities loaned, including any accrued interest, with the
value of the collateral and loaned securities marked-to-market daily to maintain
collateral coverage of at least 102%. This collateral shall consist of cash. The
lending of securities is a common practice in the securities industry. The Fund
may engage in security loan arrangements with the primary objective of
increasing the Fund's income either through investing the cash collateral in
short-term interest bearing obligations or by receiving a loan premium from the
borrower. Under the securities loan agreement, the Fund continues to be entitled
to all dividends or interest on any loaned securities. As with any extension of
credit, there are risks of delay in recovery and loss of rights in the
collateral should the borrower of the security fail financially. While such
securities are on loan, the borrower will pay the Fund any income accruing
thereon, and the Fund may invest the cash collateral in portfolio securities,
thereby earning additional income. The Fund will not lend its portfolio
securities if the loans are not permitted by the laws or regulations of any
state in which its shares are qualified for sale. Loans are typically subject to
termination by the Fund in the normal settlement time or by the borrower on one
day's notice. Borrowed securities must be returned when the loan is terminated.
Any gain or loss in the market price of the borrowed securities that occurs
during the term of the loan inures to the Fund and its shareholders. The Fund
may pay reasonable finders', borrowers', administrative and custodial fees in
connection with a loan of its securities.
INVESTMENT RESTRICTIONS
Each Fund has adopted the following restrictions as fundamental policies. These
restrictions may not be changed without the approval of a majority of the
outstanding voting securities of that Fund. Under the 1940 Act, this means the
approval of (i) more than 50% of the outstanding shares of the Fund or (ii) 67%
or more of the shares of the Fund present at a shareholder meeting if more than
50% of the outstanding shares of the Fund are represented at the meeting in
person or by proxy, whichever is less. A Fund may not:
1. Borrow money or mortgage or pledge any of its assets, except that borrowings
(and a pledge of assets therefore) for temporary or emergency purposes may be
made from banks in any amount up to 5% of the total asset value.
2. Buy any securities on "margin" or sell any securities "short," except that it
may use such short-term credits as are necessary for the clearance of
transactions.
3. Make loans, except through the purchase of readily marketable debt securities
which are either publicly distributed or customarily purchased by institutional
investors. Although such loans are not presently intended, this prohibition will
not preclude a Fund from loaning portfolio securities to broker/dealers or other
institutional investors if at least 102% cash collateral is pledged and
maintained by the borrower; provided such portfolio security loans may not be
made if, as a result, the aggregate of such loans exceeds 10% of the value of
the Fund's total assets at the time of the most recent loan.
4. Act as underwriter of securities issued by other persons, except insofar as
the Fund may be technically deemed an underwriter under the federal securities
laws in connection with the disposition of portfolio securities.
5. Purchase the securities of any issuer which would result in owning more than
10% of the voting securities of such issuer, except with respect to the Trust's
non-diversified Funds, which Funds will not purchase a security, if as a result:
i) more than 25% of its total assets would be invested in the securities of a
single issuer or ii) with respect to 50% of its total assets, more than 5% of
its assets would be invested in the securities of a single issuer.
6. Purchase securities from or sell to the Trust's officers and trustees, or any
firm of which any officer or trustee is a member, as principal, or retain
securities of any issuer if, to the knowledge of the Trust, one or more of the
Trust's officers, trustees, or investment adviser own beneficially more than 1/2
of 1% of the securities of such issuer and all such officers and trustees
together own beneficially more than 5% of such securities.
7. Acquire, lease or hold real estate, except such as may be necessary or
advisable for the maintenance of its offices and provided that this limitation
shall not prohibit the purchase of municipal and other debt securities secured
by real estate or interests therein.
8. Invest in commodities and commodity contracts, puts, calls, straddles,
spreads or any combination thereof, or interests in oil, gas, or other mineral
exploration or development programs, except that it may purchase, hold and
dispose of "obligations with puts attached" in accordance with its investment
policies.
9. Invest in companies for the purpose of exercising control or management.
10. Purchase securities of other investment companies, except in connection with
a merger, consolidation or reorganization except to the extent the Fund invests
its uninvested daily cash balances in shares of the Franklin Tax-Exempt Money
Fund and other tax-exempt money market funds in the Franklin Group of Funds
provided i) its purchases and redemptions of such money market fund shares may
not be subject to any purchase or redemption fees, ii) its investments may not
be subject to duplication of management fees, nor to any charge related to the
expense of distributing the Fund's shares (as determined under Rule 12b-1, as
amended under the federal securities laws) and iii) provided aggregate
investments by the Fund in any such money market fund do not exceed (A) the
greater of (i) 5% of the Fund's total net assets or (ii) $2.5 million, or (B)
more than 3% of the outstanding shares of any such money market fund.
11. Invest more than 25% of its assets in securities of any industry; although
for purposes of this limitation, tax-exempt securities and U.S. government
obligations are not considered to be part of any industry.
If a percentage restriction is met at the time of investment, a later increase
or decrease in the percentage due to a change in value of portfolio securities
or the amount of assets will not be considered a violation of any of the
foregoing restrictions.
Officers and Trustees
The Board has the responsibility for the overall management of the Trust,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of the Trust who are responsible for
administering the Trust's day-to-day operations. The affiliations of the
officers and Board members and their principal occupations for the past five
years are shown below. Members of the Board who are considered "interested
persons" of the Trust under the 1940 Act, are indicated by an asterisk (*).
Positions and Offices Principal Occupation During
Name, Age and Address with the Trust the Past Five Years
Frank H. Abbott, III (75)Trustee
1045 Sansome St.
San Francisco, CA 94111
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 (64) Trustee
General Host Corporation
Metro Center, 1 Station Place
Stamford, CT 06904-2045
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) Trustee
Park Avenue at Morris County
P. O. Box 1945
Morristown, NJ 07962-1945
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) Trustee
111 New Montgomery St., #402
San Francisco, CA 94105
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) Chairman
777 Mariners Island Blvd. of the Board
San Mateo, CA 94404 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) President and
777 Mariners Island Blvd. Trustee
San Mateo, CA 94404
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 (67) Trustee
20833 Stevens Creek Blvd.
Suite 102
Cupertino, CA 95014
General Partner, Peregrine Associates and Miller & LaHaye, which are General
Partners of Peregrine Ventures and Peregrine Ventures II (venture capital
firms); Chairman of the Board and Director, Quarterdeck Office Systems, Inc.;
Director, FischerImaging Corporation; and director or trustee or managing
general partner, as the case may be, of 26 of the investment companies in the
Franklin Group of Funds.
Gordon S. Macklin (68) Trustee
8212 Burning Tree Road
Bethesda, MD 20817
Chairman, White River Corporation (information services); Director, Fund
American Enterprises Holdings, Inc., MCI Communications, Inc., MedImmune, Inc.
(biotechnology), InfoVest Corporation (information services), Fusion Systems
Corporation (industrial technology), and Source One Mortgage Services
Corporation (information services); 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) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
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) Vice President -
777 Mariners Island Blvd. Financial Reporting
San Mateo, CA 94404 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 (63) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
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 (36) Vice President
777 Mariners Island Blvd. and Chief
San Mateo, CA 94404 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) Vice President
777 Mariners Island Blvd. and Secretary
San Mateo, CA 94404
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 (33) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Senior Vice President, Franklin Advisers, Inc. and officer of eight of the
investment companies in the Franklin Group of Funds.
Diomedes Loo-Tam (57) Treasurer
777 Mariners Island Blvd. and Principal
San Mateo, CA 94404 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) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
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 table above shows the officers and Board members who are affiliated with
Distributors and Advisers. Nonaffiliated members of the Board are currently paid
$1,300 per month plus $1,300 per meeting attended. As shown above, some of the
nonaffiliated Board members also serve as directors, trustees or managing
general partners of other investment companies in the Franklin Templeton Group
of Funds. They may receive fees from these funds for their services. The
following table provides the total fees paid to nonaffiliated Board members by
the Trust and by other funds in the Franklin Templeton Group of Funds.
<TABLE>
<CAPTION>
Total Fees Received Number of Boards in
Total Fees from the Franklin the Franklin Templeton
Received Templeton Group Group of Funds on
Name from the Trust* of Funds** Which Each Serves***
<S> <C> <C> <C>
Frank H. Abbott, III.... $31,200 $162,420 31
Harris J. Ashton........ $31,200 $327,925 56
S. Joseph Fortunato..... $31,200 $344,745 58
David W. Garbellano..... $31,200 $146,100 30
Frank W.T. LaHaye....... $29,900 $143,200 26
Gordon S. Macklin....... $31,200 $321,525 53
</TABLE>
*For the fiscal year ended February 29, 1996.
**For the calendar year ended December 31, 1995.
***We base the number of boards on the number of registered investment companies
in the Franklin Templeton Group of Funds. This number does not include the total
number of series or funds within each investment company for which the Board
members are responsible. The Franklin Templeton Group of Funds currently
includes 61 registered investment companies, with approximately 165 U.S. based
funds or series.
Nonaffiliated members of the Board are reimbursed for expenses incurred in
connection with attending board meetings, paid pro rata by each fund in the
Franklin Templeton Group of Funds for which they serve as director, trustee or
managing general partner. No officer or Board member received any other
compensation directly from the Fund. Certain officers or Board members who are
shareholders of Resources may be deemed to receive indirect remuneration by
virtue of their participation, if any, in the fees paid to its subsidiaries.
As of June 3, 1996, the officers and Board members, as a group, did not own of
record or beneficially any outstanding shares of the Funds. Many of the Board
members also own shares in other funds in the Franklin Templeton Group of Funds.
Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.
INVESTMENT ADVISORY AND OTHER SERVICES
Investment Manager and Services Provided. The Fund's investment manager is
Advisers. Advisers provides investment research and portfolio management
services, including the selection of securities for the Fund to buy, hold or
sell and the selection of brokers through whom the Fund's portfolio transactions
are executed. Advisers' extensive research activities include, as appropriate,
traveling to meet with issuers and to review project sites. Advisers' activities
are subject to the review and supervision of the Board to whom Advisers renders
periodic reports of the Fund's investment activities.
Advisers provides office space and furnishings, facilities and equipment
required for managing the business affairs of the Fund. Advisers also maintains
all internal bookkeeping, clerical, secretarial and administrative personnel and
services and provides certain telephone and other mechanical services. Advisers
is covered by fidelity insurance on its officers, directors and employees for
the protection of the Fund.
Advisers acts as investment manager or administrator to 36 U.S. registered
investment companies with 121 separate series. Advisers may give advice and take
action with respect to any of the other funds it manages, or for its own
account, that may differ from action taken by Advisers on behalf of the Fund.
Similarly, with respect to the Fund, Advisers is not obligated to recommend, buy
or sell, or to refrain from recommending, buying or selling any security that
Advisers and access persons, as defined by the 1940 Act, may buy or sell for its
or their own account or for the accounts of any other fund. Advisers is not
obligated to refrain from investing in securities held by the Fund or other
funds that it manages or administers. Of course, any transactions for the
accounts of Advisers and other access persons will be made in compliance with
the Fund's Code of Ethics.
Management Fees. Under its management agreement, the Fund pays Advisers a
management fee 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) of 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. The fee is computed
at the close of business on the last business day of each month. Each class will
pay its proportionate share of the management fee.
The management fee will be reduced as necessary to comply with the most
stringent limits on Fund expenses of any state where the Fund offers it shares.
Currently, the most restrictive limitation on a fund's allowable expenses for
each fiscal year, as a percentage of its average net assets, is 2.5% of the
first $30 million in assets, 2% of the next $70 million, and 1.5% of assets over
$100 million. Expense reductions have not been necessary based on state
requirements.
Advisers has agreed in advance to limit its management fees for the Kentucky
Fund. The table below shows the management fees, before any advance waiver, and
the management fees paid by each Fund for the three fiscal years ended February
29, 1996.
1996:
Management Management
Fees (before Fees Paid
fee waiver) by the Fund
Alabama Fund $1,025,448 $1,025,448
Florida Fund 6,180,348 6,180,348
Georgia Fund 744,453 744,453
Kentucky Fund 223,931 49,195
Louisiana Fund 655,033 655,033
Maryland Fund 954,307 954,307
Missouri Fund 1,318,581 1,318,581
North Carolina Fund 1,292,366 1,292,366
Texas Fund 776,321 776,321
Virginia Fund 1,441,960 1,441,960
1995:
Alabama Fund $ 969,002 $ 969,002
Florida Fund 5,976,798 5,976,798
Georgia Fund 703,628 703,628
Kentucky Fund 190,072 34,216
Louisiana Fund 661,267 661,267
Maryland Fund 877,941 877,941
Missouri Fund 1,246,460 1,246,460
North Carolina Fund 1,181,708 1,181,708
Texas Fund 804,364 804,364
Virginia Fund 1,385,287 1,385,287
1994:
Alabama Fund $ 964,354 $ 964,354
Florida Fund 6,074,908 6,074,908
Georgia Fund 665,735 665,735
Kentucky Fund 128,196 --
Louisiana Fund 671,274 671,274
Maryland Fund 837,521 837,521
Missouri Fund 1,146,123 1,146,123
North Carolina Fund 1,093,721 1,093,721
Texas Fund 856,916 856,916
Virginia Fund 1,326,276 1,326,276
Management Agreement. The management agreement is in effect until March 31,
1997. It may continue in effect for successive annual periods if its continuance
is specifically approved at least annually by a vote of the Board or by a vote
of the holders of a majority of the Fund's outstanding voting securities, and in
either event by a majority vote of the Board members who are not parties to the
management agreement or interested persons of any such party (other than as
members of the Board), cast in person at a meeting called for that purpose. The
management agreement may be terminated without penalty at any time by the Board
or by a vote of the holders of a majority of the Fund's outstanding voting
securities, or by Advisers on 30 days' written notice, and will automatically
terminate in the event of its assignment, as defined in the 1940 Act.
Shareholder Servicing Agent. Investor Services, a wholly-owned subsidiary of
Resources, is the Fund's shareholder servicing agent and acts as the Fund's
transfer agent and dividend-paying agent. Investor Services is compensated on
the basis of a fixed fee per account.
Custodians. 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.
Auditors. Coopers & Lybrand L.L.P., 333 Market Street, San Francisco, California
94105, are the Fund's independent auditors. During the fiscal year ended
February 29, 1996, their auditing services consisted of rendering an opinion on
the financial statements of the Trust included in the Trust's Annual Report to
Shareholders for the fiscal year ended February 29, 1996.
HOW DOES THE FUND BUY
SECURITIES FOR ITS PORTFOLIO?
Since most purchases by the Fund are principal transactions at net prices, the
Fund incurs little or no brokerage costs. The Fund deals directly with the
selling or buying 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 using the services of a broker. Purchases of
portfolio securities from underwriters will include a commission or concession
paid by the issuer to the underwriter, and purchases from dealers will include a
spread between the bid and ask prices. As a general rule, the Fund does not buy
bonds in underwritings where it is given no choice, or only limited choice, in
the designation of dealers to receive the commission. The Fund seeks to obtain
prompt execution of orders at the most favorable net price. Transactions may be
directed to dealers in return for research and statistical information, as well
as for special services provided by the dealers in the execution of orders.
It is not possible to place a dollar value on the special executions or on the
research services received by Advisers from dealers effecting transactions in
portfolio securities. The allocation of transactions in order to obtain
additional research services permits Advisers to supplement its own research and
analysis activities and to receive the views and information of individuals and
research staff of other securities firms. As long as it is lawful and
appropriate to do so, Advisers and its affiliates may use this research and data
in their investment advisory capacities with other clients. If the Fund's
officers are satisfied that the best execution is obtained, the sale of Fund
shares may also be considered a factor in the selection of broker-dealers to
execute the Fund's portfolio transactions.
If purchases or sales of securities of the Fund and one or more other investment
companies or clients supervised by Advisers are considered at or about the same
time, transactions in these securities will be allocated among the several
investment companies and clients in a manner deemed equitable to all by
Advisers, taking into account the respective sizes of the funds and the amount
of securities to be purchased or sold. In some cases this procedure could have a
detrimental effect on the price or volume of the security so far as the Fund is
concerned. In other cases it is possible that the ability to participate in
volume transactions and to negotiate lower brokerage commissions will be
beneficial to the Fund.
During the past three fiscal years ended February 29, 1996, the Fund paid no
brokerage commissions.
As of February 29, 1996, the Fund did not own securities of its regular
broker-dealers.
HOW DO I BUY, SELL AND EXCHANGE SHARES?
ADDITIONAL INFORMATION ON BUYING SHARES
The Fund continuously offers its shares through securities dealers who have an
agreement with Distributors. Securities dealers may at times receive the entire
sales charge. A securities dealer who receives 90% or more of the sales charge
may be deemed an underwriter under the Securities Act of 1933, as amended.
Securities laws of states where the Fund offers its shares may differ from
federal law. Banks and financial institutions that sell shares of the Fund may
be required by state law to register as securities dealers. Financial
institutions or their affiliated brokers may receive an agency transaction fee
in the percentages indicated in the table under "How Do I Buy Shares? - Purchase
Price of Fund Shares" in the Prospectus.
When you buy shares, if you submit a check or a draft that is returned unpaid to
the Fund we may impose a $10 charge against your account for each returned item.
Under agreements with certain banks in Taiwan, Republic of China, the Fund's
shares are available to these banks' trust accounts without a sales charge. The
banks may charge service fees to their customers who participate in the trusts.
A portion of these service fees may be paid to Distributors or one of its
affiliates to help defray expenses of maintaining a service office in Taiwan,
including expenses related to local literature fulfillment and communication
facilities.
Class I shares of the Fund may be offered to investors in Taiwan through
securities advisory firms known locally as Securities Investment Consulting
Enterprises. In conformity with local business practices in Taiwan, Class I
shares may be offered with the following schedule of sales charges:
Sales
Size of Purchase - U.S. dollars Charge
Under $30,000 3%
$30,000 but less than $100,000 2%
$100,000 but less than $400,000 1%
$400,000 or more 0%
Other Payments to Securities Dealers. Distributors will pay the following
commissions, out of its own resources, to securities dealers who initiate and
are responsible for purchases of Class I shares of $1 million or more: 0.75% on
sales of $1 million 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.
Letter of Intent. You may qualify for a reduced sales charge when you buy Class
I shares, as described in the Prospectus. At any time within 90 days after the
first investment that you want to qualify for a reduced sales charge, you may
file with the Fund a signed shareholder application with the Letter of Intent
section completed. After the Letter is filed, each additional investment will be
entitled to the sales charge applicable to the level of investment indicated on
the Letter. Sales charge reductions based on purchases in more than one Franklin
Templeton Fund will be effective only after notification to Distributors that
the investment qualifies for a discount. Your holdings in the Franklin Templeton
Funds, 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 on the
amount actually purchased (less redemptions) during the period. If you execute a
Letter prior to a change in the sales charge structure of the Fund, you may
complete the Letter at the lower of the new sales charge structure or the sales
charge structure in effect at the time the Letter was filed.
As mentioned in the Prospectus, five percent (5%) of the amount of the total
intended purchase will be reserved in Class I shares of the Fund registered in
your name until you fulfill the letter. If 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
total purchases, less redemptions, exceed the amount specified under the Letter
and is an amount that would qualify for a further quantity discount, a
retroactive price adjustment will be made by Distributors and the securities
dealer through whom purchases were made pursuant to the Letter (to reflect such
further quantity discount) on purchases made within 90 days before and on those
made after filing the Letter. The resulting difference in offering price will be
applied to the purchase of additional shares at the offering price applicable to
a single purchase or the dollar amount of the total purchases. If the 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 the purchases had
been made at a single time. Upon remittance, the reserved shares held for your
account will be deposited to an account in your name or delivered to you or as
you direct. If within 20 days after written request the difference in sales
charge is not paid, the redemption of an appropriate number of reserved shares
to realize the difference will be made. In the event of a total redemption of
the account 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.
ADDITIONAL INFORMATION ON EXCHANGING SHARES
If you request the exchange of the total value of your account, accrued but
unpaid income dividends and capital gain distributions will be reinvested in the
Fund at the net asset value on the date of the exchange, and then the entire
share balance will be exchanged into the new fund. Backup withholding and
information reporting may apply. Information regarding the possible tax
consequences of an exchange is included in the tax section in this SAI and in
the Prospectus.
If a substantial number of shareholders should, within a short period, sell
their shares of the Fund under the exchange privilege, the Fund might have to
sell portfolio securities it might otherwise hold and incur the additional costs
related to such transactions. On the other hand, increased use of the exchange
privilege may result in periodic large inflows of money. If this occurs, it is
the Fund's general policy to initially invest this money in short-term,
tax-exempt municipal securities, unless it is believed that attractive
investment opportunities consistent with the Fund's investment objective exist
immediately. This money will then be withdrawn from the short-term tax-exempt
municipal securities and invested in portfolio securities in as orderly a manner
as is possible when attractive investment opportunities arise.
The proceeds from the sale of shares of an investment company are generally not
available until the fifth business day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange until
that fifth business day. The sale of Fund shares to complete an exchange will be
effected at net asset value at the close of business on the day the request for
exchange is received in proper form. Please see "May I Exchange Shares for
Shares of Another Fund?" in the Prospectus.
ADDITIONAL INFORMATION ON SELLING SHARES
Systematic Withdrawal Plan. There are no service charges for establishing or
maintaining a systematic withdrawal plan. 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.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the Fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Because the amount
withdrawn under the plan may be more than your actual yield or income, part of
the payment may be a return of your investment.
The Fund may discontinue a systematic withdrawal plan by notifying you in
writing and will automatically discontinue a systematic withdrawal plan if all
shares in your account are withdrawn or if the Fund receives notification of the
shareholder's death or incapacity.
Through Your Securities Dealer. If you sell shares through your securities
dealer, it is your dealer's responsibility to transmit the order to the Fund in
a timely fashion. Any loss to you resulting from your dealer's failure to do so
must be settled between you and your securities dealer.
Redemptions in Kind. The Fund has committed itself to pay in cash (by check) all
requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the value
of the Fund's net assets at the beginning of the 90-day period. This commitment
is irrevocable without the prior approval of the SEC. In the case of redemption
requests in excess of these amounts, the Board reserves the right to make
payments in whole or in part in securities or other assets of the Fund, in case
of an emergency, or if the payment of such a redemption in cash would be
detrimental to the existing shareholders of the Fund. In these circumstances,
the securities distributed would be valued at the price used to compute the
Fund's net assets and you may incur brokerage fees in converting the securities
to cash. The Fund does not intend to redeem illiquid securities in kind. If this
happens, however, you may not be able to recover your investment in a timely
manner.
GENERAL INFORMATION
If dividend checks are returned to the Fund marked "unable to forward" by the
postal service, we will consider this a request by you to change your dividend
option to reinvest all distributions. The proceeds will be reinvested in
additional shares at net asset value until we receive new instructions.
If mail is returned as undeliverable or we are unable to locate you or verify
your current mailing address, we may deduct the costs of our efforts to find you
from your account. These costs may include a percentage of the account when a
search company charges a percentage fee in exchange for its location services.
All checks, drafts, wires and other payment mediums used to buy or sell shares
of the Fund must be denominated in U.S. dollars. We may, in our sole discretion,
either (a) reject any order to buy or sell shares denominated in any other
currency or (b) honor the transaction or make adjustments to your account for
the transaction as of a date and with a foreign currency exchange factor
determined by the drawee bank.
Special Services. The Franklin Templeton Institutional Services Department
provides specialized services, including recordkeeping, for institutional
investors. The cost of these services is not borne by the Fund.
Investor Services may pay certain financial institutions that maintain omnibus
accounts with the Fund on behalf of numerous beneficial owners for recordkeeping
operations performed with respect to such owners. For each beneficial owner in
the omnibus account, the Fund may reimburse Investor Services an amount not to
exceed the per account fee that the Fund normally pays Investor Services. These
financial institutions may also charge a fee for their services directly to
their clients.
HOW ARE FUND SHARES VALUED?
We calculate the net asset value per share 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 Fund is informed
that the Exchange observes the following holidays: New Year's Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
For the purpose of determining the aggregate net assets of the Fund, cash and
receivables are valued at their realizable amounts. Interest is recorded as
accrued. Over-the-counter portfolio securities are valued within the range of
the most recent quoted bid and ask prices. Portfolio securities that are traded
both in the over-the-counter market and on a stock exchange are valued according
to the broadest and most representative market as determined by Advisers.
Municipal securities generally trade in the over-the-counter market rather than
on a securities exchange.
Generally, trading in U.S. government securities and money market instruments is
substantially completed each day at various times before the scheduled close of
the Exchange. The value of these securities used in computing the net asset
value of each class is determined as of such times. Occasionally, events
affecting the values of these securities may occur between the times at which
they are determined and the scheduled close of the Exchange that will not be
reflected in the computation of the net asset value of each class. If events
materially affecting the values of these securities occur during this period,
the securities will be valued at their fair value as determined in good faith by
the Board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the Board. With the approval of the Board, the
Fund may utilize a pricing service, bank or securities dealer to perform any of
the above described functions.
ADDITIONAL INFORMATION ON
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
You may receive two types of distributions from the Fund:
1. Income dividends. The Fund receives income generally in the form of interest
and other income derived from its investments. This income, less the expenses
incurred in the Fund's operations, is its net investment income from which
income dividends may be distributed. Thus, the amount of dividends paid per
share may vary with each distribution.
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 that 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.
TAXES
As stated in the Prospectus, each Fund has elected to be treated as a regulated
investment company under Subchapter M of the Code. The Board reserves the right
not to maintain the qualification of the Fund as a regulated investment company
if it determines this course of action to be beneficial to shareholders. In that
case, the Fund will be subject to federal and possibly state corporate taxes on
its taxable income and gains, to the alternative minimum tax on a portion of its
tax-exempt income, and distributions (including its tax-exempt interest
dividends) to shareholders will be taxable to the extent of the Fund's available
earnings and profits.
The Code requires all funds to distribute at least 98% of their taxable ordinary
income earned during the calendar year and at least 98% of their capital gain
net income earned during the twelve-month period ending October 31 of each year
(in addition to amounts from the prior year that were neither distributed nor
taxed to the Fund) to shareholders by December 31 of each year in order to avoid
the imposition of a federal excise tax. Under these rules, certain distributions
which are declared in October, November or December but which, for operational
reasons, may not be paid to you until the following January, will be treated for
tax purposes as if paid by the Fund and received by you on December 31 of the
calendar year in which they are declared. The Fund intends as a matter of policy
to declare and pay such dividends, if any, in December to avoid the imposition
of this tax, but does not guarantee that the distributions will be sufficient to
avoid any or all federal excise taxes.
Redemptions and exchanges of Fund shares are taxable transactions for federal
and state income tax purposes. Gain or loss will be recognized in an amount
equal to the difference between your basis in the shares and the amount you
received, subject to the rules described below. If such shares are a capital
asset in your hands, gain or loss will be capital gain or loss and will be
long-term for federal income tax purposes if your shares have been held for more
than one year.
All or a portion of the sales charge incurred in buying shares of the Fund will
not be included in the federal tax basis of shares sold or exchanged within
ninety (90) days of their purchase (for purposes of determining gain or loss
with respect to such shares) if you reinvest the sale proceeds in the Fund or in
another fund in the Franklin Templeton Funds, and a sales charge which would
otherwise apply to the reinvestment is reduced or eliminated. Any portion of the
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. You should consult your
tax advisor concerning the tax rules applicable to the redemption or exchange of
a Fund's shares.
Since the Fund's income is derived from interest income and gain on the sale of
portfolio securities rather than dividend income, no portion of the Fund's
distributions will generally be eligible for the corporate dividends-received
deduction. None of the distributions paid by the Fund for the fiscal year ended
February 29, 1996, qualified for this deduction and it is not anticipated that
any of the current year's dividends will so qualify.
All or a portion of a loss you realize upon a redemption of shares will be
disallowed to the extent you buy other shares of the Fund (through reinvestment
of dividends or otherwise) within 30 days before or after the redemption. Any
loss disallowed under these rules will be added to your tax basis of the shares
purchased.
Many states grant tax-free status to dividends paid to shareholders of mutual
funds from interest income earned by a fund from direct obligations of the U.S.
government, subject in some states to minimum investment requirements that must
be met by a fund. Investments in GNMA/FNMA securities and repurchase agreements
collateralized by U.S. government securities do not generally qualify for
tax-free treatment. While it is not the primary investment objective of the Fund
to invest in such obligations, the Fund is authorized to so invest for temporary
or defensive purposes. To the extent that such investments are made, any
affected Fund will provide you with the percentage of any dividends paid which
may qualify for such tax-free treatment at the end of each calendar year. You
should consult with your tax advisor with respect to the application of your
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.
If you are defined in the Code as a "substantial user" (or related person) of
facilities financed by private activity bonds, you should consult your tax
advisor before buying shares of the Fund.
THE FUND'S UNDERWRITER
Pursuant to an underwriting agreement in effect until March 31, 1997,
Distributors acts as principal underwriter in a continuous public offering for
both classes of the Fund's shares. The underwriting agreement will continue in
effect for successive annual periods if its continuance is specifically approved
at least annually by a vote of the Board or by a vote of the holders of a
majority of the Fund's outstanding voting securities, and in either event by a
majority vote of the Board members who are not parties to the underwriting
agreement or interested persons of any such party (other than as members of the
Board), cast in person at a meeting called for that purpose. The underwriting
agreement terminates automatically in the event of its assignment and may be
terminated by either party on 90 days' written notice.
Distributors pays the expenses of the distribution of Fund shares, including
advertising expenses and the costs of printing sales material and prospectuses
used to offer shares to the public. The Fund pays the expenses of preparing and
printing amendments to its registration statements and prospectuses (other than
those necessitated by the activities of Distributors) and of sending
prospectuses to existing shareholders.
Until April 30, 1994, income dividends for Class I shares were reinvested at the
offering price 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, this reinvestment is at net asset value.
In connection with the offering of Fund shares, the following table sets forth
aggregate underwriting commissions, the net underwriting discounts and
commissions retained by Distributors, after allowances to dealers, and
compensation received by Distributors in connection with redemptions
orrepurchases of Fund shares, for each of the three fiscal years ended February
29, 1996:
Total Net Total Compensation
Commissions Underwriting Received in Connection
Received Commissions With Redemptions
by Distributors Retained and Repurchases
1996
Alabama Fund........... $ 699,785 $ 44,192 $ --
Florida Fund........... 4,497,258 291,187 23,101
Georgia Fund........... 652,146 40,452 --
Kentucky Fund.......... 187,687 12,551 --
Louisiana Fund......... 339,900 21,165 --
Maryland Fund.......... 937,157 59,111 480
Missouri Fund.......... 900,767 56,179 11,741
North Carolina Fund.... 1,283,034 81,834 --
Texas Fund............. 258,255 16,685 --
Virginia Fund.......... 963,532 60,342 --
1995
Alabama Fund........... $ 643,138 $ 31,977 --
Florida Fund........... 3,251,098 167,327 --
Georgia Fund........... 523,120 25,986 --
Kentucky Fund.......... 241,431 9,670 --
Louisiana Fund......... 334,861 17,215 --
Maryland Fund.......... 764,216 37,696 --
Missouri Fund.......... 1,080,398 52,784 --
North Carolina Fund.... 1,089,308 51,529 --
Texas Fund............. 243,044 14,162 --
Virginia Fund.......... 998,646 946,658 --
Total Net Total Compensation
Commissions Underwriting Received in Connection
Received Commissions With Redemptions
by Distributors Retained and Repurchases
1994
Alabama Fund........... $1,482,367 $ 59,224 --
Florida Fund........... 8,654,468 293,832 --
Georgia Fund........... 1,155,912 46,527 --
Kentucky Fund.......... 562,417 8,248 --
Louisiana Fund......... 992,774 38,777 --
Maryland Fund.......... 1,718,141 61,697 --
Missouri Fund.......... 2,311,745 83,772 --
North Carolina Fund.... 2,310,605 86,228 --
Texas Fund............. 805,955 46,982 --
Virginia Fund.......... 2,134,332 104,836 --
Distributors may be entitled to reimbursement under the Rule 12b-1 plan for each
class, as discussed below. Except as noted, Distributors received no other
compensation from the Fund for acting as underwriter.
THE RULE 12B-1 PLANS
Each class has adopted a distribution plan or "Rule 12b-1 plan" pursuant to Rule
12b-1 of the 1940 Act.
The Class I Plan. Under the Class I plan, the Fund may pay up to a maximum of
0.10% per year of Class I's average daily net assets, payable quarterly, for
expenses incurred in the promotion and distribution of Class I shares.
In implementing the Class I plan, the Board has determined that the annual fees
payable under the plan will be equal to the sum of: (i) the amount obtained by
multiplying 0.10% by the average daily net assets represented by Class I shares
of the Fund that were acquired by investors on or after May 1, 1994, the
effective date of the plan ("New Assets"), and (ii) the amount obtained by
multiplying 0.05% by the average daily net assets represented by Class I shares
of the Fund that were acquired before May 1, 1994 ("Old Assets"). These fees
will be paid to the current securities dealer of record on the account. In
addition, until such time as the maximum payment of 0.10% is reached on a yearly
basis, up to an additional 0.02% will be paid to Distributors under the plan.
The payments made to Distributors will be used by Distributors to defray other
marketing expenses that have been incurred in accordance with the plan, such as
advertising.
The fee is a Class I expense. This means that all Class I shareholders,
regardless of when they purchased their shares, will bear Rule 12b-1 expenses at
the same rate. The initial rate will be at least 0.07% (0.05% plus 0.02%) of the
average daily net assets of Class I and, as Class I shares are sold on or after
May 1, 1994, will increase over time. Thus, as the proportion of Class I shares
purchased on or after May 1, 1994, increases in relation to outstanding Class I
shares, the expenses attributable to payments under the plan will also increase
(but will not exceed 0.10% of average daily net assets). While this is the
currently anticipated calculation for fees payable under the Class I plan, the
plan permits the Board to allow the Fund to pay a full 0.10% on all assets at
any time. The approval of the Board would be required to change the calculation
of the payments to be made under the Class I plan.
The Class I plan does not permit unreimbursed expenses incurred in a particular
year to be carried over to or reimbursed in later years.
The Class II Plan. Under the Class II plan, the Fund pays Distributors up to
0.50% per year of Class II's average daily net assets, payable quarterly, for
distribution and related expenses. These fees may be used to compensate
Distributors or others for providing distribution and related services and
bearing certain Class II expenses. All distribution expenses over this amount
will be borne by those who have incurred them without reimbursement by the Fund.
Under the Class II plan, the Fund also pays an additional 0.15% per year of
Class II's average daily net assets, payable quarterly, as a servicing fee.
During the first year after a purchase of Class II shares, Distributors may keep
this portion of the Rule 12b-1 fees associated with the Class II purchase.
The Class I and Class II Plans. In addition to the payments that Distributors or
others are entitled to under each plan, each plan also provides that to the
extent the Fund, Advisers or Distributors or other parties on behalf of the
Fund, Advisers or Distributors make payments that are deemed to be for the
financing of any activity primarily intended to result in the sale of shares of
each class within the context of Rule 12b-1 under the 1940 Act, then such
payments shall be deemed to have been made pursuant to the plan. The terms and
provisions of each plan relating to required reports, term, and approval are
consistent with Rule 12b-1.
In no event shall the aggregate asset-based sales charges, which include
payments made under each plan, plus any other payments deemed to be made
pursuant to a plan, exceed the amount permitted to be paid pursuant to the Rules
of Fair Practice of the National Association of Securities Dealers, Inc.,
Article III, Section 26(d)4.
To the extent fees are for distribution or marketing functions, as distinguished
from administrative servicing or agency transactions, certain banks will not be
entitled to participate in the plans as a result of applicable federal law
prohibiting certain banks from engaging in the distribution of mutual fund
shares. These banking institutions, however, are permitted to receive fees under
the plans for administrative servicing or for agency transactions. If you are a
customer of a bank that is prohibited from providing these services, you would
be permitted to remain a shareholder of the Fund, and alternate means for
continuing the servicing would be sought. In this event, changes in the services
provided might occur and you might no longer be able to avail yourself of any
automatic investment or other services then being provided by the bank. It is
not expected that you would suffer any adverse financial consequences as a
result of any of these changes.
Each plan has been approved in accordance with the provisions of Rule 12b-1. The
plans are effective through March 31, 1997, and renewable annually by a vote of
the Board, including a majority vote of the Board members who are not interested
persons of the Fund and who have no direct or indirect financial interest in the
operation of the plans, cast in person at a meeting called for that purpose. It
is also required that the selection and nomination of such Board members be done
by the non-interested members of the Board. The plans and any related agreement
may be terminated at any time, without penalty, by vote of a majority of the
non-interested Board members on not more than 60 days' written notice, by
Distributors on not more than 60 days' written notice, by any act that
constitutes an assignment of the management agreement with Advisers, or the
underwriting agreement with Distributors, or by vote of a majority of the
outstanding shares of the class. Distributors or any dealer or other firm may
also terminate their respective distribution or service agreement at any time
upon written notice.
The plans and any related agreements may not be amended to increase materially
the amount to be spent for distribution expenses without approval by a majority
of the outstanding shares of the class, and all material amendments to the plans
or any related agreements shall be approved by a vote of the non-interested
members of the Board, cast in person at a meeting called for the purpose of
voting on any such amendment.
Distributors is required to report in writing to the Board at least quarterly on
the amounts and purpose of any payment made under the plans and any related
agreements, as well as to furnish the Board with such other information as may
reasonably be requested in order to enable the Board to make an informed
determination of whether the plans should be continued.
For the fiscal year ended February 29, 1996, Distributors' eligible expenditures
for advertising, printing, and payments to underwriters and broker-dealers
pursuant to the Class I and Class II plans and the amounts paid by the Fund to
Distributors were as follows:
Class I Class II
------------------ ------------------
Distributors' Amount Distributors' Amount
Eligible Paid By Eligible Paid By
Expenses the Fund Expenses the Fund
Florida Fund................. -- -- 79,763 17,447
Georgia Fund................. 107,718 96,521 13,796 2,143
Kentucky Fund................ 41,984 27,693 N/A N/A
Louisiana Fund............... 84,322 79,754 17,611 1,773
Maryland Fund................ 140,582 131,476 8,120 1,950
Missouri Fund................ 193,592 176,767 19,447 3,092
North Carolina Fund.......... 198,119 182,238 23,325 4,566
Texas Fund................... 103,850 98,291 1,621 139
Virginia Fund................ 206,194 196,658 22,408 4,830
Distribution fees paid by the following Funds, which equaled the eligible
expenditures by Distributors, were spent as follows:
<TABLE>
<CAPTION>
Rule 12b-1 Printing and Payments
Fees Paid Mailing of Payments to to Brokers
by Fund Advertising Prospectuses Underwriters or Dealers
<S> <C> <C> <C> <C> <C>
Alabama Fund Class I.... $136,983 -- -- -- $136,983
Alabama Fund Class II... 3,343 -- -- -- 3,343
Florida Fund Class I.... 960,596 $74,779 $94,512 $72,107 719,198
</TABLE>
HOW DOES THE FUND MEASURE PERFORMANCE?
Performance quotations are subject to SEC rules. These rules require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the Fund be accompanied by
certain standardized performance information computed as required by the SEC.
Current yield and average annual total return quotations used by the Fund are
based on the standardized methods of computing performance mandated by the SEC.
If a Rule 12b-1 plan is adopted, performance figures reflect fees from the date
of the plan's implementation. An explanation of these and other methods used by
the Fund to compute or express performance for each class follows. 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.
TOTAL RETURN
Average Annual Total Return. Average annual total return is determined by
finding the average annual 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, and income dividends and capital gain distributions are reinvested at
net asset value. The quotation assumes the account was completely redeemed at
the end of each 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.
The average annual total return for Class I shares for the indicated periods
ended on February 29, 1996, were as shown below.
Average Annual Total Return
Inception From
of the Fund One Year Five Year Inception
Alabama Fund.......... 09/01/87 5.10% 7.13% 7.74%
Florida Fund.......... 09/01/87 4.67 7.29 8.09
Georgia Fund.......... 09/01/87 4.29 6.92 7.78
Kentucky Fund......... 10/12/91 6.00 n/a 6.91
Louisiana Fund........ 09/01/87 4.13 6.67 7.61
Maryland Fund......... 10/03/88 5.54 7.18 7.33
Missouri Fund......... 09/01/87 5.54 7.41 7.86
North Carolina Fund... 09/01/87 4.68 6.80 7.75
Texas Fund............ 09/01/87 4.60 7.02 7.91
Virginia Fund......... 09/01/87 4.78 7.18 7.87
These figures were calculated according to the SEC formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the one-, five- or ten-year periods at the end of the one-,
five- or ten-year periods (or fractional portion thereof)
Cumulative Total Return. The Fund may also quote the cumulative total return for
each class, in addition to the average annual total return. These quotations are
computed the same way, except the cumulative total return will be based on the
actual return for each class for a specified period rather than on the average
return over one-, five- and ten-year periods, or fractional portion thereof. The
cumulative total return for each class for the indicated periods ended on
February 29, 1996, were as follows: Cumulative Total Return
Inception From
of the Fund One Year Five Year Inception
Alabama Fund Class I........... 09/01/87 5.10% 41.08% 88.49%
Alabama Fund Class II.......... 05/01/95 -- -- 5.99
Florida Fund Class I........... 09/01/87 4.67 42.19 93.75
Florida Fund Class II.......... 05/01/95 -- -- 6.03
Georgia Fund Class I........... 09/01/87 4.29 39.76 89.16
Georgia Fund Class II.......... 05/01/95 -- -- 5.31
Kentucky Fund.................. 10/12/91 6.00 N/A 34.08
Louisiana Fund Class I......... 09/01/87 4.13 38.11 86.55
Louisiana Fund Class II........ 05/01/95 -- -- 5.71
Maryland Fund Class I.......... 10/03/88 5.54 41.44 68.92
Maryland Fund Class II......... 05/01/95 -- -- 6.98
Missouri Fund Class I.......... 09/01/87 5.54 42.95 90.33
Missouri Fund Class II......... 05/01/95 -- -- 6.55
North Carolina Fund Class I.... 09/01/87 4.68 38.98 88.73
North Carolina Fund Class II... 05/01/95 -- -- 5.66
Texas Fund Class I............. 09/01/87 4.60 40.38 91.05
Texas Fund Class II............ 05/01/95 -- -- 6.19
Virginia Fund Class I.......... 09/01/87 4.78 41.43 90.38
Virginia Fund Class II......... 05/01/95 -- -- 6.04
YIELD
Current Yield. Current yield of each class shows the income per share earned by
the Fund. It is calculated by dividing the net investment income per share of
each class earned during a 30-day base period by the applicable maximum offering
price per share on the last day of the period and annualizing the result.
Expenses accrued for the period include any fees charged to all shareholders of
the class during the base period. The yield for each class for the 30-day period
ended on February 29, 1996, were as follows:
30-Day Current Yield
Class I Class II
Alabama Fund.................... 4.67% 4.24%
Florida Fund.................... 4.68 4.25
Georgia Fund.................... 4.39 3.95
Kentucky Fund................... 5.03 N/A
Louisiana Fund.................. 4.72 4.30
Maryland Fund................... 4.47 4.04
Missouri Fund................... 4.48 4.00
North Carolina Fund............. 4.58 4.17
Texas Fund...................... 4.20 3.76
Virginia Fund................... 4.45 4.03
These figures were obtained using the following SEC formula:
6
Yield = 2 [(a-b + 1) - 1]
---
cd
where:
a = interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that were
entitled to receive dividends
d = the maximum offering price per share on the last day of the period
Taxable-Equivalent Yield. The Fund may also quote a taxable-equivalent yield for
each class that shows the before-tax yield that would have to be earned from a
taxable investment to equal the yield for the class. Taxable-equivalent yield is
computed by dividing the portion of the class' yield that is tax-exempt by one
minus the highest applicable combined federal and state income tax rate and
adding the product to the portion of the class' yield that is not tax-exempt, if
any. The taxable-equivalent yield for each class for the 30-day period ended on
February 29, 1996, was as follows:
30-Day Taxable-
Equivalent Yield
Class I Class II
Alabama Fund.................... 8.14% 7.39%
Florida Fund.................... 7.75 7.04
Georgia Fund.................... 7.73 6.96
Kentucky Fund................... 8.86 N/A
Louisiana Fund.................. 8.31 7.57
Maryland Fund................... 8.19 7.40
Missouri Fund................... 7.89 7.04
North Carolina Fund............. 8.22 7.48
Texas Fund...................... 6.95 6.23
Virginia Fund................... 7.82 7.08
As of the date of this SAI, the state and the combined state and federal income
tax rates upon which the taxable-equivalent yield quotations are based were as
follows:
State Combined
State Tax Tax*
Alabama.......................... 5.00% 42.62%
Florida.......................... 0.00 39.60
Georgia.......................... 6.00 43.22
Kentucky......................... 6.00 43.22
Louisiana........................ 6.00 43.22
Maryland**....................... 5.00 44.43
Missouri......................... 6.00 43.22
North Carolina................... 7.75 44.28
Texas............................ 0.00 39.60
Virginia......................... 5.75 43.07
*Based on the maximum combined state and 39.6% federal tax rate.
**Based on the maximum combined federal, state and county tax rate for all
Maryland counties except Worcester County.
From time to time, as any changes to the rates become effective,
taxable-equivalent yield quotations advertised by the Fund will be updated to
reflect these changes. The Fund expects updates may be necessary as tax rates
are changed by federal, state and local governments. The advantage of tax-free
investments, like the Fund, will be enhanced by any tax rate increases.
Therefore, the details of specific tax increases may be used in sales material
for the Fund.
Quotations of taxable-equivalent yield by the Fund 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 taxable-equivalent yield, which are calculated according to a
formula prescribed by the SEC, are not indicative of the amounts which were or
will be paid to shareholders 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 usually computed by
annualizing the dividends paid per share by a class during a certain period and
dividing that amount by the current maximum offering price. The current
distribution rate differs from the current yield computation because it may
include distributions to shareholders from sources other than interest, such as
short-term capital gains and is calculated over a different period of time. The
current distribution rate for each class for the 30-day period ended February
29, 1996 was as follows:
Class I Class II
Alabama Fund 5.39% 4.98%
Florida Fund 5.60 5.18
Georgia Fund 5.32 4.90
Kentucky Fund 5.31 N/A
Louisiana Fund 5.48 5.07
Maryland Fund 5.25 4.83
Missouri Fund 5.20 4.78
North Carolina Fund 5.28 4.86
Texas Fund 5.55 5.12
Virginia Fund 5.29 4.87
A taxable-equivalent distribution rate shows the taxable distribution rate
equivalent to the class' current distribution rate. The advertised
taxable-equivalent distribution rate will reflect the most current federal,
state and city tax rates available to the Fund. The taxable-equivalent
distribution rate for each class for the 30-day period ended February 29, 1996
was as follows:
Class I Class II
Alabama Fund 9.39% 8.68%
Florida Fund 9.27 8.58
Georgia Fund 9.37 8.63
Kentucky Fund 9.35 N/A
Louisiana Fund 9.65 8.93
Maryland Fund 9.45 8.69
Missouri Fund 9.16 8.42
North Carolina Fund 9.48 8.72
Texas Fund 9.19 8.48
Virginia Fund 9.29 8.55
VOLATILITY
Occasionally statistics may be used to show the Fund's volatility or risk.
Measures of volatility or risk are generally used to compare the Fund's net
asset value or performance to a market index. One measure of volatility is beta.
Beta is the volatility of a fund relative to the total market, as represented by
an index considered representative of the types of securities in which the fund
invests. A beta of more than 1.00 indicates volatility greater than the market
and a beta of less than 1.00 indicates volatility less than the market. Another
measure of volatility or risk is standard deviation. Standard deviation is used
to measure variability of net asset value or total return around an average over
a specified period of time. The idea is that greater volatility means greater
risk undertaken in achieving performance.
OTHER PERFORMANCE QUOTATIONS
For investors who are permitted to buy Class I shares without a sales charge,
sales literature about Class I may quote a current distribution rate, yield,
cumulative total return, average annual total return and other measures of
performance as described elsewhere in this SAI with the substitution of net
asset value for the public offering price.
The 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 the Fund may satisfy your
investment objective, advertisements and other materials about the Fund may
discuss certain measures of each class' performance as reported by various
financial publications. Materials may also compare performance (as calculated
above) to performance as reported by other investments, indices, and averages.
These comparisons may include, but are not limited to, the following examples:
Lipper Fixed-Income Fund Performance Analysis ranked the Kentucky Fund number
one in total return in the Kentucky Municipal Debt Funds Category for its
one-year total return for the year-ended December 31, 1995, with a total return
of 19.87%. There were seven funds in the category.
Lipper Fixed-Income Fund Performance Analysis ranked the Maryland Fund number
one in total return in the Maryland Municipal Debt Funds Category for its
five-year total return for the year-ended December 31, 1995, with a total return
of 51.90%. There were nine funds in the category.
Lipper Fixed-Income Fund Performance Analysis ranked the Alabama Fund number one
in total return in the Alabama Municipal Debt Funds Category for its five-year
total return for the year-ended December 31, 1995, with a total return of
50.76%. There were two funds in the category.
Lipper Fixed-Income Fund Performance Analysis ranked the Georgia Fund number one
in total return in the Georgia Municipal Debt Funds Category for its five-year
total return for the year ended December 31, 1995, with a total return of
49.61%. There were four funds in the category.
The Lipper Fixed-Income Fund Performance Analysis and Lipper Mutual Fund Yield
Survey for Industry Averages - measure total return and average current yield
for the mutual fund industry and 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:
a) Lehman Brothers Municipal Bond Index measures yield, price, and total return
for the municipal bond market.
b) Bond Buyer 20-Bond Index - an index of municipal bond yields based upon
yields of 20 general obligation bonds maturing in 20 years.
c) Bond Buyer 40-Bond Index - an index of municipal bond yields based upon
yields of 40 general obligation bonds with an average maturity of 29-30 years.
d) Salomon Brothers Composite High Yield Index or its component indices -
measures yield, price and total return for the Long-Term High-Yield Index,
Intermediate-Term High-Yield Index, and Long-Term Utility High-Yield Index.
e) 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.
f) 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.
g) Savings & Loan Historical Interest Rates - as published in the U.S. Savings &
Loan League Fact Book.
h) Inflation as measured by the Consumer Price Index, published by the U.S.
Bureau of Labor Statistics.
i) 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.
j) Financial Publications: The Wall Street Journal, Business Week, Changing
Times, Financial World, Forbes, and Money magazine.
k) Standard & Poor's Bond Indices - measure yield and price of corporate,
municipal, and government bonds.
From time to time, advertisements or information for the Fund may include a
discussion of certain attributes or benefits to be derived from an investment in
the Fund. The advertisements or information may include symbols, headlines, or
other material that highlights or summarizes the information discussed in more
detail in the communication.
Advertisements or information may also compare a class' performance to the
return on CDs or other investments. You should be aware, however, that an
investment in the Fund involves the risk of fluctuation of principal value, a
risk generally not present in an investment in a CD issued by a bank. For
example, as the general level of interest rates rise, the value of the Fund's
fixed-income investments, as well as the value of its shares that 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. CDs are frequently insured by an agency of the U.S.
government. An investment in the Fund is not insured by any federal, state or
private entity.
In assessing 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 the Fund will continue its performance as
compared to these other averages.
Franklin had the first single-state municipal bond funds in California,
Massachusetts, Michigan, Minnesota and Ohio.
MISCELLANEOUS INFORMATION
Under current tax laws, municipal securities remain one of the few investments
offering the potential for tax-free income. In 1996, 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 1996.)
Franklin tax-free funds, however, offer tax relief through a professionally
managed portfolio of tax-free securities selected based on their yield, quality
and maturity. An investment in a Franklin tax-free fund can provide you with the
potential to earn income free of federal taxes and, depending on the fund, state
and local taxes as well, while supporting state and local public projects.
Franklin tax-free funds may also provide tax-free compounding, when dividends
are reinvested. An investment in Franklin's tax-free funds can grow more rapidly
than similar taxable investments.
Municipal securities are generally considered to be creditworthy, second in
quality only to securities issued or guaranteed by the U.S. government and its
agencies. The market price of such securities, however, may fluctuate. This
fluctuation will have a direct impact on the net asset value of an investment in
a Fund.
Currently, there are more mutual funds than there are stocks listed on the
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 your unique goals and needs, as well as the types of risks
associated with such investment.
The 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
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis in order to have
a projected amount available in the future to fund a child's college education.
(Projected college cost estimates are based upon current costs published by the
College Board.) Of course, an investment in the Fund cannot guarantee that these
goals will be met.
The Fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin, one of the
oldest mutual fund organizations, has managed mutual funds for over 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 $143
billion in assets under management for more than 4.1 million U.S. based mutual
fund shareholder and other accounts. The Franklin Templeton Group of Funds
offers 115 U.S. based mutual funds to the public.
The 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
$43 billion in municipal bond assets for over three-quarters of a million
investors. According to Research and Ratings Review, Franklin's municipal
research team ranked number 2 out of 800 investment advisory firms surveyed by
TMS Holdings, Inc., as of March 31, 1996.
The Dalbar Surveys, Inc. broker-dealer survey has ranked Franklin number one in
service quality for five of the past eight years.
According to Strategic Insight, dated February 29, 1996, the Florida Fund is the
largest Florida municipal bond fund. The Alabama and Missouri Funds are also the
largest municipal bond funds in their respective states.
From time to time advertisements or sales material issued by the Fund may
discuss or be based upon information in a recent issue of the Special Report on
Tax Freedom Day published by the Tax Foundation, a Washington, D.C. based
nonprofit research and public education organization. The report illustrates,
among other things, the annual amount of time the average taxpayer works to
satisfy his or her tax obligations to the federal, state and local taxing
authorities.
As of June 3, 1996, the principal shareholders of the Fund, beneficial or of
record, were as follows:
Fund, Name and Address Share Amount Percentage
ALABAMA FUND - CLASS II
Prudential Securities Inc. FBO....................... 17,190.030 6.4%
Mr. Paul A. Banfi & Mr. Paul A. Banfi II JT TEN
P.O. Box 457
Theodore, AL 36590-0457
Lee Potter Smith TTEE................................ 15,149.863 5.6%
Lee Potter Smith TR
DTD 02-08-93
302 N. Summit St.
Fairhope, AL 36532
Robert C. Ford....................................... 16,920.474 6.3%
3605 Ratliff Rd.
Birmingham, AL 35210
GEORGIA FUND - CLASS II
Win Communication Corp............................... 20,946.977 11.8%
ATTN: Jim May
6755 Jimmy Carter Blvd.
Norcross, GA 30071-1702
Interstate/Johnson Lane.............................. 12,224.450 6.9%
FBO 403-99039-11
Interstate Tower
P.O. Box 1220
Charlotte, NC 28201-1220
KENTUCKY FUND - CLASS I
Franklin Resources Inc............................... 257,206.532 6.8%
ATTN: Corporate Accounting #95
P.O. Box 7777
San Mateo, CA 94403-7777
Fund, Name and Address Share Amount Percentage
LOUISIANA FUND - CLASS II
Henry L. Bango....................................... 11,324.042 5.5%
1910 Anniston Ave.
Shreveport, LA 71105-3516
Prudential Securities Inc. FBO....................... 43,103.448 21.2%
Mrs. Leigh Landry King Cust.
Tyra Nicole Landry
Unif Gift Min Act La
3939 Tulane Ave. Ste. 310
New Orleans, LA 70119-6938
MARYLAND FUND - CLASS II
Dorothy M. Jackson &................................. 8,643.042 5.9%
James S. Jackson JT TEN
14610 Bar Harbor Ct.
Issue, MD 20645
MISSOURI FUND - CLASS II
James Janning & Donna Janning JTWROS................. 11,407.479 6.7%
11204 Hunter's Pond Rd.
Creve Coeur, MO 63141
Stanley Gollub & Allan Gallup & Earl D. Hearst &..... 8,562.278 5%
Samuel W. Gollub TTEES
Sadie Gollub Rev TR DTD 02-18-94
801 N. Price Rd.
Saint Louis, MO 63132-3713
John V. Pfeifauf TTEE................................ 17,081.581 10.1%
John V. Pfeifauf REV TR
DTD 08-09-93
7629 Paragon Cir.
Saint Louis, MO 63123
NORTH CAROLINA FUND - CLASS II
Wachovia Securities Inc.............................. 22,732.865 5.7%
FBO 1005220411
301 N. Main St. MC-32002
Winston-Salem, NC 27150
TEXAS FUND - CLASS II
Randall H. Dean & Connie J. Dean JT WROS............. 1,720.561 9.9%
P.O. Box 966
East Bernard, TX 77435
Family LTD Partnership............................... 2,561.306 14.8%
Alo Family Limited
4512 Teas St.
Bellaire, TX 77401-4223
VIRGINIA FUND - CLASS II
Wheat First FBO A/C 3641-3350........................ 18,958.155 6.7%
Mark J. Grady & Ruth E. Grady JT TEN
103 Wall Cir.
Winchester, VA 22602-6939
David A. Ruth & Vivian Olsen Ruth JT TEN............. 14,151.635 5%
3703 Ridgelea Dr.
Fairfax, VA 22031
From time to time, the number of Fund shares held in the "street name" accounts
of various securities dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares outstanding.
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
Fund's Agreement and Declaration of Trust, however, contains an express
disclaimer of shareholder liability for acts or obligations of the Fund. The
Declaration of Trust also provides for indemnification and reimbursement of
expenses out of the Fund's assets if you are held personally liable for
obligations of the Fund. The Declaration of Trust provides that the Fund shall,
upon request, assume the defense of any claim made against you for any act or
obligation of the Fund and satisfy any judgment thereon. All such rights are
limited to the assets of the Fund. The Declaration of Trust further provides
that the Fund may maintain appropriate insurance (for example, fidelity bonding
and errors and omissions insurance) for the protection of the Fund, its
shareholders, trustees, officers, employees and agents to cover possible tort
and other liabilities. Furthermore, the activities of the Fund as an investment
company, as distinguished from an operating company, would not likely give rise
to liabilities in excess of the Fund's total assets. Thus, the risk of you
incurring financial loss on account of shareholder liability is limited to the
unlikely circumstances in which both inadequate insurance exists and the Fund
itself is unable to meet its obligations.
In the event of disputes involving multiple claims of ownership or authority to
control your account, the Fund has the right (but has no obligation) to: (a)
freeze the account and require the written agreement of all persons deemed by
the Fund to have a potential property interest in the account, prior to
executing instructions regarding the account; (b) interplead disputed funds or
accounts with a court of competent jurisdiction; or (c) surrender ownership of
all or a portion of the account to the IRS in response to a Notice of Levy.
FINANCIAL STATEMENTS
The audited financial statements contained in the Annual Report to Shareholders
of the Trust, for the fiscal year ended February 29, 1996, including the
auditors' report, are incorporated herein by reference.
USEFUL TERMS AND DEFINITIONS
1940 Act - Investment Company Act of 1940, as amended
Advisers - Franklin Advisers, Inc., the Fund's investment manager
Board - The Board of Trustees of the Trust
CD - Certificate of deposit
Class I and Class II - The Fund offers two classes of shares, designated "Class
I" and "Class II." The two classes have proportionate interests in the Fund's
portfolio. They differ, however, primarily in their sales charge structures and
Rule 12b-1 plans.
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
Franklin Templeton Group of Funds - All U.S. registered mutual funds in the
Franklin Group of Funds(R) and the Templeton Group of Funds
Investor Services - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
Letter - Letter of Intent
Net Asset Value (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
Offering Price - The public offering price is based on the net asset value per
share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 4.25% for Class I and 1% for Class II.
Prospectus - The prospectus for the Fund dated July 1, 1996, as may be amended
from time to time
Resources - Franklin Resources, Inc.
SAI - Statement of Additional Information
SEC - U.S. Securities and Exchange Commission
Securities Dealer - A financial institution which, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
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
We/Our/Us - Unless a different meaning is indicated by the context, these terms
refer to the Fund and/or Investor Services, Distributors, or another
wholly-owned subsidiary of Resources.
APPENDICES
DESCRIPTION OF RATINGS
MUNICIPAL BOND RATINGS
MOODY'S
Aaa: Municipal bonds rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin, and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Municipal bonds rated Aa are judged to be high quality by all standards.
Together with the Aaa group, they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large, fluctuation of protective elements may be of
greater amplitude, or there may be other elements present which make the
long-term risks appear somewhat larger.
A: Municipal bonds rated A possess many favorable investment attributes and are
considered upper medium-grade obligations. Factors giving security to principal
and interest are considered adequate, but elements may be present which suggest
a susceptibility to impairment sometime in the future.
Baa: Municipal bonds 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: Municipal bonds 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: Municipal bonds rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Municipal bonds rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Municipal bonds rated Ca represent obligations which are speculative to a
high degree. Such issues are often in default or have other marked shortcomings.
C: Municipal bonds rated C are the lowest-rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Con.(-): Municipal bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon the
completion of construction or the elimination of the basis of the condition.
S&P
AAA: Municipal bonds rated AAA are the highest-grade obligations. They possess
the ultimate degree of protection as to principal and interest. In the market,
they move with interest rates and, hence, provide the maximum safety on all
counts.
AA: Municipal bonds rated AA also qualify as high-grade obligations, and in the
majority of instances differ from AAA issues only in a small degree. Here, too,
prices move with the long-term money market.
A: Municipal bonds rated A are regarded as upper medium-grade. They have
considerable investment strength but are not entirely free from adverse effects
of changes in economic and trade conditions. Interest and principal are regarded
as safe. They predominantly reflect money rates in their market behavior but
also, to some extent, economic conditions.
BBB: 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: Municipal bonds rated AAA are 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: Municipal bonds rated AA are considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong although not quite as strong as bonds rated AAA and not
significantly vulnerable to foreseeable future developments.
A: Municipal bonds rated A are considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB: Municipal bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an 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: Municipal bonds rated BB are considered speculative. The obligor's ability
to pay interest and repay principal may be affected over time by adverse
economic changes. However, business and financial alternatives can be identified
which could assist the obligor in satisfying its debt service requirements.
B: Municipal bonds rated B are considered highly speculative. While bonds in
this class are currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the obligor's
limited margin of safety and the need for reasonable business and economic
activity throughout the life of the issue.
CCC: Municipal bonds rated CCC have certain identifiable characteristics which,
if not remedied, may lead to default. The ability to meet obligations requires
an advantageous business and economic environment.
CC: Municipal bonds rated CC are minimally protected. Default in payment of
interest and/or principal seems probable over time.
C: Municipal bonds rated C are in imminent default in the payment of interest or
principal.
DDD, DD and D: Municipal bonds rated DDD, DD and D are in default on interest
and/or principal payments. Such bonds are extremely speculative and should be
valued on the basis of their ultimate recovery value in liquidation or
reorganization of the obligor. DDD represents the highest potential for recovery
while D represents the lowest potential for recovery.
Plus (+) or minus (-) signs are used with a rating symbol to indicate the
relative position of a credit within the rating category. Plus or minus are not
used for the AAA and the DDD, DD or D categories.
MUNICIPAL NOTE RATINGS
MOODY'S
Moody's ratings for state, municipal and other short-term obligations will be
designated Moody's Investment Grade ("MIG"). This distinction is in recognition
of the differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower are uppermost in importance in
short-term borrowing; factors of the first importance in long-term borrowing
risk are of lesser importance in the short run. Symbols used will be as follows:
MIG 1: Notes are of the best quality enjoying strong protection from established
cash flows of funds for their servicing or from established and broad-based
access to the market for refinancing, or both.
MIG 2: Notes are of high quality, with margins of protection ample, although not
so large as in the preceding group.
MIG 3: Notes are of favorable quality, with all security elements accounted for,
but lacking the undeniable strength of the preceding grades. Market access for
refinancing, in particular, is likely to be less well established.
MIG 4: Notes are of adequate quality, carrying specific risk but having
protection and not distinctly or predominantly speculative.
S&P
Until June 29, 1984, S&P used the same rating symbols for notes and bonds. After
June 29, 1984, for new municipal note issues due in three years or less, the
ratings below will usually be assigned. Notes maturing beyond three years will
most likely receive a bond rating of the type recited above.
SP-1: Issues carrying this designation have a very strong or strong capacity to
pay principal and interest. Issues determined to possess overwhelming safety
characteristics will be given a "plus" (+) designation.
SP-2: Issues carrying this designation have a satisfactory capacity to pay
principal and interest.
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's commercial paper ratings, which are also applicable to municipal paper
investments permitted to be made by the Fund, are opinions of the ability of
issuers to repay punctually their promissory obligations not having an original
maturity in excess of nine months. Moody's employs the following designations,
all judged to be investment grade, to indicate the relative repayment capacity
of rated issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
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.
SPECIAL FACTORS AFFECTING EACH FUND
The following information supplements the summaries of state economic factors in
the Prospectus. This information is based on historically reliable sources such
as S&P's Creditweek Municipal, but it has not been independently verified by the
Trust, nor is it intended to be complete.
ALABAMA
Alabama's finances are primarily handled through the Special Education Trust and
general funds, on a cash basis. In recent years, these funds have constituted
about 43% and 11%, respectively, of all state revenues. The state implements
conservative financial policies as evidenced by its strong balanced budget acts,
which allow spending only from monies on-hand in the state treasury.
During fiscal 1991, the governor prorated the state's Special Education Trust
Fund budget twice and the general fund once to ensure expenditures did not
exceed revenues at year-end. Although these funds ended the year with positive
balances, they showed substantial declines from previous years and reflected the
effects of weakened revenue collections during the fiscal year.
In fiscal 1992, the administration had to prorate the Special Education Trust
Fund by 6.5%, which placed fiscal 1992 appropriations equal to 1991 levels. When
tax receipts improved later that year, however, the governor reduced the
original proration to 5.5%. At fiscal year end, unencumbered balances of the
Special Education Trust Fund and the general fund equaled $2.5 million and $23.4
million, respectively.
Shortfalls in general fund revenues in 1993 resulted in a 3.2% proration. As a
result, Alabama achieved a surplus of approximately $29 million for fiscal 1993.
At year end, the balances for the Special Education Trust Fund and the general
fund, respectively, were approximately $83 million and $47 million. Balances for
both these funds in 1994 and 1995 were also positive. In the 1996 fiscal year
end, however, it is estimated that the general fund balance will be zero and
that by 1997 the Special Education Trust Fund will also drop to zero.
A state circuit court judge recently ruled that Alabama's public education
system was inadequate, inequitably funded, and unconstitutional. The state has
developed a plan to correct these problems, which may include the issuance of
over $1 billion in new debt through the Alabama Public School and College
Authority. Debt service would be funded from growth in existing revenue sources
and restructuring outstanding debt. Other suits against the government,
primarily related to education funding, may further strain the state's finances.
Retirement plans maintained by the state for its teachers and other government
workers have considerable unfunded liabilities, although they have generally
declined in recent years mainly due to strong investment earnings performance.
FLORIDA
While per capita income growth was below the national average in 1990-1992,
strong growth in 1993 and 1994 moved Florida's per capita income slightly above
the national average. The state's overall outlook is stable, with moderate
(though rising) debt levels, a well managed financial program and steady
economic performance.
After several years of budget imbalances resulting from revenue shortfalls, the
state ended fiscal 1995 with a working capital reserve of $161.5 million and
$121 million in the newly established budget stabilization reserve. No tax
increases are anticipated in 1996. In Florida's most recent five year revenue
forecast, however, general fund expenditures are expected to grow at an average
annual rate of 7.9% through the end of the decade. If this is accurate, it is
predicted that a 2% annual increase in total general fund revenues will be
needed for the state to balance its budget in 2001 and maintain its current
spending levels.
Florida continues to have a relatively narrow tax base, with 70% of its total
revenues derived from the 6% sales and use tax. This reliance on sales taxes
creates vulnerability to recession and longer term slower growth in the taxable
base, as well as minimizes revenues from its tourist trade and seasonal
residents. A revenue limit beginning in fiscal 1996 may also become
constraining, though the state is currently able to meet its needs.
GEORGIA
Through the 1980's, Georgia's financial operations were favorable, with strong
general fund revenue gains and increases in reserve levels. While slower than
expected revenue growth contributed to budget deficits in 1990-1992 and
virtually depleted state reserves, stronger economic trends and more
conservative budgeting resulted in surpluses in 1993-1994 and increases in
reserve fund levels. In fiscal years 1993 and 1994, Georgia deposited
approximately $123 million and $220 million to the Revenue Shortfall Reserve,
and $83.5 million each year to the Mid-Year Adjustment Reserve.
By mid-year fiscal 1995 revenues were already 8.6% above fiscal 1994 levels. In
addition, the budget provided for a reduced capital borrowing program of $377
million, down from 1993's $792 million, but that amount was raised to $727
million in January 1995. Net proceeds of an anticipated $240 million from the
state lottery will be used to fund education programs. The governor's proposed
fiscal 1996 budget anticipated spending $10.7 billion, a 9.3% increase over
spending in 1995, with funds coming from taxes and fees, lottery proceeds, and
Indigent Care Trust Fund receipts.
The state's overall outlook is positive, and has moderate but growing debt
levels. The state's constitution places restrictions on debt levels.
KENTUCKY
Substantial increases in educational expenditures strained Kentucky's financial
operations in 1987-1990. Following a 1989 state supreme court decision, Kentucky
increased taxes by more than $1.2 billion to fund education reform in the
1990-1992 biennium. By June 30, 1991, these new taxes helped the commonwealth
build an unreserved general fund balance of $60 million (restated). By fiscal
1992, however, the commonwealth had to withhold income tax refunds to balance
its cash-based budget and spent almost $139 million more than it took in. Of
even greater concern was the structural imbalance between what the commonwealth
was spending and what it was taking in as revenue. For fiscal 1993, Kentucky
again resorted to delaying income tax refunds to balance the budget.
By fiscal 1994 financial operations stabilized as the commonwealth enacted
measures promoting structural balance and increased reserves. By depositing $56
million at fiscal 1994 year end, Kentucky raised the Budget Revenue Fund balance
to approximately $90 million. The enacted biennial budget for fiscal 1995 and
1996 was designed to continue this trend. The budget calls for a $100 million
Budget Reserve Fund balance by 1995 fiscal year end. Fiscal year 1995
preliminary results show an operating surplus of $90 million. The 1996 budget
appears balanced and its assumptions appear reasonable.
School reform is a top priority of the state. In 1994, Kentucky's Department of
Education (DOE) was given a role in ensuring full and timely rental payments
under a lease. This allows DOE to have a district's state aid withheld to pay
debt, and also allows DOE's general fund money to be used to pay debt.
LOUISIANA
Louisiana's property tax code structure tends to favor residences over
commercial and industrial real estate, with the latter two sectors carrying much
of the local tax burden. Attempts to reform the tax code have not met with
success in recent years, although new attempts to create a more equitable tax
code are likely.
Louisiana's financial position has been precarious since the 1980's, when it
felt the effects of the decline of the energy sector. About $1 billion in
deficit funding bonds were issued through the Louisiana Recovery District in
1988, which gave the state liquidity and restored its cash position. The state
then had two years with operating surpluses, but drew heavily on those surpluses
during 1991 and 1992.
Several ad hoc measures narrowly balanced the budget in 1993 and 1994, including
relief refunding of certain bonds. The positive balance in 1993 primarily
resulted from one-time accounting devices, but in 1994 operations were actually
balanced. Improved revenue from economic recovery and temporary federal Medicaid
revenue were helpful in balancing the 1994 budget. The state's risk management
pool was seriously weakened by merging the assets of the Risk Management Fund
with those of the general fund. The liabilities the Risk Management Fund
attempted to address remain with the state and are now treated as long term
debt. Other, more beneficial developments, such as changes to internal borrowing
legislation, also positively affected the state's financial position.
While fiscal 1995 ended with reserves, the structural imbalance between revenues
and expenditures and a limited ability to raise taxes present serious problems
for the future. In 1996, Louisiana faces large gaps in funding, with a projected
loss of $750 million in federal Medicaid funding and a projected $41 million
shortfall in the 1996 budget. Only short-term, one-time revenue measures have
been adopted to fund the shortfall resulting from federal Medicaid cuts. S&P has
stated that Louisiana has a negative future outlook. Louisiana has high but
declining debt levels.
MARYLAND
Although Maryland has an above-average debt burden, it has maintained a superior
credit rating. The state has restrained borrowing in recent years, resulting in
a more modest relative debt position. Strong administrative control of state
finances is maintained by the State Board of Public Works, made up of the
governor, treasurer and controller.
During the late 1980's, when the state's economy flourished, sizable reserves
were gathered in the Revenue Stabilization Fund. The revenue stream relies on a
diversified variety of taxes, including sales, income, and state property taxes.
The state's financial performance and position, though historically very strong,
came under stress during, and after, the recent recession. A combination of
revenue shortfalls and expenditure overruns hindered state finances in the years
just prior to 1993. Budgetary solutions have included administrative expenditure
cuts, use of general and other fund reserves, implementation of new revenues
measures, and local aid reductions.
Prompt and prudent actions by state officials restored budgetary balance in
1993. The state ended 1993 with a positive $302 million and $114 million general
fund balance on a budgetary and GAAP basis, respectively. In addition, the
state's reserve fund was restored to $57.5 million after being reduced
substantially in prior years to fund budget shortfalls.
Positive balances were also recorded in 1994.
Fiscal 1995 ended with an unaudited general fund surplus of $132 million. The
budgets for 1996 and 1997 anticipate slowed economic growth, with shortfalls
expected in income and sales tax receipts. Budget cuts and other expenditure
adjustments are expected to meet those shortfalls.
For fiscal 1997, the governor has proposed increasing less than 1% of the
general fund budget over 1996 levels. The state expects current federal
proposals for Medicare to cost the state at least $1.6 billion, with some
estimates as high as $2.99 billion, over seven years. The state also faces some
difficulty in funding the new football stadium for the former Cleveland Browns,
although final financing has not yet been determined.
MISSOURI
Despite operating deficits in 1990 and 1991, in 1993 the state's general fund
recorded an unreserved, undesignated surplus of $77 million. A continuing
strength was the state's reserve for cash operations and budget stabilization,
which increased to $218 million in 1993 from $204.9 million in 1992.
General revenues for fiscal 1994 were up approximately 7.1% and allowed Missouri
to make additional deposits to reserves. The state projects that general
revenues for fiscal year 1995 will increase approximately 9.8% over fiscal 1994.
Medicaid was expected to grow by 31% in fiscal 1995, to account for about 8% of
fiscal 1995 general revenue resources.
Fiscal 1996 promises cost-saving measures such as an expanded Medicaid waiver
program and the expenditure of one-time revenues on state prison expansion.
Strong growth in personal income and employment in nonmanufacturing sectors are
expected to help the state's financial position to remain strong. Missouri
continues to maintain relatively low per capita debt levels.
NORTH CAROLINA
Economic improvement and conservative budget practices continued the
improvements in the state's finances in fiscal 1993. The general fund deficit
was eliminated and at June 30, the unreserved, undesignated general fund balance
equaled $209 million, not including $176 million reserved for budget
stabilization, and $57 million reserved for repairs and replacement. When
combined, these balances equal $442 million, which compares very favorably with
the original budgetary estimate of only $3.6 million. The positive difference
from the original budget resulted largely from better-than-expected tax
revenues. Personal income tax collections exceeded estimates by $195 million,
and sales taxes were greater than estimated by $18 million. Expenditures for
fiscal 1993 fell $320 million below original budgetary projection. Spending
reversions in excess of $150 million combined with $158 million of federal aid
for disproportionate share payments caused the positive expenditure difference.
As required by the state's 1992 budget reform package, 25% of all future ending
balances are to be reserved in a budget stabilization fund until that fund
equals 5% of the prior year's operating budget. At the end of fiscal 1995, the
balance is projected at $359 million.
Fiscal 1994 closed with a budgetary balance of $887.5 million. Revenues exceeded
estimates by $384.4 million and expenditures fell $314.3 million below budgeted
levels. During fiscal 1995, revenues were ahead of budget expectations again. As
fiscal reform continues, the governor recommends a tax relief package that would
result in $500 million in tax reductions by fiscal 1998. While general
obligation debt has increased to $1 billion, debt ratios remain very low.
TEXAS
Texas' financial performance has improved following the substantial operating
and fund balance deficits for the fiscal 1986-1987 biennium, which were
precipitated by an economic downturn in the energy sector. The state's economy
slowly began to rebound during the fiscal 1988-1989 biennium, and the recovery,
coupled with a $5.7 billion tax bill approved by the 1987 legislature,
strengthened the state's financial position. The state ended fiscal year 1992
with $615 million in cash in the state treasury.
The state had a projected budget gap of $4.8 billion for the biennium ending
August 31, 1993. This was offset by $1.9 billion in budget cuts and $540 million
of consolidation of funds, as well as approval of a state lottery in order to
generate $500 million. Tax rates were increased and tax bases expanded which
raised an additional $1.6 billion. As a result, the state ended fiscal year 1993
with $1.6 billion in cash in the state treasury.
Due to an economy that outpaced the nation as a whole, Texas finished fiscal
1994 with an approximately $600 million budget surplus and approximately $2.2
billion in the state treasury. The budget for the biennium that began September
1, 1995, approximating $80 billion, represents a 6.2% increase in spending over
the prior budget. The state anticipates a surplus at the end of fiscal 1996 of
$412 million. Uncertainties about federal reform of medical assistance and
welfare, however, raise doubts about budget balancing in future years.
In response to a 1989 Texas Supreme Court decision that held the state's school
finance system was unconstitutional, the Texas legislature enacted Senate Bill
7, which provides for five alternative ways for wealthy districts to share their
tax base with poorer districts. In January 1995, the Texas Supreme Court upheld
Senate Bill 7, thus resolving a major but not the only major uncertainty
surrounding Texas school financing.
Debt ratios remain manageable, although they have grown. Borrowings have
increased, primarily for construction of correction facilities and veterans'
housing programs.
VIRGINIA
The commonwealth enjoys a superior credit rating based in part on a long history
of well-managed financial operations. Its guideline of limiting expected debt
service to 5% of revenues is a prudent management tool. Also, the commonwealth
has made significant mid-biennium budgetary adjustments to maintain financial
balance. During the 1990-1992 period, when revenue expectations for the biennium
were reduced $2.1 billion, the commonwealth preserved financial balance through
a series of transfers, appropriation reductions and other budgetary revisions.
As a result, the general fund ended fiscal 1992 with a surplus of $195 million.
The commonwealth's finances continued to improve through fiscal years 1993 and
1994. Improved general fund balances resulted primarily from increased revenue
collections generated by better economic conditions, the collections growing
8.9% in 1993 and 6.0% in 1994. At the end of fiscal 1993, the commonwealth
deposited approximately $79 million in a constitutionally mandated revenue
stabilization fund.
Fiscal 1995 ended with a cash balance of $350.7 million. Almost $80 million of
that amount will go to the "rainy day" fund, while another $70 million will be
used to make payments to federal retirements under settlement of the pension tax
litigation. General fund revenue growth exceeded the official forecast, but
individual income and sales taxes were slightly less than expected. The first
two months of fiscal 1996 show revenues that are 1.8% higher than official
estimates.
The budget for the 1996-1998 biennium assumes a slower growing economy in
1997-1998. Revenue growth is projected at 4.3% and 4.6%. Factors affecting state
financing include the need to fund legal settlements of up to $580 million
additional funding to begin operations at five new prisons. Medicaid growth
remains restrained, however, and the budget proposal allows for additional
deposits to the Revenue Stabilization Fund.
The commonwealth's outlook is stable and reflects strong financial management
and low debt burdens.
FRANKLIN
TAX FREE
TRUST
STATEMENT OF
ADDITIONAL INFORMATION
JULY 1, 1996
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777 1-800/DIAL BEN
CONTENTS PAGE
How Does the Fund Invest Its Assets? 2
Investment Restrictions........... 4
Officers and Trustees............. 5
Investment Advisory and Other Services 9
How Does the Fund Buy Securities
For Its Portfolio?............... 10
How Do I Buy, Sell and
Exchange Shares?................. 10
How Are Fund Shares Valued?....... 13
Additional Information on Distributions
and Taxes........................ 13
The Fund's Underwriter............ 14
How Does the Fund Measure
Performance?..................... 17
Miscellaneous Information......... 21
Financial Statements.............. 24
Useful Terms and Definitions...... 24
Appendices........................ 25
Additional Description of Ratings 25
Special Factors Affecting Each
State Fund...................... 27
The Franklin Tax-Free Trust (the "Trust") is an open-end management investment
company with 28 separate series. This SAI describes the ten series listed below.
Eight of the series offer two classes of shares.
Franklin Arizona Tax-Free Income Fund -
Class I & Class II
Franklin Colorado Tax-Free Income Fund -
Class I & Class II
Franklin Connecticut Tax-Free Income Fund -
Class I & Class II
Franklin High Yield Tax-Free Income Fund -
Class I & Class II
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 & Class II
Franklin Oregon Tax-Free Income Fund -
Class I & Class II
Franklin Pennsylvania Tax-Free Income Fund -
Class I & Class II
Franklin Puerto Rico Tax-Free Income Fund -
Class I & Class II
Each Fund may, separately or collectively, be referred to as the "Fund," or
"Funds," or the "State Funds" or individually by the state, territory or
investment policy in its name.
Each Fund seeks to provide investors with as high a level of income exempt from
federal income taxes as is consistent with prudent investing, while seeking
preservation of shareholders' capital. Each Fund, other than the High Yield
Fund, also seeks to provide a maximum level of income that is exempt from the
personal income taxes, if any, for resident shareholders of the named state or
territory. The Puerto Rico Fund seeks to provide a maximum level of income that
is exempt from the personal income taxes of the majority of states. The
investment objective of each Fund is a fundamental policy. The Connecticut and
Michigan Funds are non-diversified. The other Funds are diversified.
Each State Fund invests primarily in municipal securities issued by its
respective state and that state's political subdivisions, agencies, and
instrumentalities.
The High Yield Fund invests in a diversified portfolio of municipal securities
from different states. The High Yield Fund seeks to provide investors with a
high current yield exempt from federal income taxes by investing in municipal
securities rated in the lower rating categories by 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 Advisers. As a secondary objective, the High Yield Fund
will seek capital appreciation to the extent this is possible and consistent
with its principal investment objective.
TFT3 SAI 06/96
The Prospectus, dated July 1, 1996, as may be amended from time to time,
contains the basic information you should know before investing in the Fund. For
a free copy, call 1-800/DIAL BEN or write the Fund at the address shown.
THIS SAI IS NOT A PROSPECTUS. IT CONTAINS INFORMATION IN ADDITION TO AND IN MORE
DETAIL THAN SET FORTH IN THE PROSPECTUS. THIS SAI IS INTENDED TO PROVIDE YOU
WITH ADDITIONAL INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF THE FUND,
AND SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS.
HOW DOES THE FUND INVEST ITS ASSETS?
DESCRIPTION OF MUNICIPAL AND OTHER SECURITIES
Tax Anticipation Notes. These 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. These 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. These are normally issued to provide interim financing
until long-term financing can be arranged. Long-term bonds then provide the
money for the repayment of the notes.
Construction Loan Notes. These 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. These typically represent a short-term obligation
(270 days or less) issued by a municipality to meet working capital needs.
Municipal Bonds that 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. These are bonds that pay
tax-exempt interest and are, in most cases, revenue bonds. They 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 these bonds is solely dependent on the ability of the
facility's user to meet its financial obligations and the pledge, if any, of the
real and personal property so financed as security for payment.
Variable or Floating Rate Demand Notes ("VRDNs"). As stated in the Prospectus,
VRDNs are tax-exempt obligations that contain a floating or variable interest
rate and a right of demand, which may be unconditional, to receive payment of
the unpaid principal balance plus accrued interest upon a short notice period
(generally up to 30 days) prior to specified dates, either from the issuer or by
drawing on a bank letter of credit, a guarantee or insurance issued with respect
to the instrument. The interest rates are adjustable at intervals ranging from
daily up to monthly, and are calculated to maintain the market value of the VRDN
at approximately its par value on the adjustment date.
When-Issued Purchases. Municipal bonds are frequently offered on a "when-issued"
basis. When so offered, the price, which is generally expressed in yield terms,
is fixed at the time the commitment to buy is made, but delivery and payment for
the when-issued securities take place at a later date. During the period between
purchase and settlement, no payment is made by the Fund to the issuer and no
interest accrues to the Fund. To the extent that assets of the Fund are held in
cash pending the settlement of a purchase of securities, the Fund would earn no
income; however, it is each Fund's intention to be fully invested to the extent
practicable and subject to its investment policies. While when-issued securities
may be sold prior to the settlement date, each Fund intends to buy such
securities with the purpose of actually acquiring them, unless a sale appears
desirable for investment reasons. At the time the Fund makes the commitment to
buy a municipal bond on a when-issued basis, it will record the transaction and
reflect the value of the security in determining its net asset value. The Fund
believes that its net asset value or income will not be adversely affected by
its purchase of municipal bonds on a when-issued basis. The Fund will establish
a segregated account in which it will maintain cash and marketable securities
equal in value to its commitments for when-issued securities.
Stripped Municipal Securities. Municipal securities may also be sold in
"stripped" form. Stripped municipal securities represent separate ownership of
interest and principal payments on municipal obligations.
Callable Bonds. There are municipal bonds issued with provisions that 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 Advisers, each Fund believes it
has reduced the risk of adverse impact on net asset value based on calls of
callable bonds. Advisers may dispose of such bonds in the years prior to their
call date, if Advisers believes such bonds are at their maximum premium
potential. In pricing such bonds in each Fund's portfolio, each callable bond is
marked-to-market daily based on the bond's call date. Thus, the call of some or
all of a Fund's callable bonds may have an impact on such Fund's net asset
value. In light of each Fund's pricing policies and because each Fund follows
certain amortization procedures required by the IRS, a Fund is not expected to
suffer any material adverse impact related to the value at which a Fund has
carried the bonds in connection with calls of bonds purchased at a premium.
Notwithstanding such policies, however, the reinvestment of the proceeds of any
called bond may be in bonds that pay a higher or lower rate of return than the
called bonds; and, as with any investment strategy, there is no guarantee that a
call may not have a more substantial impact than anticipated or that the Fund's
objective will be achieved.
Zero-Coupon Securities. 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 semiannually at the
rate fixed at the time of issuance the value of such securities is generally
more volatile than other fixed-income securities. Since zero-coupon bondholders
do not receive interest payments, zero-coupon securities fall more dramatically
than bonds paying interest on a current basis when interest rates rise. When
interest rates fall, zero-coupon securities rise more rapidly in value, because
the bonds reflect a fixed rate of return.
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 that a Fund may buy 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.
Escrow-Secured Bonds or Defeased Bonds. These are created when an issuer refunds
in advance of maturity (or pre-refunds) an outstanding bond issue that 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 buy high grade, interest
bearing debt securities that 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. These 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. 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 that 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 Funds' objectives and policies.
Loans of Portfolio Securities. Consistent with procedures approved by the Board
and subject to the following conditions, the Fund may lend its portfolio
securities to qualified securities dealers or other institutional investors, if
loans do not exceed 10% of the value of the Fund's total assets at the time of
the most recent loan. The borrower must deposit with the Fund's custodian bank
collateral with an initial market value of at least 102% of the initial market
value of the securities loaned, including any accrued interest, with the value
of the collateral and loaned securities marked-to-market daily to maintain
collateral coverage of at least 102%. This collateral shall consist of cash. The
lending of securities is a common practice in the securities industry. The Fund
may engage in security loan arrangements with the primary objective of
increasing the Fund's income either through investing the cash collateral in
short-term interest bearing obligations or by receiving a loan premium from the
borrower. Under the securities loan agreement, the Fund continues to be entitled
to all dividends or interest on any loaned securities. As with any extension of
credit, there are risks of delay in recovery and loss of rights in the
collateral should the borrower of the security fail financially. While such
securities are on loan, the borrower will pay the Fund any income accruing
thereon, and the Fund may invest the cash collateral in portfolio securities,
thereby earning additional income. The Fund will not lend its portfolio
securities if the loans are not permitted by the laws or regulations of any
state in which its shares are qualified for sale. Loans are typically subject to
termination by the Fund in the normal settlement time or by the borrower on one
day's notice. Borrowed securities must be returned when the loan is terminated.
Any gain or loss in the market price of the borrowed securities that occurs
during the term of the loan inures to the Fund and its shareholders. The Fund
may pay reasonable finders', borrowers', administrative and custodial fees in
connection with a loan of its securities.
Income derived by 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
Each Fund has adopted the following restrictions as fundamental policies. These
restrictions may not be changed without the approval of a majority of the
outstanding voting securities of that Fund. Under the 1940 Act, this means the
approval of (i) more than 50% of the outstanding shares of the Fund or (ii) 67%
or more of the shares of the Fund present at a shareholder meeting if more than
50% of the outstanding shares of the Fund are represented at the meeting in
person or by proxy, whichever is less. A Fund may not:
1. Borrow money or mortgage or pledge any of its assets, except that borrowings
(and a pledge of assets therefore) for temporary or emergency purposes may be
made from banks in any amount up to 5% of the total asset value.
2. Buy any securities on "margin" or sell any securities "short," except that
it may use such short-term credits as are necessary for the clearance of
transactions.
3. Make loans, except through the purchase of readily marketable debt
securities which are either publicly distributed or customarily purchased by
institutional investors. Although such loans are not presently intended, this
prohibition will not preclude a Fund from loaning portfolio securities to
broker/dealers or other institutional investors if at least 102% cash collateral
is pledged and maintained by the borrower; provided such portfolio security
loans may not be made if, as a result, the aggregate of such loans exceeds 10%
of the value of the Fund's total assets at the time of the most recent loan.
4. Act as underwriter of securities issued by other persons, except insofar as
the Fund may be technically deemed an underwriter under the federal securities
laws in connection with the disposition of portfolio securities.
5. Purchase the securities of any issuer which would result in owning more than
10% of the voting securities of such issuer, except with respect to the Trust's
non-diversified Funds, which Funds will not purchase a security if, as a result:
i) more than 25% of its total assets would be invested in the securities of a
single issuer or ii) with respect to 50% of its total assets, more than 5% of
its assets would be invested in the securities of a single issuer.
6. Purchase securities from or sell to the Trust's officers and trustees, or
any firm of which any officer or trustee is a member, as principal, or retain
securities of any issuer if, to the knowledge of the Trust, one or more of the
Trust's officers, trustees, or investment adviser own beneficially more than 1/2
of 1% of the securities of such issuer and all such officers and trustees
together own beneficially more than 5% of such securities.
7. Acquire, lease or hold real estate, except such as may be necessary or
advisable for the maintenance of its offices and provided that this limitation
shall not prohibit the purchase of municipal and other debt securities secured
by real estate or interests therein.
8. Invest in commodities and commodity contracts, puts, calls, straddles,
spreads or any combination thereof, or interests in oil, gas, or other mineral
exploration or development programs, except that it may purchase, hold and
dispose of "obligations with puts attached" in accordance with its investment
policies.
9. Invest in companies for the purpose of exercising control or management.
10. Purchase securities of other investment companies, except in connection with
a merger, consolidation or reorganization, except to the extent the Fund invests
its uninvested daily cash balances in shares of the Franklin Tax-Exempt Money
Fund and other tax-exempt money market funds in the Franklin Group of Funds
provided i) its purchases and redemptions of such money market fund shares may
not be subject to any purchase or redemption fees, ii) its investments may not
be subject to duplication of management fees, nor to any charge related to the
expense of distributing the Fund's shares (as determined under Rule 12b-1, as
amended under the federal securities laws) and iii) provided aggregate
investments by the Fund in any such money market fund do not exceed (A) the
greater of (i) 5% of the Fund's total net assets or (ii) $2.5 million, or (B)
more than 3% of the outstanding shares of any such money market fund.
11. Invest more than 25% of its assets in securities of any industry; although
for purposes of this limitation, tax-exempt securities and U.S. government
obligations are not considered to be part of any industry.
If a percentage restriction is met at the time of investment, a later increase
or decrease in the percentage due to a change in value of portfolio securities
or the amount of assets will not be considered a violation of any of the
foregoing restrictions.
OFFICERS AND TRUSTEES
The Board has the responsibility for the overall management of the Trust,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of the Trust who are responsible for
administering the Trust's day-to-day operations. The affiliations of the
officers and Board members and their principal occupations for the past five
years are shown below. Members of the Board who are considered "interested
persons" of the Trust under the 1940 Act, are indicated by an asterisk (*).
Positions and Offices Principal Occupation
Name, Age and Address with the Trust During Past Five Years
Frank H. Abbott, III (75) Trustee
1045 Sansome St.
San Francisco, CA 94111
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 (64) Trustee
General Host Corporation
Metro Center, 1 Station Place
Stamford, CT 06904-2045
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) Trustee
Park Avenue at Morris County
P. O. Box 1945
Morristown, NJ 07962-1945
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) Trustee
111 New Montgomery St., #402
San Francisco, CA 94105
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) Chairman of the
777 Mariners Island Blvd. Board and Trustee
San Mateo, CA 94404
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) President and
777 Mariners Island Blvd. Trustee
San Mateo, CA 94404
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 (67) Trustee
20833 Stevens Creek Blvd.
Suite 102
Cupertino, CA 95014
General Partner, Peregrine Associates and Miller & LaHaye, which are General
Partners of Peregrine Ventures and Peregrine Ventures II (venture capital
firms); Chairman of the Board and Director, Quarterdeck Office Systems, Inc.;
Director, FischerImaging Corporation; and director or trustee or managing
general partner, as the case may be, of 26 of the investment companies in the
Franklin Group of Funds.
Gordon S. Macklin (68) Trustee
8212 Burning Tree Road
Bethesda, MD 20817
Chairman, White River Corporation (information services); Director, Fund
American Enterprises Holdings, Inc., MCI Communications, Inc., MedImmune, Inc.
(biotechnology), InfoVest Corporation (information services), Fusion Systems
Corporation (industrial technology), and Source One Mortgage Services
Corporation (information services); 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) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
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) Vice President -
777 Mariners Island Blvd. Financial
San Mateo, CA 94404 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 (63) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
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 (36) Vice President
777 Mariners Island Blvd. and Chief
San Mateo, CA 94404 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) Vice President
777 Mariners Island Blvd. and Secretary
San Mateo, CA 94404
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 (33) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Senior Vice President, Franklin Advisers, Inc. and officer of eight of the
investment companies in the Franklin Group of Funds.
Diomedes Loo-Tam (57) Treasurer and
777 Mariners Island Blvd. Principal
San Mateo, CA 94404 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) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
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 table above shows the officers and Board members who are affiliated with
Distributors and Advisers. Nonaffiliated members of the Board are currently paid
$1,300 per month plus $1,300 per meeting attended. As shown above, some of the
nonaffiliated Board members also serve as directors, trustees or managing
general partners of other investment companies in the Franklin Templeton Group
of Funds. They may receive fees from these funds for their services. The
following table provides the total fees paid to nonaffiliated Board members by
the Trust and by other funds in the Franklin Templeton Group of Funds.
Number of
Total Fees Boards in the
Total Fees Received from the FranklinTempleton
Received from FranklinTempleton Group of Funds on
Name the Trust* Group of Funds** Which Each Serves***
Frank H. Abbott, III.......... $31,200 $162,420 31
Harris J. Ashton.............. 31,200 327,925 56
S. Joseph Fortunato........... 31,200 344,745 58
David W. Garbellano........... 31,200 146,100 30
Frank W.T. LaHaye............. 29,900 143,200 26
Gordon S. Macklin............. 31,200 321,525 53
*For the fiscal year ended February 29, 1996
**For the calendar year ended December 31, 1995.
***We base the number of boards on the number of registered investment companies
in the Franklin Templeton Group of Funds. This number does not include the total
number of series or funds within each investment company for which the Board
members are responsible. The Franklin Templeton Group of Funds currently
includes 61 registered investment companies, with approximately 165 U.S. based
funds or series.
Nonaffiliated members of the Board are reimbursed for expenses incurred in
connection with attending board meetings, paid pro rata by each fund in the
Franklin Templeton Group of Funds for which they serve as director, trustee or
managing general partner. No officer or Board member received any other
compensation directly from the Fund. Certain officers or Board members who are
shareholders of Resources may be deemed to receive indirect remuneration by
virtue of their participation, if any, in the fees paid to its subsidiaries.
As of June 3, 1996, the officers and Board members, as a group, owned of record
and beneficially approximately 1,664 shares of the Connecticut Fund, 29,549
shares of the New Jersey Fund, 5,344 of the Oregon Fund and 90 shares of the
High Yield Fund or less than 1% of such Fund's total outstanding shares. Many of
the Board members also own shares in other funds in the Franklin Templeton Group
of Funds. Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.
INVESTMENT ADVISORY AND OTHER SERVICES
Investment Manager and Services Provided. The Fund's investment manager is
Advisers. Advisers provides investment research and portfolio management
services, including the selection of securities for the Fund to buy, hold or
sell and the selection of brokers through whom the Fund's portfolio transactions
are executed. Advisers' extensive research activities include, as appropriate,
traveling to meet with issuers and to review project sites. Advisers' activities
are subject to the review and supervision of the Board to whom Advisers renders
periodic reports of the Fund's investment activities.
Advisers provides office space and furnishings, facilities and equipment
required for managing the business affairs of the Fund. Advisers also maintains
all internal bookkeeping, clerical, secretarial and administrative personnel and
services and provides certain telephone and other mechanical services. Advisers
is covered by fidelity insurance on its officers, directors and employees for
the protection of the Fund.
Advisers acts as investment manager or administrator to 36 U.S. registered
investment companies with 121 separate series. Advisers may give advice and take
action with respect to any of the other funds it manages, or for its own
account, that may differ from action taken by Advisers on behalf of the Fund.
Similarly, with respect to the Fund, Advisers is not obligated to recommend, buy
or sell, or to refrain from recommending, buying or selling any security that
Advisers and access persons, as defined by the 1940 Act, may buy or sell for its
or their own account or for the accounts of any other fund. Advisers is not
obligated to refrain from investing in securities held by the Fund or other
funds that it manages or administers. Of course, any transactions for the
accounts of Advisers and other access persons will be made in compliance with
the Fund's Code of Ethics.
For the three fiscal years ended February 29, 1996, the following management
fees were paid to Advisers.
Management Fees
1996 1995 1994
Arizona Fund............................... $ 3,578,992 $ 3,571,548 $ 3,701,321
Colorado Fund.............................. 1,156,138 1,081,347 1,046,886
Connecticut Fund........................... 941,489 892,225 876,259
High Yield Fund............................ 16,252,138 14,863,761 14,279,943
Indiana Fund............................... 298,107 284,741 272,338
New Jersey Fund............................ 2,755,151 2,640,430 2,552,530
Oregon Fund................................ 1,887,234 1,831,692 1,832,220
Pennsylvania Fund.......................... 3,029,579 2,880,051 2,828,236
Puerto Rico Fund........................... 1,054,668 986,561 936,205
Management Agreement. The management agreement is in effect until March 31,
1997. It may continue in effect for successive annual periods if its continuance
is specifically approved at least annually by a vote of the Board or by a vote
of the holders of a majority of the Fund's outstanding voting securities, and in
either event by a majority vote of the Board members who are not parties to the
management agreement or interested persons of any such party (other than as
members of the Board), cast in person at a meeting called for that purpose. The
management agreement may be terminated without penalty at any time by the Board
or by a vote of the holders of a majority of the Fund's outstanding voting
securities, or by Advisers on 30 days' written notice, and will automatically
terminate in the event of its assignment, as defined in the 1940 Act.
Shareholder Servicing Agent. Investor Services, a wholly-owned subsidiary of
Resources, is the Fund's shareholder servicing agent and acts as the Fund's
transfer agent and dividend-paying agent. Investor Services is compensated on
the basis of a fixed fee per account.
Custodians. 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.
Auditors. Coopers & Lybrand L.L.P., 333 Market Street, San Francisco, California
94105, are the Fund's independent auditors. During the fiscal year ended
February 29, 1996, their auditing services consisted of rendering an opinion on
the financial statements of the Trust included in the Trust's Annual Report to
Shareholders for the fiscal year ended February 29, 1996.
HOW DOES THE FUND BUY
SECURITIES FOR ITS PORTFOLIO?
Since most purchases by the Fund are principal transactions at net prices, the
Fund incurs little or no brokerage costs. The Fund deals directly with the
selling or buying 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 using the services of a broker. Purchases of
portfolio securities from underwriters will include a commission or concession
paid by the issuer to the underwriter, and purchases from dealers will include a
spread between the bid and ask prices. As a general rule, the Fund does not buy
bonds in underwritings where it is given no choice, or only limited choice, in
the designation of dealers to receive the commission. The Fund seeks to obtain
prompt execution of orders at the most favorable net price. Transactions may be
directed to dealers in return for research and statistical information, as well
as for special services provided by the dealers in the execution of orders.
It is not possible to place a dollar value on the special executions or on the
research services received by Advisers from dealers effecting transactions in
portfolio securities. The allocation of transactions in order to obtain
additional research services permits Advisers to supplement its own research and
analysis activities and to receive the views and information of individuals and
research staff of other securities firms. As long as it is lawful and
appropriate to do so, Advisers and its affiliates may use this research and data
in their investment advisory capacities with other clients. If the Fund's
officers are satisfied that the best execution is obtained, the sale of Fund
shares may also be considered a factor in the selection of broker-dealers to
execute the Fund's portfolio transactions.
If purchases or sales of securities of the Fund and one or more other investment
companies or clients supervised by Advisers are considered at or about the same
time, transactions in these securities will be allocated among the several
investment companies and clients in a manner deemed equitable to all by
Advisers, taking into account the respective sizes of the funds and the amount
of securities to be purchased or sold. In some cases this procedure could have a
detrimental effect on the price or volume of the security so far as the Fund is
concerned. In other cases it is possible that the ability to participate in
volume transactions and to negotiate lower brokerage commissions will be
beneficial to the Fund.
During the past three fiscal years ended February 29, 1996, the Fund paid no
brokerage commissions.
As of February 29, 1996, the Fund did not own securities of its regular
broker-dealers.
HOW DO I BUY, SELL AND EXCHANGE SHARES?
ADDITIONAL INFORMATION ON BUYING SHARES
The Fund continuously offers its shares through securities dealers who have an
agreement with Distributors. Securities dealers may at times receive the entire
sales charge. A securities dealer who receives 90% or more of the sales charge
may be deemed an underwriter under the Securities Act of 1933, as amended.
Securities laws of states where the Fund offers its shares may differ from
federal law. Banks and financial institutions that sell shares of the Fund may
be required by state law to register as securities dealers. Financial
institutions or their affiliated brokers may receive an agency transaction fee
in the percentages indicated in the table under "How Do I Buy Shares? - Purchase
Price of Fund Shares" in the Prospectus.
When you buy shares, if you submit a check or a draft that is returned unpaid to
the Fund we may impose a $10 charge against your account for each returned item.
Under agreements with certain banks in Taiwan, Republic of China, the Fund's
shares are available to these banks' trust accounts without a sales charge. The
banks may charge service fees to their customers who participate in the trusts.
A portion of these service fees may be paid to Distributors or one of its
affiliates to help defray expenses of maintaining a service office in Taiwan,
including expenses related to local literature fulfillment and communication
facilities.
Class I shares of the Fund may be offered to investors in Taiwan through
securities advisory firms known locally as Securities Investment Consulting
Enterprises. In conformity with local business practices in Taiwan, Class I
shares may be offered with the following schedule of sales charges:
Sales
Size of Purchase - U.S. dollars Charge
Under $30,000.................. 3%
$30,000 but less than $100,000. 2%
$100,000 but less than $400,000 1%
$400,000 or more............... 0%
Other Payments to Securities Dealers. Distributors will pay the following
commissions, out of its own resources, to securities dealers who initiate and
are responsible for purchases of Class I shares of $1 million or more: 0.75% on
sales of $1 million 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.
Letter of Intent. You may qualify for a reduced sales charge when you buy Class
I shares, as described in the Prospectus. At any time within 90 days after the
first investment that you want to qualify for a reduced sales charge, you may
file with the Fund a signed shareholder application with the Letter of Intent
section completed. After the Letter is filed, each additional investment will be
entitled to the sales charge applicable to the level of investment indicated on
the Letter. Sales charge reductions based on purchases in more than one Franklin
Templeton Fund will be effective only after notification to Distributors that
the investment qualifies for a discount. Your holdings in the Franklin Templeton
Funds, 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 on the
amount actually purchased (less redemptions) during the period. If you execute a
Letter prior to a change in the sales charge structure of the Fund, you may
complete the Letter at the lower of the new sales charge structure or the sales
charge structure in effect at the time the Letter was filed.
As mentioned in the Prospectus, five percent (5%) of the amount of the total
intended purchase will be reserved in Class I shares of the Fund registered in
your name until you fulfill the letter. If 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
total purchases, less redemptions, exceed the amount specified under the Letter
and is an amount that would qualify for a further quantity discount, a
retroactive price adjustment will be made by Distributors and the securities
dealer through whom purchases were made pursuant to the Letter (to reflect such
further quantity discount) on purchases made within 90 days before and on those
made after filing the Letter. The resulting difference in offering price will be
applied to the purchase of additional shares at the offering price applicable to
a single purchase or the dollar amount of the total purchases. If the 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 the purchases had
been made at a single time. Upon remittance, the reserved shares held for your
account will be deposited to an account in your name or delivered to you or as
you direct. If within 20 days after written request the difference in sales
charge is not paid, the redemption of an appropriate number of reserved shares
to realize the difference will be made. In the event of a total redemption of
the account 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.
ADDITIONAL INFORMATION ON EXCHANGING SHARES
If you request the exchange of the total value of your account, accrued but
unpaid income dividends and capital gain distributions will be reinvested in the
Fund at the net asset value on the date of the exchange, and then the entire
share balance will be exchanged into the new fund. Backup withholding and
information reporting may apply. Information regarding the possible tax
consequences of an exchange is included in the tax section in this SAI and in
the Prospectus.
If a substantial number of shareholders should, within a short period, sell
their shares of the Fund under the exchange privilege, the Fund might have to
sell portfolio securities it might otherwise hold and incur the additional costs
related to such transactions. On the other hand, increased use of the exchange
privilege may result in periodic large inflows of money. If this occurs, it is
the Fund's general policy to initially invest this money in short-term,
tax-exempt municipal securities, unless it is believed that attractive
investment opportunities consistent with the Fund's investment objective exist
immediately. This money will then be withdrawn from the short-term tax-exempt
municipal securities and invested in portfolio securities in as orderly a manner
as is possible when attractive investment opportunities arise.
The proceeds from the sale of shares of an investment company are generally not
available until the fifth business day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange until
that fifth business day. The sale of Fund shares to complete an exchange will be
effected at net asset value at the close of business on the day the request for
exchange is received in proper form. Please see "May I Exchange Shares for
Shares of Another Fund?" in the Prospectus.
ADDITIONAL INFORMATION ON SELLING SHARES
Systematic Withdrawal Plan. There are no service charges for establishing or
maintaining a systematic withdrawal plan. 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.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the Fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Because the amount
withdrawn under the plan may be more than your actual yield or income, part of
the payment may be a return of your investment.
The Fund may discontinue a systematic withdrawal plan by notifying you in
writing and will automatically discontinue a systematic withdrawal plan if all
shares in your account are withdrawn or if the Fund receives notification of the
shareholder's death or incapacity.
Through Your Securities Dealer. If you sell shares through your securities
dealer, it is your dealer's responsibility to transmit the order to the Fund in
a timely fashion. Any loss to you resulting from your dealer's failure to do so
must be settled between you and your securities dealer.
Redemptions in Kind. The Fund has committed itself to pay in cash (by check) all
requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the value
of the Fund's net assets at the beginning of the 90-day period. This commitment
is irrevocable without the prior approval of the SEC. In the case of redemption
requests in excess of these amounts, the Board reserves the right to make
payments in whole or in part in securities or other assets of the Fund, in case
of an emergency, or if the payment of such a redemption in cash would be
detrimental to the existing shareholders of the Fund. In these circumstances,
the securities distributed would be valued at the price used to compute the
Fund's net assets and you may incur brokerage fees in converting the securities
to cash. The Fund does not intend to redeem illiquid securities in kind. If this
happens, however, you may not be able to recover your investment in a timely
manner.
GENERAL INFORMATION
If dividend checks are returned to the Fund marked "unable to forward" by the
postal service, we will consider this a request by you to change your dividend
option to reinvest all distributions. The proceeds will be reinvested in
additional shares at net asset value until we receive new instructions.
If mail is returned as undeliverable or we are unable to locate you or verify
your current mailing address, we may deduct the costs of our efforts to find you
from your account. These costs may include a percentage of the account when a
search company charges a percentage fee in exchange for its location services.
All checks, drafts, wires and other payment mediums used to buy or sell shares
of the Fund must be denominated in U.S. dollars. We may, in our sole discretion,
either (a) reject any order to buy or sell shares denominated in any other
currency or (b) honor the transaction or make adjustments to your account for
the transaction as of a date and with a foreign currency exchange factor
determined by the drawee bank.
Special Services. The Franklin Templeton Institutional Services Department
provides specialized services, including recordkeeping, for institutional
investors. The cost of these services is not borne by the Fund.
Investor Services may pay certain financial institutions that maintain omnibus
accounts with the Fund on behalf of numerous beneficial owners for recordkeeping
operations performed with respect to such owners. For each beneficial owner in
the omnibus account, the Fund may reimburse Investor Services an amount not to
exceed the per account fee that the Fund normally pays Investor Services. These
financial institutions may also charge a fee for their services directly to
their clients.
HOW ARE FUND SHARES VALUED?
We calculate the net asset value per share 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 Fund is informed
that the Exchange observes the following holidays: New Year's Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
For the purpose of determining the aggregate net assets of the Fund, cash and
receivables are valued at their realizable amounts. Interest is recorded as
accrued. Over-the-counter portfolio securities are valued within the range of
the most recent quoted bid and ask prices. Portfolio securities that are traded
both in the over-the-counter market and on a stock exchange are valued according
to the broadest and most representative market as determined by Advisers.
Municipal securities generally trade in the over-the-counter market rather than
on a securities exchange.
Generally, trading in U.S. government securities and money market instruments is
substantially completed each day at various times before the scheduled close of
the Exchange. The value of these securities used in computing the net asset
value of each class is determined as of such times. Occasionally, events
affecting the values of these securities may occur between the times at which
they are determined and the scheduled close of the Exchange that will not be
reflected in the computation of the net asset value of each class. If events
materially affecting the values of these securities occur during this period,
the securities will be valued at their fair value as determined in good faith by
the Board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the Board. With the approval of the Board, the
Fund may utilize a pricing service, bank or securities dealer to perform any of
the above described functions.
ADDITIONAL INFORMATION ON
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
You may receive two types of distributions from the Fund:
1. Income dividends. The Fund receives income generally in the form of interest
and other income derived from its investments. This income, less the expenses
incurred in the Fund's operations, is its net investment income from which
income dividends may be distributed. Thus, the amount of dividends paid per
share may vary with each distribution.
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 that 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.
TAXES
As stated in the Prospectus, each Fund has elected to be treated as a regulated
investment company under Subchapter M of the Code. The Board reserves the right
not to maintain the qualification of the Fund as a regulated investment company
if it determines this course of action to be beneficial to shareholders. In that
case, the Fund will be subject to federal and possibly state corporate taxes on
its taxable income and gains, to the alternative minimum tax on a portion of its
tax-exempt income, and distributions (including its tax-exempt interest
dividends) to shareholders will be taxable to the extent of the Fund's available
earnings and profits.
The Code requires all funds to distribute at least 98% of their taxable ordinary
income earned during the calendar year and at least 98% of their capital gain
net income earned during the twelve-month period ending October 31 of each year
(in addition to amounts from the prior year that were neither distributed nor
taxed to the Fund) to shareholders by December 31 of each year in order to avoid
the imposition of a federal excise tax. Under these rules, certain distributions
which are declared in October, November or December but which, for operational
reasons, may not be paid to you until the following January, will be treated for
tax purposes as if paid by the Fund and received by you on December 31 of the
calendar year in which they are declared. The Fund intends as a matter of policy
to declare and pay such dividends, if any, in December to avoid the imposition
of this tax, but does not guarantee that the distributions will be sufficient to
avoid any or all federal excise taxes.
Redemptions and exchanges of Fund shares are taxable transactions for federal
and state income tax purposes. Gain or loss will be recognized in an amount
equal to the difference between your basis in the shares and the amount you
received, subject to the rules described below. If such shares are a capital
asset in your hands, gain or loss will be capital gain or loss and will be
long-term for federal income tax purposes if your shares have been held for more
than one year.
All or a portion of the sales charge incurred in buying shares of the Fund will
not be included in the federal tax basis of shares sold or exchanged within
ninety (90) days of their purchase (for purposes of determining gain or loss
with respect to such shares) if you reinvest the sale proceeds in the Fund or in
another fund in the Franklin Templeton Funds and a sales charge which would
otherwise apply to the reinvestment is reduced or eliminated. Any portion of the
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. You should consult your
tax advisor concerning the tax rules applicable to the redemption or exchange of
a Fund's shares.
Since the Fund's income is derived from interest income and gain on the sale of
portfolio securities rather than dividend income, no portion of the Fund's
distributions will generally be eligible for the corporate dividends-received
deduction. None of the distributions paid by the Fund for the fiscal year ended
February 29, 1996, qualified for this deduction and it is not anticipated that
any of the current year's dividends will so qualify.
All or a portion of a loss you realize upon a redemption of shares will be
disallowed to the extent you buy other shares of the Fund (through reinvestment
of dividends or otherwise) within 30 days before or after the redemption. Any
loss disallowed under these rules will be added to your tax basis of the shares
purchased.
Many states grant tax-free status to dividends paid to shareholders of mutual
funds from interest income earned by a fund from direct obligations of the U.S.
government, subject in some states to minimum investment requirements that must
be met by a fund. Investments in GNMA/FNMA securities and repurchase agreements
collateralized by U.S. government securities do not generally qualify for
tax-free treatment. While it is not the primary investment objective of the Fund
to invest in such obligations, the Fund is authorized to so invest for temporary
or defensive purposes. To the extent that such investments are made, any
affected Fund will provide you with the percentage of any dividends paid which
may qualify for such tax-free treatment at the end of each calendar year. You
should consult with your tax advisor with respect to the application of your
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.
If you are defined in the Code as a "substantial user" (or related person) of
facilities financed by private activity bonds, you should consult your tax
advisor before buying shares of the Fund.
THE FUND'S UNDERWRITER
Pursuant to an underwriting agreement in effect until March 31, 1997,
Distributors acts as principal underwriter in a continuous public offering for
both classes of the Fund's shares. The underwriting agreement will continue in
effect for successive annual periods if its continuance is specifically approved
at least annually by a vote of the Board or by a vote of the holders of a
majority of the Fund's outstanding voting securities, and in either event by a
majority vote of the Board members who are not parties to the underwriting
agreement or interested persons of any such party (other than as members of the
Board), cast in person at a meeting called for that purpose. The underwriting
agreement terminates automatically in the event of its assignment and may be
terminated by either party on 90 days' written notice.
Distributors pays the expenses of the distribution of Fund shares, including
advertising expenses and the costs of printing sales material and prospectuses
used to offer shares to the public. The Fund pays the expenses of preparing and
printing amendments to its registration statements and prospectuses (other than
those necessitated by the activities of Distributors) and of sending
prospectuses to existing shareholders.
Until April 30, 1994, income dividends for Class I shares were reinvested at the
offering price 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, this reinvestment is at net asset value.
In connection with the offering of Fund shares, the following table sets forth
aggregate underwriting commissions, the net underwriting discounts and
commissions retained by Distributors, after allowances to dealers, and
compensation received by Distributors in connection with redemptions or
repurchases of Fund shares, for each of the three fiscal years ended February
29, 1996:
Total Net Total Compensation
Commissions Underwriting Received in Connection
Received Commissions With Redemptions
by Distributors Retainedand Repurchases
1996
Arizona Fund................. $ 2,315,362 $ 152,141 $ 812
Colorado Fund................ 932,916 61,815 436
Connecticut Fund............. 727,487 45,602 298
High Yield Fund.............. 19,134,519 1,206,920 23,071
Indiana Fund................. 156,127 9,719 0
New Jersey Fund.............. 2,192,091 134,915 1,903
Oregon Fund.................. 1,246,121 78,977 1,888
Pennsylvania Fund............ 2,610,881 163,405 13,128
Puerto Rico Fund............. 757,696 49,098 0
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 --
Distributors may be entitled to reimbursement under the Rule 12b-1 plan for each
class, as discussed below. Except as noted, Distributors received no other
compensation from the Fund for acting as underwriter.
THE RULE 12B-1 PLANS
Each class has adopted a distribution plan or "Rule 12b-1 plan" pursuant to Rule
12b-1 of the 1940 Act.
The Class I Plan (all Funds except the Michigan Fund). Under the Class I plan,
the Fund may pay up to a maximum of 0.10% per year of Class I's average daily
net assets, payable quarterly, for expenses incurred in the promotion and
distribution of Class I shares.
Michigan Fund. Under the Class I plan, the Michigan Fund may currently reimburse
Distributors or others up to 0.10% per year of its average daily net assets,
payable quarterly, for distribution expenses.
In implementing the Class I plan, the Board has determined that the annual fees
payable under the plan will be equal to the sum of: (i) the amount obtained by
multiplying 0.10% by the average daily net assets represented by Class I shares
of the Fund that were acquired by investors on or after May 1, 1994, the
effective date of the plan ("New Assets"), and (ii) the amount obtained by
multiplying 0.05% by the average daily net assets represented by Class I shares
of the Fund that were acquired before May 1, 1994 ("Old Assets"). These fees
will be paid to the current securities dealer of record on the account. In
addition, until such time as the maximum payment of 0.10% is reached on a yearly
basis, up to an additional 0.02% will be paid to Distributors under the plan.
The payments made to Distributors will be used by Distributors to defray other
marketing expenses that have been incurred in accordance with the plan, such as
advertising.
The fee is a Class I expense. This means that all Class I shareholders,
regardless of when they purchased their shares, will bear Rule 12b-1 expenses at
the same rate. The initial rate will be at least 0.07% (0.05% plus 0.02%) of the
average daily net assets of Class I and, as Class I shares are sold on or after
May 1, 1994, will increase over time. Thus, as the proportion of Class I shares
purchased on or after May 1, 1994 increases in relation to outstanding Class I
shares, the expenses attributable to payments under the plan will also increase
(but will not exceed 0.10% of average daily net assets). While this is the
currently anticipated calculation for fees payable under the Class I plan, the
plan permits the Board to allow the Fund to pay a full 0.10% on all assets at
any time. The approval of the Board would be required to change the calculation
of the payments to be made under the Class I plan.
The Class I plan does not permit unreimbursed expenses incurred in a particular
year to be carried over to or reimbursed in later years.
The Class II Plan. Under the Class II plan, the Fund pays Distributors up to
0.50% per year of Class II's average daily net assets, payable quarterly, for
distribution and related expenses. These fees may be used to compensate
Distributors or others for providing distribution and related services and
bearing certain Class II expenses. All distribution expenses over this amount
will be borne by those who have incurred them without reimbursement by the Fund.
Under the Class II plan, the Fund also pays an additional 0.15% per year of
Class II's average daily net assets, payable quarterly, as a servicing fee.
During the first year after a purchase of Class II shares, Distributors may keep
this portion of the Rule 12b-1 fees associated with the Class II purchase.
The Class I and Class II Plans. In addition to the payments that Distributors or
others are entitled to under each plan, each plan also provides that to the
extent the Fund, Advisers or Distributors or other parties on behalf of the
Fund, Advisers or Distributors make payments that are deemed to be for the
financing of any activity primarily intended to result in the sale of shares of
each class within the context of Rule 12b-1 under the 1940 Act, then such
payments shall be deemed to have been made pursuant to the plan. The terms and
provisions of each plan relating to required reports, term, and approval are
consistent with Rule 12b-1.
In no event shall the aggregate asset-based sales charges, which include
payments made under each plan, plus any other payments deemed to be made
pursuant to a plan, exceed the amount permitted to be paid pursuant to the Rules
of Fair Practice of the National Association of Securities Dealers, Inc.,
Article III, Section 26(d)4.
To the extent fees are for distribution or marketing functions, as distinguished
from administrative servicing or agency transactions, certain banks will not be
entitled to participate in the plans as a result of applicable federal law
prohibiting certain banks from engaging in the distribution of mutual fund
shares. These banking institutions, however, are permitted to receive fees under
the plans for administrative servicing or for agency transactions. If you are a
customer of a bank that is prohibited from providing these services, you would
be permitted to remain a shareholder of the Fund, and alternate means for
continuing the servicing would be sought. In this event, changes in the services
provided might occur and you might no longer be able to avail yourself of any
automatic investment or other services then being provided by the bank. It is
not expected that you would suffer any adverse financial consequences as a
result of any of these changes.
Each plan has been approved in accordance with the provisions of Rule 12b-1. The
plans are effective through March 31, 1997 and renewable annually by a vote of
the Board, including a majority vote of the Board members who are not interested
persons of the Fund and who have no direct or indirect financial interest in the
operation of the plans, cast in person at a meeting called for that purpose. It
is also required that the selection and nomination of such Board members be done
by the non-interested members of the Board. The plans and any related agreement
may be terminated at any time, without penalty, by vote of a majority of the
non-interested Board members on not more than 60 days' written notice, by
Distributors on not more than 60 days' written notice, by any act that
constitutes an assignment of the management agreement with Advisers, or the
underwriting agreement with Distributors, or by vote of a majority of the
outstanding shares of the class. Distributors or any dealer or other firm may
also terminate their respective distribution or service agreement at any time
upon written notice.
The plans and any related agreements may not be amended to increase materially
the amount to be spent for distribution expenses without approval by a majority
of the outstanding shares of the class, and all material amendments to the plans
or any related agreements shall be approved by a vote of the non-interested
members of the Board, cast in person at a meeting called for the purpose of
voting on any such amendment.
Distributors is required to report in writing to the Board at least quarterly on
the amounts and purpose of any payment made under the plans and any related
agreements, as well as to furnish the Board with such other information as may
reasonably be requested in order to enable the Board to make an informed
determination of whether the plans should be continued.
For the fiscal year ended February 29, 1996, Distributors' eligible expenditures
for advertising, printing and payments to underwriters and broker-dealers
pursuant to the Class I and Class II plans and the amounts paid by the Fund to
Distributors were as follows:
Class I Class II
Total Eligible Amount Paid Total Eligible Amount Paid
Payments By the Fund Payments By the Fund
Arizona Fund+.......... $ -- $ 549,633 $ 25,043 $ 5,239
Colorado Fund.......... 176,811 154,836 18,118 3,647
Connecticut Fund....... 130,028 122,434 14,938 3,370
High Yield Fund........ 3,069,740 2,751,097 450,082 105,429
Indiana Fund........... 43,740 32,137 -- --
New Jersey Fund........ 462,460 433,649 44,269 8,984
Oregon Fund............ 280,557 263,972 22,531 4,978
Pennsylvania Fund...... 477,411 463,337 27,287 6,577
Puerto Rico Fund....... 142,708 141,195 7,532 989
+For the fiscal year ended February 29, 1996, the total amount of distribution
fees paid by the Arizona Fund which equaled the eligible expenditure by
Distributors were $549,633 which was used for advertising ($57,028), printing
and mailing of prospectuses ($45,337), payments to underwriters ($37,344) and
payment to brokers or dealers ($409,924).
HOW DOES THE FUND MEASURE PERFORMANCE?
Performance quotations are subject to SEC rules. These rules require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the Fund be accompanied by
certain standardized performance information computed as required by the SEC.
Current yield and average annual total return quotations used by the Fund are
based on the standardized methods of computing performance mandated by the SEC.
If a Rule 12b-1 plan is adopted, performance figures reflect fees from the date
of the plan's implementation. An explanation of these and other methods used by
the Fund to compute or express performance for each class follows. 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.
TOTAL RETURN
Average Annual Total Return. Average annual total return is determined by
finding the average annual 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, and income dividends and capital gain distributions are reinvested at
net asset value. The quotation assumes the account was completely redeemed at
the end of each 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.
The average annual total return for Class I shares for the indicated periods
ended February 29, 1996 were as shown below.
Average Annual Total Return
Inception From
of the Fund One-Year Five-Year Inception
Arizona Fund......................... 09/01/87 4.62% 6.99% 7.58%
Colorado Fund........................ 09/01/87 5.39 7.49 7.90
Connecticut Fund..................... 10/03/88 4.43 6.39 6.72
High Yield Fund...................... 03/18/86 6.58 8.28 8.27
Indiana Fund......................... 09/01/87 4.52 7.10 7.92
New Jersey Fund...................... 05/12/88 4.78 6.76 7.83
Oregon Fund.......................... 09/01/87 4.53 6.69 7.19
Pennsylvania Fund.................... 12/01/86 4.53 7.56 6.83
Puerto Rico Fund..................... 04/03/85 4.08 6.74 7.71
These figures were calculated according to the 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)
Cumulative Total Return. The Fund may also quote the cumulative total return for
each class, in addition to the average annual total return. These quotations are
computed the same way, except the cumulative total return will be based on the
actual return for each class for a specified period rather than on the average
return over one-, five- and ten-year periods, or fractional portion thereof. The
cumulative total return for each class for the indicated periods ended February
29, 1996 were as follows:
Cumulative Total Return
Inception of Class I shares Class II shares
the Fund One-Year Five-Year from inception from inception*
Arizona Fund..... 09/01/87 4.62% 40.17% 86.12% 5.56%
Colorado Fund.... 09/01/87 5.39 43.48 90.91 6.45
Connecticut Fund. 10/03/88 4.43 36.32 61.92 5.37
High Yield Fund.. 03/18/86 6.58 48.85 120.73 7.18
Indiana Fund...... 09/01/87 4.52 40.94 91.20 N/A
New Jersey Fund... 05/12/88 4.78 38.67 80.14 5.98
Oregon Fund....... 09/01/87 4.53 38.22 80.46 5.86
Pennsylvania Fund. 12/01/86 4.53 43.99 84.37 5.67
Puerto Rico Fund.. 04/03/85 4.08 38.59 124.95 5.19
*Inception date for Class II shares was May 1, 1995.
YIELD
Current Yield. Current yield of each class shows the income per share earned by
the Fund. It is calculated by dividing the net investment income per share of
each class earned during a 30-day base period by the applicable maximum offering
price per share on the last day of the period and annualizing the result.
Expenses accrued for the period include any fees charged to all shareholders of
the class during the base period. The yield for each class for the 30-day period
ended on February 29, 1996 was as follows:
30-Day
Current Yield
Class I Class II
Arizona Fund............. 4.32% 3.88%
Colorado Fund............ 4.55 4.12
Connecticut Fund......... 4.52 4.10
High Yield Fund.......... 5.53 5.14
Indiana Fund............. 4.49 N/A
New Jersey Fund.......... 4.52 4.10
Oregon Fund.............. 4.43 4.00
Pennsylvania Fund........ 4.54 4.12
Puerto Rico Fund......... 4.45 4.02
These figures were obtained using the following SEC formula:
6
Yield = 2 [(a-b + 1) - 1]
---
cd
where:
a = interest earned during the period
b = net expenses accrued for the period
c = the average daily number of shares outstanding during the period that were
entitled to receive dividends
d = the maximum offering price per share on the last day of the period
Taxable-Equivalent Yield. The Fund may also quote a taxable-equivalent yield for
each class that shows the before-tax yield that would have to be earned from a
taxable investment to equal the yield for the class. Taxable-equivalent yield is
computed by dividing the portion of the class' yield that is tax-exempt by one
minus the highest applicable combined federal and state income tax rate and
adding the product to the portion of the class' yield that is not tax-exempt, if
any. The taxable-equivalent yield for each class for the 30-day period ended
February 29, 1996 was as follows:
30-Day
Taxable-Equivalent Yield
Class I Class II
Arizona Fund............ 7.58% 6.80%
Colorado Fund........... 7.93 7.18
Connecticut Fund........ 7.84 7.11
High Yield Fund......... 9.16 8.51
Indiana Fund............ 7.69 N/A
New Jersey Fund......... 7.99 7.25
Oregon Fund............. 8.06 7.28
Pennsylvania Fund....... 7.73 7.02
Puerto Rico Fund........ 7.37 6.66
As of the date of this SAI, the state and the combined state and federal income
tax rates upon which the taxable-equivalent yield quotations are based were as
follows:
State Combined*
Arizona................ 5.60% 42.98%
Colorado............... 5.00 42.62
Connecticut............ 4.50 42.32
Indiana................ 3.40 41.65
New Jersey............. 6.37 43.45
Oregon................. 9.00 45.04
Pennsylvania........... 2.80 41.29
Puerto Rico............ N/A 39.60
High Yield............. N/A 39.60
*Based on the maximum combined state and 39.6% federal tax rate.
From time to time, as any changes to the rates become effective,
taxable-equivalent yield quotations advertised by the Fund will be updated to
reflect these changes. The Fund expects updates may be necessary as tax rates
are changed by federal, state and local governments. The advantage of tax-free
investments, like the Fund, will be enhanced by any tax rate increases.
Therefore, the details of specific tax increases may be used in sales material
for the Fund.
Quotations of taxable-equivalent yield by the Fund 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 taxable-equivalent yield, which are calculated according to a
formula prescribed by the SEC, are not indicative of the amounts which were or
will be paid to shareholders 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 usually computed by
annualizing the dividends paid per share by a class during a certain period and
dividing that amount by the current maximum offering price. The current
distribution rate differs from the current yield computation because it may
include distributions to shareholders from sources other than interest, such as
short-term capital gains and is calculated over a different period of time. The
current distribution rate for each class for the 30-day period ended February
29, 1996 was as follows:
Current
Distribution Rate
Fund Class I Class II
Arizona Fund............ 5.47% 5.05%
Colorado Fund........... 5.34 4.93
Current
Distribution Rate
Fund Class I Class II
Connecticut Fund........ 5.45 5.06
High Yield Fund......... 6.26 5.88
Indiana Fund............ 5.37 N/A
New Jersey Fund......... 5.21 4.79
Oregon Fund............. 5.15% 4.72%
Pennsylvania Fund....... 5.72 5.32
Puerto Rico Fund........ 5.45 5.04
A taxable-equivalent distribution rate shows the taxable distribution rate
equivalent to the class' current distribution rate. The advertised
taxable-equivalent distribution rate will reflect the most current federal,
state and city tax rates available to the Fund. The taxable-equivalent
distribution rate for each class for the 30-day period ended February 29, 1996
was as follows:
Taxable-Equivalent
Distribution Rate
Fund Class Class II
Arizona Fund........... 9.59% 8.79%
Colorado Fund.......... 9.31 8.59
Connecticut Fund....... 9.45 8.77
High Yield Fund........ 10.36 9.74
Indiana Fund........... 9.20 N/A
New Jersey Fund........ 9.21 8.47
Oregon Fund............ 9.37 8.59
Pennsylvania Fund...... 9.74 9.06
Puerto Rico Fund....... 9.02 8.34
VOLATILITY
Occasionally statistics may be used to show the Fund's volatility or risk.
Measures of volatility or risk are generally used to compare the Fund's net
asset value or performance to a market index. One measure of volatility is beta.
Beta is the volatility of a fund relative to the total market, as represented by
an index considered representative of the types of securities in which the fund
invests. A beta of more than 1.00 indicates volatility greater than the market
and a beta of less than 1.00 indicates volatility less than the market. Another
measure of volatility or risk is standard deviation. Standard deviation is used
to measure variability of net asset value or total return around an average over
a specified period of time. The idea is that greater volatility means greater
risk undertaken in achieving performance.
OTHER PERFORMANCE QUOTATIONS
For investors who are permitted to buy Class I shares without a sales charge,
sales literature about Class I may quote a current distribution rate, yield,
cumulative total return, average annual total return and other measures of
performance as described elsewhere in this SAI with the substitution of net
asset value for the public offering price.
The 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 the Fund may satisfy your
investment objective, advertisements and other materials about the Fund may
discuss certain measures of each class' performance as reported by various
financial publications. Materials may also compare performance (as calculated
above) to performance as reported by other investments, indices, and averages.
These comparisons may include, but are not limited to, the following examples:
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, 1995, with a total return of
48.13%. 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, 1995, with a total return
of 50.40%. There were six 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 and 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:
a) Lehman Brothers Municipal Bond Index measures yield, price, and total return
for the municipal bond market.
b) Bond Buyer 20 Bond Index is an index of municipal bond yields based on yields
of 20 general obligation bonds maturing in 20 years.
c) Bond Buyer 40 Bond Index is an index of municipal bond yields based on yields
of 40 general obligation bonds maturing in 29-30 years.
d) 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.
e) 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.
f) 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.
g) Savings & Loan Historical Interest Rates as published by the U.S. Savings &
Loan League Fact Book.
h) Inflation as measured by the Consumer Price Index, published by the U.S.
Bureau of Labor Statistics.
i) 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.
j) Financial Publications: The Wall Street Journal, Business Week, Changing
Times, Financial World, Forbes, and Money magazine.
k) Standard & Poor's Bond Indices - measure yield and price of corporate,
municipal, and government bonds.
From time to time, advertisements or information for the Fund may include a
discussion of certain attributes or benefits to be derived from an investment in
the Fund. The advertisements or information may include symbols, headlines, or
other material that highlights or summarizes the information discussed in more
detail in the communication.
Advertisements or information may also compare a class' performance to the
return on CDs or other investments. You should be aware, however, that an
investment in the Fund involves the risk of fluctuation of principal value, a
risk generally not present in an investment in a CD issued by a bank. For
example, as the general level of interest rates rise, the value of the Fund's
fixed-income investments, as well as the value of its shares that 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. CDs are frequently insured by an agency of the U.S.
government. An investment in the Fund is not insured by any federal, state or
private entity.
In assessing 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 the Fund will continue its performance as
compared to these other averages.
Franklin had the first single-state municipal bond funds in California,
Massachusetts, Michigan, Minnesota and Ohio.
MISCELLANEOUS INFORMATION
Under current tax laws, municipal securities remain one of the few investments
offering the potential for tax-free income. In 1996, 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 1996.)
Franklin tax-free funds, however, offer tax relief through a professionally
managed portfolio of tax-free securities selected based on their yield, quality
and maturity. An investment in a Franklin tax-free fund can provide you with the
potential to earn income free of federal taxes and, depending on the fund, state
and local taxes as well, while supporting state and local public projects.
Franklin tax-free funds may also provide tax-free compounding, when dividends
are reinvested. An investment in Franklin's tax-free funds can grow more rapidly
than similar taxable investments.
Municipal securities are generally considered to be creditworthy, second in
quality only to securities issued or guaranteed by the U.S. government and its
agencies. The market price of such securities, however, may fluctuate. This
fluctuation will have a direct impact on the net asset value of an investment in
a Fund.
Currently, there are more mutual funds than there are stocks listed on the
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 your unique goals and needs, as well as the types of risks
associated with such investment.
The 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
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis in order to have
a projected amount available in the future to fund a child's college education.
(Projected college cost estimates are based upon current costs published by the
College Board.) Of course, an investment in the Fund cannot guarantee that these
goals will be met.
The Fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin, one of the
oldest mutual fund organizations, has managed mutual funds for over 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 $143
billion in assets under management for more than 4.1 million U.S. based mutual
fund shareholder and other accounts. The Franklin Templeton Group of Funds
offers 115 U.S. based mutual funds to the public. The 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
$43 billion in municipal bond assets for over three-quarters of a million
investors. According to Research and Ratings Review, Franklin's municipal
research team ranked number 2 out of 800 investment advisory firms surveyed by
TMS Holdings, Inc. as of March 31, 1996.
The Dalbar Surveys, Inc. broker-dealer survey has ranked Franklin number one in
service quality for five of the past eight years.
From time to time, advertisements or sales material issued by the Fund may
discuss or be based upon information in a recent issue of the Special Report on
Tax Freedom Day published by the Tax Foundation, a Washington, D.C. based
nonprofit research and public education organization. The report illustrates,
among other things, the annual amount of time the average taxpayer works to
satisfy his or her tax obligations to the federal, state and local taxing
authorities.
As of June 3, 1996, the principal shareholders of the Fund, beneficial or of
record, were as follows:
Fund, Name and Address Share Amount Percentage
ARIZONA FUND - CLASS II
Prudential Securities FB0................................ 17,654.280 7.6%
Walter H. Lankford TTEE
Walter H. Lankford Rev Trust
3595 S. Via Del Jilguero
Green Valley, AZ 85614-4841
Phillippi D. Sparks & Jodi B. Sparks Jt Ten.............. 23,525.113 10.1%
4948 W. Hackamore Dr.
Glendale, AZ 85310-2224
COLORADO FUND - CLASS II
John M. Hershner & Virginia H. Hershner Jt Ten........... 16,792.611 7.2%
9215 E. Center Ave
Denver, CO 80231-1403
Painewebber FBO Gail R. Allen............................ 25,402.202 10.9%
48 El Paso Blvd
Manitou Springs, CO 80829-2455
D W Clapp................................................ 13,332.798 5.7%
615 S. Alton Way #10c
Denver, CO 80231
Fund, Name and Address Share Amount Percentage
Alan Sandler............................................. 29,645.143 12.7%
50430 RR #56A
Steamboat Springs, CO 80487
CONNECTICUT FUND - CLASS II
June E. Sawyer........................................... 13,109.361 5.8%
168 Hemlock Dr.
Stamford, CT 06902
Mark Vacirca............................................. 21,409.701 9.5%
17 Center St.
Pleasantville, NY 10570
Janice L. Strollo & Glenda B. Le Page &
Barbara B. Moeckel & Judith B. Batten Jtwros............. 12,751.441 5.7%
972 Quassapaug Rd.
Woodbury, CT 06798
Richard J. Nowak......................................... 12,849.055 5.7%
45 Windy Hill Dr.
South Windsor, CT 06074
OREGON FUND - CLASS II
Painewebber FBO Charles L. Wright &
Rebecca Wright TTEES FBO The Wright Fam. Lv. Tr.......... 15,788.000 6.1%
3129 Pepperwood Dr.
Medford, OR 97504-8146
Dale Burgess TTEE Dale Burgess Liv. Tr................... 23,633.241 9.1%
82613 Meadow Ln.
Creswell, OR 97426-9402
PUERTO RICO FUND - CLASS II
Painewebber FBO Michael L. Blake, Linda F. Blake JTWROS.. 4,411.739 9.9%
5212 Ridge Road
McFarland, WI 53558-9508
Mark W. Scheel........................................... 8,605.852 19.3%
5738 Maple Dr
Mission, KS 66202-2723
From time to time, the number of Fund shares held in the "street name" accounts
of various securities dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares outstanding.
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
Fund's Agreement and Declaration of Trust, however, contains an express
disclaimer of shareholder liability for acts or obligations of the Fund. The
Declaration of Trust also provides for indemnification and reimbursement of
expenses out of the Fund's assets if you are held personally liable for
obligations of the Fund. The Declaration of Trust provides that the Fund shall,
upon request, assume the defense of any claim made against you for any act or
obligation of the Fund and satisfy any judgment thereon. All such rights are
limited to the assets of the Fund. The Declaration of Trust further provides
that the Fund may maintain appropriate insurance (for example, fidelity bonding
and errors and omissions insurance) for the protection of the Fund, its
shareholders, trustees, officers, employees and agents to cover possible tort
and other liabilities. Furthermore, the activities of the Fund as an investment
company, as distinguished from an operating company, would not likely give rise
to liabilities in excess of the Fund's total assets. Thus, the risk of you
incurring financial loss on account of shareholder liability is limited to the
unlikely circumstances in which both inadequate insurance exists and the Fund
itself is unable to meet its obligations.
In the event of disputes involving multiple claims of ownership or authority to
control your account, the Fund has the right (but has no obligation) to: (a)
freeze the account and require the written agreement of all persons deemed by
the Fund to have a potential property interest in the account, prior to
executing instructions regarding the account; (b) interplead disputed funds or
accounts with a court of competent jurisdiction; or (c) surrender ownership of
all or a portion of the account to the IRS in response to a Notice of Levy.
FINANCIAL STATEMENTS
The audited financial statements contained in the Annual Report to Shareholders
of the Trust, for the fiscal year ended February 29, 1996, including the
auditors' report, are incorporated herein by reference.
USEFUL TERMS AND DEFINITIONS
1940 Act - Investment Company Act of 1940, as amended
Advisers - Franklin Advisers, Inc., the Fund's investment manager
Board - The Board of Trustees of the Trust
CD - Certificate of deposit
Class I and Class II - The Fund offers two classes of shares, designated "Class
I" and "Class II." The two classes have proportionate interests in the Fund's
portfolio. They differ, however, primarily in their sales charge structures and
Rule 12b-1 plans.
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
Franklin Templeton Group of Funds - All U.S. registered mutual funds in the
Franklin Group of Funds(R) and the Templeton Group of Funds
Investor Services - Franklin/Templeton Investor Services, Inc., the Fund's
Shareholder Servicing and Transfer Agent
IRS - Internal Revenue Service
Letter - Letter of Intent
Net Asset Value (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
Offering Price - The public offering price is based on the net asset value per
share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 4.25% for Class I and 1% for Class II.
Prospectus - The prospectus for the Fund dated July 1, 1996, as may be amended
from time to time
Resources - Franklin Resources, Inc.
SAI - Statement of Additional Information
SEC - U.S. Securities and Exchange Commission
Securities Dealer - A financial institution which, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
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
We/Our/Us - Unless a different meaning is indicated by the context, these terms
refer to the Fund and/or Investor Services, Distributors, or another
wholly-owned subsidiary of Resources.
APPENDICES
ADDITIONAL DESCRIPTION OF RATINGS
MUNICIPAL BOND RATINGS
Moody's
Aaa: Municipal bonds rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin, and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Municipal bonds rated Aa are judged to be high quality by all standards.
Together with the Aaa group, they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large, fluctuation of protective elements may be of
greater amplitude, or there may be other elements present which make the
long-term risks appear somewhat larger.
A: Municipal bonds rated A possess many favorable investment attributes and are
considered upper medium-grade obligations. Factors giving security to principal
and interest are considered adequate, but elements may be present which suggest
a susceptibility to impairment sometime in the future.
Baa: Municipal bonds 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: Municipal bonds 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: Municipal bonds rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Municipal bonds rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Municipal bonds rated Ca represent obligations which are speculative to a
high degree. Such issues are often in default or have other marked shortcomings.
C: Municipal bonds rated C are the lowest-rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Con. (-): Municipal bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon the
completion of construction or the elimination of the basis of the 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.
Fitch
AAA: Municipal bonds rated AAA are 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: Municipal bonds rated AA are considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong although not quite as strong as bonds rated AAA and not
significantly vulnerable to foreseeable future developments.
A: Municipal bonds rated A are considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB: Municipal bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an 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: Municipal bonds rated BB are considered speculative. The obligor's ability
to pay interest and repay principal may be affected over time by adverse
economic changes. However, business and financial alternatives can be identified
which could assist the obligor in satisfying its debt service requirements.
B: Municipal bonds rated B are considered highly speculative. While bonds in
this class are currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the obligor's
limited margin of safety and the need for reasonable business and economic
activity throughout the life of the issue.
CCC: Municipal bonds rated CCC have certain identifiable characteristics which,
if not remedied, may lead to default. The ability to meet obligations requires
an advantageous business and economic environment.
CC: Municipal bonds rated CC are minimally protected. Default in payment of
interest and/or principal seems probable over time.
C: Municipal bonds rated C are in imminent default in the payment of interest or
principal.
DDD, DD and D: Municipal bonds rated DDD, DD and D are in default on interest
and/or principal payments. Such bonds are extremely speculative and should be
valued on the basis of their ultimate recovery value in liquidation or
reorganization of the obligor. DDD represents the highest potential for recovery
while D represents the lowest potential for recovery.
Plus (+) or minus (-) signs are used with a rating symbol to indicate the
relative position of a credit within the rating category. Plus or minus are not
used for the AAA and the DDD, DD or D categories.
MUNICIPAL NOTE RATINGS
Moody's
Moody's ratings for state, municipal and other short-term obligations will be
designated Moody's Investment Grade ("MIG"). This distinction is in recognition
of the differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower are uppermost in importance in
short-term borrowing; factors of the first importance in long-term borrowing
risk are of lesser importance in the short run. Symbols used will be as follows:
MIG 1: Notes are of the best quality enjoying strong protection from established
cash flows of funds for their servicing or from established and broad-based
access to the market for refinancing, or both.
MIG 2: Notes are of high quality, with margins of protection ample, although not
so large as in the preceding group.
MIG 3: Notes are of favorable quality, with all security elements accounted for,
but lacking the undeniable strength of the preceding grades. Market access for
refinancing, in particular, is likely to be less well established.
MIG 4: Notes are of adequate quality, carrying specific risk but having
protection and not distinctly or predominantly speculative.
COMMERCIAL PAPER RATINGS
Moody's
Moody's commercial paper ratings, which are also applicable to municipal paper
investments permitted to be made by the Fund, are opinions of the ability of
issuers to repay punctually their promissory obligations not having an original
maturity in excess of nine months. Moody's employs the following designations,
all judged to be investment grade, to indicate the relative repayment capacity
of rated issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
Fitch
Fitch 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.
SPECIAL FACTORS AFFECTING EACH STATE FUND
The following information supplements the summaries of state economic factors in
the Prospectus. This information is based on historically reliable sources such
as S&P's Creditweek Municipal, but it has not been independently verified by the
Trust, nor is it intended to be complete.
ARIZONA
In the late 1980's Arizona lost 30,000 jobs in the construction sector, but a
25% increase in service sector jobs during that same time period more than made
up for these losses. Arizona experienced an overall job loss of 2.0% during the
1991-1992 national recession, but that job loss was short lived. Even during its
low point, the state economy fared better than that of the nation.
In 1970, Arizona retired its general obligation bonds and is now
constitutionally prohibited from issuing such debt. A significant amount of
state debt is supported by motor fuel taxes and highway user fees, and the state
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. The improving state economy in fiscal 1993 helped Arizona
regain an earlier level of liquidity, a comfortable 2.0% of expenditures. Fiscal
1994, with strong revenues growth, closed with 95.8% balance. The budget
stabilization fund is expected to grow to 4.7% of general fund revenues in an
even stronger fiscal 1995. A $200 million income tax cut in fiscal 1996 and a
$200 million property tax cut for fiscal 1997 may cause concern, however, if the
economy cools.
COLORADO
The constitution prohibits the state from incurring general obligation debt, so
the state relies on general fund appropriations for pay-as-you-go capital
projects. The state's master lease purchase program has mostly been used to
provide new correctional facilities, with lottery revenues largely intended to
repay these obligations. In 1992, however, Colorado voters approved the
redirection of lottery revenues to outdoor recreation. Alternate general fund
resources will be needed for future lease payments after 1998. General
obligations of the Colorado Housing Finance Authority are ultimately secured by
the state's moral obligation pledge.
Debt ratios are low in Colorado.
Although the state faced a potential $92 million funding gap at the start of
fiscal 1992, the state reduced appropriations and made revenue adjustments so
that its general fund balance in June 30, 1992 was $72 million, just short of
the 3% statutorily required reserve of $84 million. Since June, 1992, Colorado
has maintained an adequate financial position, despite increasing expenditure
demands from Medicaid, corrections and education. In June of 1993 and 1994,
Colorado reported a general fund reserved balance of approximately 6.1% of
expenditures for both years. Revenue growth exceeded expectations in 1994 and
1995, and the state has a sizable balance in its capital projects fund. Colorado
had a general fund balance of $405 million in fiscal 1994.
To make good on a 1988 plan to increase the state's contribution toward primary
and secondary education, nearly $200 million was added to K-12 education in
fiscal 1994. For fiscal 1995, Colorado adopted a new school financial reform
measure that attempts to further equalize school funding across the state,
although total state funding is expected to rise only marginally.
The proposed budget for 1996 is expected to draw down the total reserved general
fund budgetary basis balance to $331 million, which will be offset by $120
million transferred from the general fund to the capital projects fund. While
the fiscal 1996 budget is not expected to be affected by Colorado's
constitutional revenue and spending limit, long term projections suggest the
limit may become an issue in the future.
CONNECTICUT
In the late 1980's and early 1990's, Connecticut's economy weakened, producing
revenue shortfalls and over-budget social services spending. The general fund
deficit of nearly $1.0 billion in 1991 was addressed through the issuance of
five-year recovery notes totaling almost $966 million. In addition, the state
implemented a recovery package that included a 4% personal income tax and a more
favorable tax structure for industry and business, which has contributed to
operating surpluses in fiscal years 1992-1995. Despite a midyear shortfall of
$174 million, the state ended fiscal 1995 with an $80 million surplus. Fiscal
year budget projections for the general fund as of April, 1996 indicate a
potential surplus of $49.4 million.
The state's approved biennial budget for fiscal 1996-1997 allows for reductions
in personal and corporate income tax rates and revisions to the state's
inheritance tax, with the intent of stimulating economic activity in the state.
The expenditure budget attempts to restrain costs and make structural changes,
especially in the social services, to provide long-term savings. The federal
government is currently reviewing the state's welfare reform program, which
involves state takeover of the general assistance program and measures to limit
eligibility and prevent fraud.
Debt indicators are on the rise in Connecticut and, with the inclusion of
deficit borrowing, are high. The capital budget approved by the legislature is
lower than that requested by the governor and much lower than the $1.2 billion
average in fiscal years 1987-1992. The state is reducing certain pension
contributions, which will affect the state's already sizable unfunded pension
liability. The state also has a large unfunded liability in the Second Injury
Fund of the state's workers' compensation system.
INDIANA
The state's financial position declined significantly during the recession of
the early 1980s, but the economy has grown steadily since that time. In 1984,
the state legislature established an economic stabilization reserve fund
intended to lessen the impact of future economically-driven revenue shortfalls.
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 being 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.
As of June 30, 1995, the budget stabilization fund had grown to $419.3 million,
which, when combined with the state's tuition reserve and general funds,
contributed to a fiscal year-end balance of $1.29 billion. Aggressive budget
cuts, moderate revenue growth, substantial cuts in Medicaid and general
government have helped the state add to its reserves. Projections for 1996
include combined reserves of $1.67 billion.
While the state has economic and financial strength, its State Teachers
Retirement Fund has large and growing liabilities that are currently estimated
at $6.6 billion. State appropriations are made based on the estimated amount of
payouts each year. The state has taken several steps to control this problem,
including (i) enacting a new pension plan that requires funds to be set aside
for new teachers as their benefits are accrued, (ii) shifting primary funding to
the local school districts and (iii) creating a special stabilization fund to
pay teachers' pensions. This fund is expected to keep future payouts to teachers
from the general fund below 5.3% of the budget.
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
that 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, although a state-levied property tax and the
reinstatement of local property tax levies at lower levels will also provide
revenue. The state expects that the budget stabilization fund balance will
increase to $1.1 billion at the close of fiscal 1995 from $779 million at 1994
fiscal year end.
Michigan's debt burden is moderate, with all ratios below the national median.
However, the state's economic health will continue to be tied to the auto
industry which is often very cyclical.
NEW JERSEY
New Jersey's credit strength is based on its broad-based economy, high wealth
levels, and history of maintaining a positive financial position. In the recent
recession, however, 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. The state also became
increasingly dependent on non-recurring revenues to balance the budget during
the recession.
Beginning in 1994, New Jersey cut income tax rates by 15%. Overall budget
expenditures were cut for fiscal year 1995 to accommodate the rate cut,
primarily by cutting retiree pension fund contributions (but not benefits). The
fiscal 1996 budget represents a 3% increase in spending from fiscal 1995, but
appropriations are about 1% lower than the previous year. The surplus revenue
balance for fiscal 1996 is projected to remain unchanged from an estimated
$246.5 million in 1995. Balancing future budgets will depend in part on the
ability to slow programmatic spending.
Debt ratios, once moderate, have been rising in recent years, and now are above
average. Debt service is expected to increase significantly this fiscal year as
a result of increased general obligation bond repayment costs. Other challenges
to the state include litigation risks in school finance, the need to control the
growth of Medicaid expenditures, the potential for federal changes to mandated
social services programs, and expenditures by municipalities and school
districts. Reallocation of tight public school funding in line with court
mandates is also expected to pose some difficulty.
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. Revenue growth overall
has increased about 9% in fiscal 1995, however, and the state expects to see a
7% growth rate over the 1995-1997 biennium.
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. There were
general fund revenue surpluses in the 1989-1991 and 1991-1993 bienniums, and 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. For the 1995-1997 biennium, the state
anticipates spending $2.7 billion on Measure 5 replacement costs, or almost 37%
of total general fund expenditures. Although the state's replacement of local
property tax revenues is supposed to end in 1996, district revenue sources are
constrained by the cap on local property taxes, which means the state will
probably have to continue to provide aid to schools.
Another recent voter initiative, Measure 11, strengthened penalties for certain
crimes and will also result in increased capital spending. For the 1995-1997
biennium, the state anticipates general fund spending of about $7.4 billion,
which is almost 25% over the amount spent during the 1993-1995 biennium. The
state likely will significantly draw down its accumulated fund balance to pay
for these expenses.
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 reserves. This was made possible by federal
Medicaid reimbursements totaling $520 million that helped offset $681 million of
the Medicaid spending.
In fiscal 1995, the commonwealth was economically strong and ended with a
comfortable balance which allowed its tax stabilization fund to be augmented to
$177 million.
Although fiscal 1996 promises stability, Pennsylvania is expected to draw down
its fund balances as the nation's economy slows. The state's financial position
is not expected to be hurt by the draw down, however.
The commonwealth has a debt level slightly above the national average. While a
sizable amount of debt has been sold by the state in the 1990's, debt represents
a declining percentage of overall spending and has remained manageable.
Pennsylvania's economy has shown stable personal and corporate income and slower
than average population and job growth.
PUERTO RICO
Puerto Rico's debt level is high, due in large part to the island's development
efforts and its centralized government, which performs many functions carried on
at the local level in the states, but also reflecting the pressures of
development, its considerable capital needs and the subsidy requirements for
certain agencies. Debt ratios increased substantially in the 1970's. Since then,
Puerto Rico has attempted to maintain its rate of debt growth at or below that
of the gross domestic product and that effort has succeeded. Still,
tax-supported debt amounted to approximately 36% of total personal income in
1994 and 40.2% in 1995.
In December 1995, the Aqueduct and Sewer Authority issued over $400 million of
refunding bonds guaranteed by the commonwealth. The commonwealth expects to pay
the debt service on these bonds in 1996.
In the past, Puerto Rico's financial position has followed general economic
trends, with fiscal improvement occurring during periods of economic growth and
deteriorations in financial conditions experienced during economic downturns.
During the recent recession, Puerto Rico has been able to balance its budget but
only through the use of non-recurring measures such as tax amnesties, the sale
of assets, and deductions from reserve funds.
The general fund budget for fiscal 1995 provided 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. Preliminary operating results for
fiscal 1995 were better than budgeted. The general fund unaudited year-end cash
balance was $485 million, which was higher than the $197 million previously
projected.
Fiscal 1996 is the transition year for the large tax changes enacted in 1994.
These changes include reducing tax rates for individuals and small businesses
and increasing them for 936 corporations. While the changes are expected to
lower government revenue, the reductions are supposed to be offset by increased
evasion control and economic growth.
There is continual discussion of a change in Puerto Rico's political status.
Although the U.S. Congress retains the right to admit a state to the union,
48.4% of Puerto Ricans preferred commonwealth status in a 1994 plebiscite.
FRANKLIN FEDERAL INTERMEDIATE-TERM TAX-FREE INCOME FUND
STATEMENT OF ADDITIONAL INFORMATION
JULY 1, 1996
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777 1-800/DIAL BEN
Contents Page
How Does the Fund Invest Its Assets? 2
Investment Restrictions........... 4
Officers and Trustees............. 5
Investment Advisory and Other Services 9
How Does the Fund Buy
Securities For Its Portfolio?.... 10
How Do I Buy, Sell and Exchange Shares? 10
How Are Fund Shares Valued?....... 13
Additional Information on
Distributions and Taxes.......... 13
The Fund's Underwriter............ 14
How Does the Fund
Measure Performance?............. 16
Miscellaneous Information......... 18
Financial Statements.............. 19
Useful Terms and Definitions.... 19
Appendix
Description of Ratings........... 20
The Franklin Federal Intermediate-Term Tax-Free Income Fund (the "Fund") is a
nondiversified series of Franklin Tax-Free Trust (the "Trust"), an open-end
management investment company. The Fund seeks to provide investors with as high
a level of income exempt from federal income taxes, including the individual
alternative minimum tax, as is consistent with prudent investing and the
preservation of shareholders' capital. The investment objective of the Fund is a
fundamental policy and may not be changed without shareholder approval. The Fund
seeks to achieve its objective by investing primarily in a portfolio of
investment grade obligations with a dollar-weighted average portfolio maturity
of more than three years but not more than ten years.
The Prospectus, dated July 1, 1996, as may be amended from time to time,
contains the basic information you should know before investing in the Fund. For
a free copy, call 1-800/DIAL BEN or write the Fund at the address shown.
This SAI is not a prospectus. It contains information in addition to and in more
detail than set forth in the Prospectus. This SAI is intended to provide you
with additional information regarding the activities and operations of the Fund,
and should be read in conjunction with the Prospectus.
How Does the Fund Invest Its Assets?
Description of Municipal and Other Securities
Tax Anticipation Notes. These 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. These 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. These are normally issued to provide interim financing
until long-term financing can be arranged. Long-term bonds then provide the
money for the repayment of the notes.
Construction Loan Notes. These 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. These typically represent a short-term obligation
(270 days or less) issued by a municipality to meet working capital needs.
Municipal Bonds that 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. These are bonds that pay
tax-exempt interest and are, in most cases, revenue bonds. They 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 these bonds is solely dependent on the ability of the
facility's user to meet its financial obligations and the pledge, if any, of the
real and personal property so financed as security for payment.
Variable or Floating Rate Demand Notes ("VRDNs"). As stated in the Prospectus,
VRDNs are tax-exempt obligations that contain a floating or variable interest
rate and a right of demand, which may be unconditional, to receive payment of
the unpaid principal balance plus accrued interest upon a short notice period
(generally up to 30 days) prior to specified dates, either from the issuer or by
drawing on a bank letter of credit, a guarantee or insurance issued with respect
to the instrument. The interest rates are adjustable, at intervals ranging from
daily up to monthly, and are calculated to maintain the market value of the VRDN
at approximately its par value on the adjustment date.
When-Issued Purchases. Municipal bonds are frequently offered on a "when-issued"
basis. When so offered, the price, which is generally expressed in yield terms,
is fixed at the time the commitment to buy is made, but delivery and payment for
the when-issued securities take place at a later date. During the period between
purchase and settlement, no payment is made by the Fund to the issuer and no
interest accrues to the Fund. To the extent that assets of the Fund are held in
cash pending the settlement of a purchase of securities, the Fund would earn no
income; however, it is each Fund's intention to be fully invested to the extent
practicable and subject to its investment policies. While when-issued securities
may be sold prior to the settlement date, each Fund intends to buy such
securities with the purpose of actually acquiring them, unless a sale appears
desirable for investment reasons. At the time the Fund makes the commitment to
buy a municipal bond on a when-issued basis, it will record the transaction and
reflect the value of the security in determining its net asset value. The Fund
believes that its net asset value or income will not be adversely affected by
its purchase of municipal bonds on a when-issued basis. The Fund will establish
a segregated account in which it will maintain cash and marketable securities
equal in value to its commitments for when-issued securities.
Stripped Municipal Securities. Municipal securities may also be sold in
"stripped" form. Stripped municipal securities represent separate ownership of
interest and principal payments on municipal obligations.
Callable Bonds. There are municipal bonds issued with provisions that 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 Advisers, each Fund believes it
has reduced the risk of adverse impact on net asset value based on calls of
callable bonds. Advisers may dispose of such bonds in the years prior to their
call date, if it believes such bonds are at their maximum premium potential. In
pricing such bonds in each Fund's portfolio, each callable bond is
marked-to-market daily based on the bond's call date. Thus, the call of some or
all of a Fund's callable bonds may have an impact on such Fund's net asset
value. In light of each Fund's pricing policies and because each Fund follows
certain amortization procedures required by the IRS, a Fund is not expected to
suffer any material adverse impact related to the value at which a Fund has
carried the bonds in connection with calls of bonds purchased at a premium.
Notwithstanding such policies, however, the reinvestment of the proceeds of any
called bond may be in bonds that pay a higher or lower rate of return than the
called bonds; and, as with any investment strategy, there is no guarantee that a
call may not have a more substantial impact than anticipated or that the Fund's
objective will be achieved.
Zero-Coupon Securities. 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 semiannually at the
rate fixed at the time of issuance, the value of such securities is generally
more volatile than other fixed-income securities. Since zero-coupon bondholders
do not receive interest payments, zero-coupon securities fall more dramatically
than bonds paying interest on a current basis when interest rates rise. When
interest rates fall, zero-coupon securities rise more rapidly in value, because
the bonds reflect a fixed rate of return.
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 that a Fund may buy 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.
Escrow-Secured Bonds or Defeased Bonds. These are created when an issuer refunds
in advance of maturity (or pre-refunds) an outstanding bond issue that 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 buy high grade, interest
bearing debt securities that are then deposited in an irrevocable escrow account
held by a trustee bank to secure all future payments of principal and interest
of the advance refunded bond. Escrow-secured bonds will often receive a triple-A
rating from Standard & Poor's Corporation ("S&P"), Moody's Investors Service
("Moody's") and Fitch Investors Service, Inc. ("Fitch").
U.S. Government Obligations. These 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. 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 that 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 Funds' objectives and policies.
Loans of Portfolio Securities. Consistent with procedures approved by the Board
and subject to the following conditions, the Fund may lend its portfolio
securities to qualified securities dealers or other institutional investors, if
the loans do not exceed 10% of the value of the Fund's total assets at the time
of the most recent loan. The borrower must deposit with the Fund's custodian
bank collateral with an initial market value of at least 102% of the initial
market value of the securities loaned, including any accrued interest, with the
value of the collateral and loaned securities marked-to-market daily to maintain
collateral coverage of at least 102%. This collateral shall consist of cash. The
lending of securities is a common practice in the securities industry. The Fund
may engage in security loan arrangements with the primary objective of
increasing the Fund's income either through investing the cash collateral in
short-term interest bearing obligations or by receiving a loan premium from the
borrower. Under the securities loan agreement, the Fund continues to be entitled
to all dividends or interest on any loaned securities. As with any extension of
credit, there are risks of delay in recovery and loss of rights in the
collateral should the borrower of the security fail financially. While such
securities are on loan, the borrower will pay the Fund any income accruing
thereon, and the Fund may invest the cash collateral in portfolio securities,
thereby earning additional income. The Fund will not lend its portfolio
securities if the loans are not permitted by the laws or regulations of any
state in which its shares are qualified for sale. Loans are typically subject to
termination by the Fund in the normal settlement time or by the borrower on one
day's notice. Borrowed securities must be returned when the loan is terminated.
Any gain or loss in the market price of the borrowed securities that occurs
during the term of the loan inures to the Fund and its shareholders. The Fund
may pay reasonable finders', borrowers', administrative and custodial fees in
connection with a loan of its securities.
Investment Restrictions
The Fund has adopted the following restrictions as fundamental policies. These
restrictions may not be changed without the approval of a majority of the
outstanding voting securities of the Fund. Under the 1940 Act, this means the
approval of (i) more than 50% of the outstanding shares of the Fund or (ii) 67%
or more of the shares of the Fund present at a shareholder meeting if more than
50% of the outstanding shares of the Trust or of the Fund are represented at the
meeting in person or by proxy, whichever is less. The Fund may not:
1. Borrow money or mortgage or pledge any of its assets, except that borrowings
(and a pledge of assets therefore) for temporary or emergency purposes may be
made from banks in any amount up to 5% of the total asset value.
2. Buy any securities on "margin" or sell any securities "short," except that it
may use such short-term credits as are necessary for the clearance of
transactions.
3. Make loans, except through the purchase of readily marketable debt securities
which are either publicly distributed or customarily purchased by institutional
investors. Although such loans are not presently intended, this prohibition will
not preclude the Fund from loaning portfolio securities to broker/ dealers or
other institutional investors if at least 102% cash collateral is pledged and
maintained by the borrower; provided such portfolio security loans may not be
made if, as a result, the aggregate of such loans exceeds 10% of the value of
the Fund's total assets at the time of the most recent loan.
4. Act as underwriter of securities issued by other persons, except insofar as
the Fund may be technically deemed an underwriter under the federal securities
laws in connection with the disposition of portfolio securities.
5. Purchase the securities of any issuer which would result in owning more than
10% of the voting securities of such issuer, except the Fund will not purchase a
security, if as a result: i) more than 25% of its total assets would be invested
in the securities of a single issuer or ii) with respect to 50% of its total
assets, more than 5% of its assets would be invested in the securities of a
single issuer.
6. Purchase securities from or sell to the Trust's officers and trustees, or any
firm of which any officer or trustee is a member, as principal, or retain
securities of any issuer if, to the knowledge of the Trust, one or more of the
Trust's officers, trustees, or investment adviser own beneficially more than 1/2
of 1% of the securities of such issuer and all such officers and trustees
together own beneficially more than 5% of such securities.
7. Acquire, lease or hold real estate, except such as may be necessary or
advisable for the maintenance of its offices and provided that this limitation
shall not prohibit the purchase of municipal and other debt securities secured
by real estate or interests therein.
8. Invest in commodities and commodity contracts, puts, calls, straddles,
spreads or any combination thereof, or interests in oil, gas, or other mineral
exploration or development programs, except that it may purchase, hold and
dispose of "obligations with puts attached" in accordance with its investment
policies.
9. Invest in companies for the purpose of exercising control or management.
10. Purchase securities of other investment companies, except in connection with
a merger, consolidation, acquisition or reorganization. To the extent permitted
by exemptions which may be granted under the 1940 Act, the Fund may invest in
shares of one or more investment companies, of the type generally referred to as
money market funds, managed by Franklin Advisers, Inc. or its affiliates.
11. Purchase securities, in private placements or in other transactions, for
which there are legal or contractual restrictions on resale.
12. Invest more than 25% of its assets in securities of any industry. For
purposes of this limitation, tax-exempt securities issued by governments or
political subdivisions of governments are not considered to be part of any
industry.
In addition to these fundamental policies, it is a non-fundamental policy of the
Fund not to invest in real estate limited partnerships or in oil, gas, or other
mineral leases. Pursuant to an undertaking given to the Ohio State Securities
Board, the Fund will limit investments in securities of issuers, together with
predecessors, of less than three years' continuous operation to 15% of a Fund's
total assets.
If a percentage restriction is met at the time of investment, a later increase
or decrease in the percentage due to a change in value of portfolio securities
or the amount of assets will not be considered a violation of any of the
foregoing restrictions.
Officers and Trustees
The Board has the responsibility for the overall management of the Trust,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of the Trust who are responsible for
administering the Fund's day-to-day operations. The affiliations of the officers
and Board members and their principal occupations for the past five years are
shown below. Members of the Board who are considered "interested persons" of the
Trust under the 1940 Act are indicated by an asterisk (*).
Frank H. Abbott, III (75)
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 (64)
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 (67)
20833 Stevens Creek Blvd.
Suite 102
Cupertino, CA 95014
Trustee
General Partner, Peregrine Associates and Miller & LaHaye, which are General
Partners of Peregrine Ventures and Peregrine Ventures II (venture capital
firms); Chairman of the Board and Director, Quarterdeck Office Systems, Inc.;
Director, FischerImaging Corporation; and director or trustee or managing
general partner, as the case may be, of 26 of the investment companies in the
Franklin Group of Funds.
Gordon S. Macklin (68)
8212 Burning Tree Road
Bethesda, MD 20817
Trustee
Chairman, White River Corporation (information services); Director, Fund
American Enterprises Holdings, Inc., MCI Communications, Inc., MedImmune, Inc.
(biotechnology), InfoVest Corporation (information services), Fusion Systems
Corporation (industrial technology), and Source One Mortgage Services
Corporation (information services); 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
Reporting Vice President Financial 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 (63)
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 (36)
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 (33)
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 (57)
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 table above shows the officers and Board members who are affiliated with
Distributors and Advisers. Nonaffiliated members of the Board are currently paid
$1,300 per month plus $1,300 per meeting attended. As shown above, some of the
nonaffiliated Board members also serve as directors, trustees or managing
general partners of other investment companies in the Franklin Templeton Group
of Funds. They may receive fees from these funds for their services. The
following table provides the total fees paid to nonaffiliated Board members by
the Trust and by other funds in the Franklin Templeton Group of Funds.
Total Fees
Received Number of Boards
from the in the Franklin
Total Fees Franklin Templeton Group
Received Templeton of Funds in Which
Name from the Trust* Group of Funds** Each Serves***
Mr. Abbott $32,200 $162,420 31
Mr. Ashton 31,200 $327,925 56
Mr. Fortunato 31,200 $344,745 58
Mr. Garbellano 31,200 $146,100 30
Mr. LaHaye 29,900 $143,200 26
Mr. Macklin 31,200 $321,525 53
*For the fiscal year ended February 29, 1996.
**For the calendar year ended December 31, 1995.
***We base the number of boards on the number of registered investment companies
in the Franklin Templeton Group of Funds. This number does not include the total
number of series or funds within each investment company for which the Board
members are responsible. The Franklin Templeton Group of Funds currently
includes 61 registered investment companies, with approximately 165 U.S. based
funds or series.
Nonaffiliated members of the Board are reimbursed for expenses incurred in
connection with attending board meetings, paid pro rata by each fund in the
Franklin Templeton Group of Funds for which they serve as director, trustee or
managing general partner. No officer or trustee received any other compensation
directly from the Trust. Certain officers or Board members who are shareholders
of Resources may be deemed to receive indirect remuneration by virtue of their
participation, if any, in the fees paid to its subsidiaries.
As of June 3, 1996, the officers and Board members, as a group, did not own of
record and beneficially total outstanding shares. Many of the Board members also
own shares in other funds in the Franklin Templeton Group of Funds. Charles B.
Johnson and Rupert H. Johnson, Jr. are brothers.
From time to time, the number of Fund shares held in the "street name" accounts
of various securities dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares outstanding. To the
best knowledge of the Fund, no other person holds beneficially or of record more
than 5% of the Fund's outstanding shares.
Investment Advisory and Other Services
Investment Manager and Services Provided. The Fund's investment manager is
Advisers. Advisers provides investment research and portfolio management
services, including the selection of securities for the Fund to buy, hold or
sell and the selection of brokers through whom the Fund's portfolio transactions
are executed. Advisers' extensive research activities include, as appropriate,
traveling to meet with issuers and to review project sites. Advisers' activities
are subject to the review and supervision of the Board to whom Advisers renders
periodic reports of the Fund's investment activities.
Advisers provides office space and furnishings, facilities and equipment
required for managing the business affairs of the Fund. Advisers also maintains
all internal bookkeeping, clerical, secretarial and administrative personnel and
services and provides certain telephone and other mechanical services. Advisers
is covered by fidelity insurance on its officers, directors and employees for
the protection of the Fund.
Advisers acts as investment manager or administrator to 36 U.S. registered
investment companies with 121 separate series. Advisers may give advice and take
action with respect to any of the other funds it manages, or for its own
account, that may differ from action taken by Advisers on behalf of the Fund.
Similarly, with respect to the Fund, Advisers is not obligated to recommend, buy
or sell, or to refrain from recommending, buying or selling any security that
Advisers and access persons, as defined by the 1940 Act, may buy or sell for its
or their own account or for the accounts of any other fund. Advisers is not
obligated to refrain from investing in securities held by the Fund or other
funds that it manages or administers. Of course, any transactions for the
accounts of Advisers and other access persons will be made in compliance with
the Fund's Code of Ethics.
Management Fees. Under its management agreement, the Fund pays Advisers a
management fee equal to a monthly rate of 5/96 of 1% (approximately 5/8 of 1%
per year) for the first $100 million of average monthly net assets of the Fund;
1/24 of 1% (approximately 1/2 of 1% per year) of average monthly net assets of
the Fund in excess of $100 million up to $250 million; and 9/240 of 1%
(approximately 45/100 of 1% per year) of average monthly net assets of the Fund
in excess of $250 million. The fee is computed at the close of business on the
last business day of each month.
The management fee will be reduced as necessary to comply with the most
stringent limits on Fund expenses of any state where the Fund offers it shares.
Currently, the most restrictive limitation on a fund's allowable expenses for
each fiscal year, as a percentage of its average net assets, is 2.5% of the
first $30 million in assets, 2% of the next $70 million, and 1.5% of assets over
$100 million. Expense reductions have not been necessary based on state
requirements.
For the fiscal years ended February 28, 1994 and 1995 and February 29, 1996 the
management fees, before any advance waiver, totaled $246,332, $455,865 and
$491,681, respectively. Under an agreement by Advisers to limit its fees, the
Fund paid management fees totaling $45,151, $250,402 and $335,817 for the same
periods.
Management Agreement. The management agreement is in effect until March 31,
1997. It may continue in effect for successive annual periods if its continuance
is specifically approved at least annually by a vote of the Board or by a vote
of the holders of a majority of the Fund's outstanding voting securities, and in
either event by a majority vote of the Board members who are not parties to the
management agreement or interested persons of any such party (other than as
members of the Board), cast in person at a meeting called for that purpose. The
management agreement may be terminated without penalty at any time by the Board
or by a vote of the holders of a majority of the Fund's outstanding voting
securities, or by Advisers on 30 days' written notice, and will automatically
terminate in the event of its assignment, as defined in the 1940 Act.
Shareholder Servicing Agent. Investor Services, a wholly-owned subsidiary of
Resources, is the Fund's shareholder servicing agent and acts as the Fund's
transfer agent and dividend-paying agent. Investor Services is compensated on
the basis of a fixed fee per account.
Custodians. 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.
Auditors. Coopers & Lybrand L.L.P., 333 Market Street, San Francisco, California
94105, are the Fund's independent auditors. During the fiscal year ended
February 29, 1996, their auditing services consisted of rendering an opinion on
the financial statements of the Trust included in the Trust's Annual Report to
Shareholders for the fiscal year ended February 29, 1996.
How Does the Fund Buy
Securities For Its Portfolio?
Since most purchases by the Fund are principal transactions at net prices, the
Fund incurs little or no brokerage costs. The Fund deals directly with the
selling or buying 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 using the services of a broker. Purchases of
portfolio securities from underwriters will include a commission or concession
paid by the issuer to the underwriter, and purchases from dealers will include a
spread between the bid and ask prices. As a general rule, the Fund does not buy
bonds in underwritings where it is given no choice, or only limited choice, in
the designation of dealers to receive the commission. The Fund seeks to obtain
prompt execution of orders at the most favorable net price. Transactions may be
directed to dealers in return for research and statistical information, as well
as for special services provided by the dealers in the execution of orders.
It is not possible to place a dollar value on the special executions or on the
research services received by Advisers from dealers effecting transactions in
portfolio securities. The allocation of transactions in order to obtain
additional research services permits Advisers to supplement its own research and
analysis activities and to receive the views and information of individuals and
research staff of other securities firms. As long as it is lawful and
appropriate to do so, Advisers and its affiliates may use this research and data
in their investment advisory capacities with other clients. If the Fund's
officers are satisfied that the best execution is obtained, the sale of Fund
shares may also be considered a factor in the selection of broker-dealers to
execute the Fund's portfolio transactions.
If purchases or sales of securities of the Fund and one or more other investment
companies or clients supervised by Advisers are considered at or about the same
time, transactions in these securities will be allocated among the several
investment companies and clients in a manner deemed equitable to all by
Advisers, taking into account the respective sizes of the funds and the amount
of securities to be purchased or sold. In some cases this procedure could have a
detrimental effect on the price or volume of the security so far as the Fund is
concerned. In other cases it is possible that the ability to participate in
volume transactions and to negotiate lower brokerage commissions will be
beneficial to the Fund.
During the fiscal years ended February 28, 1994 and 1995 and February 29, 1996,
the Fund paid no brokerage commissions.
As of February 29, 1996, the Fund did not own securities of its regular
broker-dealers.
How Do I Buy, Sell and Exchange Shares?
Additional Information on Buying Shares
The Fund continuously offers its shares through securities dealers who have an
agreement with Distributors. Securities dealers may at times receive the entire
sales charge. A securities dealer who receives 90% or more of the sales charge
may be deemed an underwriter under the Securities Act of 1933, as amended.
Securities laws of states where the Fund offers its shares may differ from
federal law. Banks and financial institutions that sell shares of the Fund may
be required by state law to register as securities dealers. Financial
institutions or their affiliated brokers may receive an agency transaction fee
in the percentages indicated in the table under "How Do I Buy Shares? - Quantity
Discounts" in the Prospectus.
When you buy shares, if you submit a check or a draft that is returned unpaid to
the Fund we may impose a $10 charge against your account for each returned item.
Under agreements with certain banks in Taiwan, Republic of China, the Fund's
shares are available to these banks' trust accounts without a sales charge. The
banks may charge service fees to their customers who participate in the trusts.
A portion of these service fees may be paid to Distributors or one of its
affiliates to help defray expenses of maintaining a service office in Taiwan,
including expenses related to local literature fulfillment and communication
facilities.
Shares of the Fund may be offered to investors in Taiwan through securities
advisory firms known locally as Securities Investment Consulting Enterprises. In
conformity with local business practices in Taiwan, shares may be offered with
the following schedule of sales charges:
Sales
Size of Purchase - U.S. dollars Charge
Under $30,000.................. 3%
$30,000 but less than $100,000. 2%
$100,000 but less than $400,000 1%
$400,000 or more............... 0%
Other Payments to Securities Dealers. Distributors 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.
Letter of Intent. You may qualify for a reduced sales charge when you buy Fund
shares, as described in the Prospectus. At any time within 90 days after the
first investment that you want to qualify for a reduced sales charge, you may
file with the Fund a signed shareholder application with the Letter of Intent
section completed. After the Letter is filed, each additional investment will be
entitled to the sales charge applicable to the level of investment indicated on
the Letter. Sales charge reductions based on purchases in more than one Franklin
Templeton Fund will be effective only after notification to Distributors that
the investment qualifies for a discount. Your holdings in the Franklin Templeton
Funds, 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 on the
amount actually purchased (less redemptions) during the period. If you execute a
Letter prior to a change in the sales charge structure of the Fund, you may
complete the Letter at the lower of the new sales charge structure or the sales
charge structure in effect at the time the Letter was filed.
As mentioned in the Prospectus, five percent (5%) of the amount of the total
intended purchase will be reserved in shares of the Fund registered in your name
until you fulfill the letter. If 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 total purchases,
less redemptions, exceed the amount specified under the Letter and is an amount
that would qualify for a further quantity discount, a retroactive price
adjustment will be made by Distributors and the securities dealer through whom
purchases were made pursuant to the Letter (to reflect such further quantity
discount) on purchases made within 90 days before and on those made after filing
the Letter. The resulting difference in offering price will be applied to the
purchase of additional shares at the offering price applicable to a single
purchase or the dollar amount of the total purchases. If the 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 the purchases had been made
at a single time. Upon remittance, the reserved shares held for your account
will be deposited to an account in your name or delivered to you or as you
direct. If within 20 days after written request the difference in sales charge
is not paid, the redemption of an appropriate number of reserved shares to
realize the difference will be made. In the event of a total redemption of the
account 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.
Additional Information on Exchanging Shares
If you request the exchange of the total value of your account, accrued but
unpaid income dividends and capital gain distributions will be reinvested in the
Fund at the net asset value on the date of the exchange, and then the entire
share balance will be exchanged into the new fund. Backup withholding and
information reporting may apply. Information regarding the possible tax
consequences of an exchange is included in the tax section in this SAI and in
the Prospectus.
If a substantial number of shareholders should, within a short period, sell
their shares of the Fund under the exchange privilege, the Fund might have to
sell portfolio securities it might otherwise hold and incur the additional costs
related to such transactions. On the other hand, increased use of the exchange
privilege may result in periodic large inflows of money. If this occurs, it is
the Fund's general policy to initially invest this money in short-term,
tax-exempt municipal securities, unless it is believed that attractive
investment opportunities consistent with the Fund's investment objective exist
immediately. This money will then be withdrawn from the short-term tax-exempt
municipal securities and invested in portfolio securities in as orderly a manner
as is possible when attractive investment opportunities arise.
The proceeds from the sale of shares of an investment company are generally not
available until the fifth business day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange until
that fifth business day. The sale of Fund shares to complete an exchange will be
effected at net asset value at the close of business on the day the request for
exchange is received in proper form. Please see "May I Exchange Shares for
Shares of Another Fund?" in the Prospectus.
Additional Information on Selling Shares
Systematic Withdrawal Plan. There are no service charges for establishing or
maintaining a systematic withdrawal plan. 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.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the Fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Because the amount
withdrawn under the plan may be more than your actual yield or income, part of
the payment may be a return of your investment.
The Fund may discontinue a systematic withdrawal plan by notifying you in
writing and will automatically discontinue a systematic withdrawal plan if all
shares in your account are withdrawn or if the Fund receives notification of the
shareholder's death or incapacity.
Through Your Securities Dealer. If you sell shares through your securities
dealer, it is your dealer's responsibility to transmit the order to the Fund in
a timely fashion. Any loss to you resulting from your dealer's failure to do so
must be settled between you and your securities dealer.
Redemptions in Kind. The Fund has committed itself to pay in cash (by check) all
requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the value
of the Fund's net assets at the beginning of the 90-day period. This commitment
is irrevocable without the prior approval of the SEC. In the case of redemption
requests in excess of these amounts, the Board reserves the right to make
payments in whole or in part in securities or other assets of the Fund, in case
of an emergency, or if the payment of such a redemption in cash would be
detrimental to the existing shareholders of the Fund. In these circumstances,
the securities distributed would be valued at the price used to compute the
Fund's net assets and you may incur brokerage fees in converting the securities
to cash. The Fund does not intend to redeem illiquid securities in kind. If this
happens, however, you may not be able to recover your investment in a timely
manner.
General Information
If dividend checks are returned to the Fund marked "unable to forward" by the
postal service, we will consider this a request by you to change your dividend
option to reinvest all distributions. The proceeds will be reinvested in
additional shares at net asset value until we receive new instructions.
If mail is returned as undeliverable or we are unable to locate you or verify
your current mailing address, we may deduct the costs of our efforts to find you
from your account. These costs may include a percentage of the account when a
search company charges a percentage fee in exchange for its location services.
All checks, drafts, wires and other payment mediums used to buy or sell shares
of the Fund must be denominated in U.S. dollars. We may, in our sole discretion,
either (a) reject any order to buy or sell shares denominated in any other
currency or (b) honor the transaction or make adjustments to your account for
the transaction as of a date and with a foreign currency exchange factor
determined by the drawee bank.
Special Services. The Franklin Templeton Institutional Services Department
provides specialized services, including recordkeeping, for institutional
investors. The cost of these services is not borne by the Fund.
Investor Services may pay certain financial institutions that maintain omnibus
accounts with the Fund on behalf of numerous beneficial owners for recordkeeping
operations performed with respect to such owners. For each beneficial owner in
the omnibus account, the Fund may reimburse Investor Services an amount not to
exceed the per account fee that the Fund normally pays Investor Services. These
financial institutions may also charge a fee for their services directly to
their clients.
How Are Fund Shares Valued?
We calculate the net asset value per share 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 Fund is informed that the Exchange
observes the following holidays: New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
For the purpose of determining the aggregate net assets of the Fund, cash and
receivables are valued at their realizable amounts. Interest is recorded as
accrued and dividends are recorded on the ex-dividend date. Over-the-counter
portfolio securities are valued within the range of the most recent quoted bid
and ask prices. Portfolio securities that are traded both in the
over-the-counter market and on a stock exchange are valued according to the
broadest and most representative market as determined by Advisers. Municipal
securities generally trade in the over-the-counter market rather than on a
securities exchange.
Generally, trading in U.S. government securities and money market instruments is
substantially completed each day at various times before the scheduled close of
the Exchange. The value of these securities used in computing the net asset
value of the Fund's shares is determined as of such times. Occasionally, events
affecting the values of these securities may occur between the times at which
they are determined and the scheduled close of the Exchange that will not be
reflected in the computation of the Fund's net asset value. If events materially
affecting the values of these securities occur during this period, the
securities will be valued at their fair value as determined in good faith by the
Board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the Board. With the approval of the Board, the
Fund may utilize a pricing service, bank or securities dealer to perform any of
the above described functions.
Additional Information on
Distributions and Taxes
Distributions
You may receive two types of distributions from the 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 that 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.
Taxes
As stated in the Prospectus, the Fund has elected to be treated as a regulated
investment company under Subchapter M of the Code. The Board reserves the right
not to maintain the qualification of the Fund as a regulated investment company
if it determines this course of action to be beneficial to shareholders. In that
case, the Fund will be subject to federal and possibly state corporate taxes on
its taxable income and gains, to the alternative minimum tax on a portion of its
tax-exempt income, and distributions (including its tax-exempt interest
dividends) to shareholders will be taxable to the extent of the Fund's available
earnings and profits.
The Code requires the Fund to distribute at least 98% of its taxable ordinary
income earned during the calendar year and at least 98% of its capital gain net
income earned during the twelve-month period ending October 31 of each year (in
addition to amounts from the prior year that were neither distributed nor taxed
to the Fund) to you 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 you until the following January, will be treated for tax
purposes as if paid by the Fund and received by you on December 31 of the
calendar year in which they are declared. The Fund intends as a matter of policy
to declare and pay such dividends, if any, in December to avoid the imposition
of this tax, but does not guarantee that the distributions will be sufficient to
avoid any or all federal excise taxes.
Redemptions and exchanges of the Fund's shares are taxable transactions for
federal and state income tax purposes. Gain or loss will be recognized in an
amount equal to the difference between your basis in the shares and the amount
you received, subject to the rules described below. If such shares are a capital
asset in your hands, gain or loss will be capital gain or loss and will be
long-term for federal income tax purposes if your 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 you buy other shares of the Fund (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 buying shares of the Fund will
not be included in the federal tax basis of such shares sold or exchanged within
90 days of their purchase (for purposes of determining gain or loss upon the
sale of such shares) if you reinvest the sales proceeds in the Fund or in
another fund in the Franklin Templeton Group of Funds and a sales charge that
would otherwise apply to the reinvestment is reduced or eliminated. Any portion
of such sales charge excluded from the tax basis of the shares sold will be
added to the tax basis of the shares acquired in the reinvestment. You should
consult with your tax advisor concerning the tax rules applicable to the
redemption or exchange of fund shares.
Since the Fund's income is derived from interest income and gain on the sale of
portfolio securities rather than dividend income, no portion of the Fund's
distributions will generally be eligible for the corporate dividends-received
deduction. None of the distributions paid by the Fund for the fiscal year ended
February 29, 1996, 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 the fund from direct obligations of the
U.S. government, subject in some states to minimum investment requirements that
must be met by the fund. Investments in GNMA/FNMA securities and repurchase
agreements collateralized by U.S. government securities do not generally qualify
for tax-free treatment. While it is not the primary investment objective of the
Fund to invest in such obligations, the Fund is authorized to so invest for
temporary or defensive purposes. To the extent that such investments are made,
the Fund will provide you with the percentage of any dividends paid which may
qualify for such tax-free treatment at the end of each calendar year. You should
consult with your own tax advisor with respect to the application of your state
and local laws to these distributions and the application of other state and
local laws on distributions and redemption proceeds received from the Fund.
If you are defined in the Code as a "substantial user" (or related person) of
facilities financed by private activity bonds, you should consult with your tax
advisor before buying shares of the Fund.
The Fund's Underwriter
Pursuant to an underwriting agreement in effect until March 31, 1997,
Distributors acts as principal underwriter in a continuous public offering for
shares of the Fund. The underwriting agreement will continue in effect for
successive annual periods if its continuance is specifically approved at least
annually by a vote of the Board or by a vote of the holders of a majority of the
Fund's outstanding voting securities, and in either event by a majority vote of
the Board members who are not parties to the underwriting agreement or
interested persons of any such party (other than as members of the Board), cast
in person at a meeting called for that purpose. The underwriting agreement
terminates automatically in the event of its assignment and may be terminated by
either party on 90 days' written notice.
Distributors pays the expenses of the distribution of Fund shares, including
advertising expenses and the costs of printing sales material and prospectuses
used to offer shares to the public. The Fund pays the expenses of preparing and
printing amendments to its registration statements and prospectuses (other than
those necessitated by the activities of Distributors) and of sending
prospectuses to existing shareholders.
In connection with the offering of the Fund's shares, aggregate underwriting
commissions for the fiscal years ended February 28, 1994 and 1995 and February
29, 1996, were $729,010, $316,890 and $235,212. After allowances to dealers,
Distributors retained $85,315, $41,373 and $33,015 in net underwriting discounts
and commissions, for the respective years, and received $3,334 in connection
with redemptions or repurchases of shares for the fiscal year ended February 29,
1996. Distributors may be entitled to reimbursement under the Rule 12b-1 plan,
as discussed below. Except as noted, Distributors received no other compensation
from the Fund for acting as underwriter.
The Rule 12b-1 Plan
The Fund has adopted a distribution plan or "Rule 12b-1 plan" pursuant to Rule
12b-1 of the 1940 Act. Under the plan, the Fund may pay up to a maximum of 0.10%
per year of its average daily net assets, payable quarterly, for expenses
incurred in the promotion and distribution of its shares.
In addition to the payments that Distributors or others are entitled to under
the plan, the plan also provides that to the extent the Fund, Advisers or
Distributors or other parties on behalf of the Fund, Advisers or Distributors
make payments that are deemed to be for the financing of any activity primarily
intended to result in the sale of shares of the Fund within the context of Rule
12b-1 under the 1940 Act, then such payments shall be deemed to have been made
pursuant to the plan.
In no event shall the aggregate asset-based sales charges, which include
payments made under the plan, plus any other payments deemed to be made pursuant
to the plan, exceed the amount permitted to be paid pursuant to the Rules of
Fair Practice of the National Association of Securities Dealers, Inc., Article
III, Section 26(d)4.
The terms and provisions of the plan relating to required reports, term, and
approval are consistent with Rule 12b-1. The plan does not permit unreimbursed
expenses incurred in a particular year to be carried over to or reimbursed in
later years.
To the extent fees are for distribution or marketing functions, as distinguished
from administrative servicing or agency transactions, certain banks will not be
entitled to participate in the plan as a result of applicable federal law
prohibiting certain banks from engaging in the distribution of mutual fund
shares. These banking institutions, however, are permitted to receive fees under
the plan for administrative servicing or for agency transactions. If you are a
customer of a bank that is prohibited from providing these services, you would
be permitted to remain a shareholder of the Fund, and alternate means for
continuing the servicing would be sought. In this event, changes in the services
provided might occur and you might no longer be able to avail yourself of any
automatic investment or other services then being provided by the bank. It is
not expected that you would suffer any adverse financial consequences as a
result of any of these changes.
The plan has been approved in accordance with the provisions of Rule 12b-1. The
plan is effective through March 31, 1997 and renewable annually by a vote of the
Board, including a majority vote of the Board members who are not interested
persons of the Fund and who have no direct or indirect financial interest in the
operation of the plan, cast in person at a meeting called for that purpose. It
is also required that the selection and nomination of such Board members be done
by the non-interested members of the Board. The plan and any related agreement
may be terminated at any time, without penalty, by vote of a majority of the
non-interested Board members on not more than 60 days' written notice, by
Distributors on not more than 60 days' written notice, by any act that
constitutes an assignment of the management agreement with Advisers, or the
underwriting agreement with Distributors, or by vote of a majority of the Fund's
outstanding shares. Distributors or any dealer or other firm may also terminate
their respective distribution or service agreement at any time upon written
notice.
The plan and any related agreements may not be amended to increase materially
the amount to be spent for distribution expenses without approval by a majority
of the Fund's outstanding shares, and all material amendments to the plan or any
related agreements shall be approved by a vote of the non-interested members of
the Board, cast in person at a meeting called for the purpose of voting on any
such amendment.
Distributors is required to report in writing to the Board at least quarterly on
the amounts and purpose of any payment made under the plan 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 plan should be continued.
For the fiscal year ended February 29, 1996, Distributors had eligible
expenditures of $219,655 for advertising, printing, and payments to underwriters
and broker-dealers pursuant to the plan, of which the Fund paid Distributors
$78,553.
How Does the Fund Measure Performance?
Performance quotations are subject to SEC rules. These rules require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the Fund be accompanied by
certain standardized performance information computed as required by the SEC.
Current yield and average annual total return quotations used by the Fund are
based on the standardized methods of computing performance mandated by the SEC.
If a Rule 12b-1 plan is adopted, performance figures reflect fees from the date
of the plan's implementation. An explanation of these and other methods used by
the Fund to compute or express performance follows. 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.
Total Return
Average Annual Total Return. Average annual total return is determined by
finding the average annual 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, and income dividends and capital gain distributions are reinvested at
net asset value. The quotation assumes the account was completely redeemed at
the end of each 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.
The Fund's average annual total return for the one-year period ended on February
29, 1996 and for the period from commencement of operations (September 23, 1992)
to February 29, 1996 was 7.47% and 6.89%.
These figures were calculated according to the SEC formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV =ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the one-, five- or ten-year periods at the end of the one-, five-
or ten-year periods (or fractional portion thereof)
Cumulative Total Return. The Fund may also quote its cumulative total return, in
addition to its average annual total return. These quotations are computed the
same way, except the cumulative total return will be based on the Fund's actual
return for a specified period rather than on its average return over one-, five-
and ten-year periods, or fractional portion thereof. The Fund's cumulative total
return for the one-year period ended on February 29, 1996, and for the period
from commencement of operations (September 23, 1992) to February 29, 1996 was
7.47% and 25.73%.
Yield
Current Yield. Current yield shows the income per share earned by the Fund. It
is calculated by dividing the net investment income per share earned during a
30-day base period by the maximum offering price per share on the last day of
the period and annualizing the result. Expenses accrued for the period include
any fees charged to all shareholders during the base period. The Fund's yield
for the 30-day period ended on February 29, 1996, was 4.47%.
This figure was obtained using the following SEC formula:
6
Yield = 2 [(a-b + 1) - 1]
----
cd
where:
a = interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that were
entitled to receive dividends
d = the maximum offering price per share on the last day of the period
Taxable-Equivalent Yield. The Fund may also quote a taxable-equivalent yield
that shows the before-tax yield that would have to be earned from a taxable
investment to equal the Fund's yield. Taxable-equivalent yield is computed by
dividing the portion of the Fund's yield that is tax-exempt by one minus the
highest applicable federal income tax rate and adding the product to the portion
of the Fund's yield that is not tax-exempt, if any. The Fund's
taxable-equivalent yield for the 30-day period ended on February 29, 1996, was
7.40%.
As of the date of this SAI, the federal income tax rate upon which the Fund's
taxable-equivalent yield quotations are based was 39.6%. From time to time, as
any changes to the rate become effective, taxable-equivalent yield quotations
advertised by the Fund will be updated to reflect these changes. The Fund
expects updates may be necessary as tax rates are changed by the federal
government. The advantage of tax-free investments, like the Fund, will be
enhanced by any tax rate increases. Therefore, the details of specific tax
increases may be used in sales material for the Fund.
Current Distribution Rate
Current yield and taxable-equivalent yield, which are calculated according to a
formula prescribed by the SEC, are not indicative of the amounts which were or
will be paid to shareholders of the Fund. Amounts paid to shareholders are
reflected in the quoted current distribution rate or taxable-equivalent
distribution rate. The current distribution rate is usually computed by
annualizing the dividends paid per share during a certain period and dividing
that amount by the current maximum offering price. The current distribution rate
differs from the current yield computation because it may include distributions
to shareholders from sources other than interest, such as short-term capital
gains and is calculated over a different period of time. The current
distribution rate for the 30-day period ended on February 29, 1996, was 4.93%.
A taxable-equivalent distribution rate shows the taxable distribution rate
equivalent to the Fund's current distribution rate. The advertised
taxable-equivalent distribution rate will reflect the most current federal tax
rate available to the Fund. The taxable-equivalent distribution rate for the
30-day period ended on February 29, 1996, was 8.16%.
Volatility
Occasionally statistics may be used to show the Fund's volatility or risk.
Measures of volatility or risk are generally used to compare the Fund's net
asset value or performance to a market index. One measure of volatility is beta.
Beta is the volatility of a fund relative to the total market, as represented by
an index considered representative of the types of securities in which the fund
invests. A beta of more than 1.00 indicates volatility greater than the market
and a beta of less than 1.00 indicates volatility less than the market. Another
measure of volatility or risk is standard deviation. Standard deviation is used
to measure variability of net asset value or total return around an average over
a specified period of time. The idea is that greater volatility means greater
risk undertaken in achieving performance.
Other Performance Quotations
For investors who are permitted to buy shares of the Fund without a sales
charge, sales literature about the Fund may quote a current distribution rate,
yield, cumulative total return, average annual total return and other measures
of performance as described elsewhere in this SAI with the substitution of net
asset value for the public offering price.
The 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 the Fund may satisfy your
investment objective, advertisements and other materials about the Fund may
discuss certain measures of Fund performance as reported by various financial
publications. Materials may also compare performance (as calculated above) to
performance as reported by other investments, indices, and averages. These
comparisons may include, but are not limited to, the following examples:
a) Salomon Brothers Broad Bond Index or its component indices - measures yield,
price, and total return for Treasury, agency, corporate and mortgage bonds.
b) Lehman Brothers Aggregate Bond Index or its component indices - measures
yield, price and total return for Treasury, agency, corporate, mortgage and
Yankee bonds.
c) Lehman Brothers Municipal Bond Index or its component indices - measures
yield, price and total return for the municipal bond market.
d) Bond Buyer 20-Bond Index - an index of municipal bond yields based upon
yields of 20 general obligation bonds maturing in 20 years.
e) Bond Buyer 30-Bond Index - an index of municipal bond yields based upon
yields of 20 revenue bonds maturing in 30 years.
f) Financial publications: The Wall Street Journal, Business Week, Financial
World, Forbes, Fortune, and Money magazines - provide performance statistics
over specified time periods.
g) Salomon Brothers Composite High Yield Index or its component indices -
measures yield, price and total return for the Long-Term High-Yield Index,
Intermediate-Term High-Yield Index, and Long-Term Utility High-Yield Index.
h) Historical data supplied by the research departments of First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch, Lehman
Brothers and Bloomberg, L.P.
i) Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income Fund
Performance Analysis - measure total return and average current yield for the
mutual fund industry and rank individual mutual fund performance over specified
time periods, assuming reinvestment of all distributions, exclusive of any
applicable sales charges.
From time to time, advertisements or information for the Fund may include a
discussion of certain attributes or benefits to be derived from an investment in
the Fund. The advertisements or information may include symbols, headlines, or
other material that highlights or summarizes the information discussed in more
detail in the communication.
Advertisements or information may also compare the Fund's performance to the
return on CDs or other investments. You should be aware, however, that an
investment in the Fund involves the risk of fluctuation of principal value, a
risk generally not present in an investment in a CD issued by a bank. For
example, as the general level of interest rates rise, the value of the Fund's
fixed-income investments, as well as the value of its shares that 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. CDs are frequently insured by an agency of the U.S.
government. An investment in the Fund is not insured by any federal, state or
private entity.
In assessing 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 the Fund will continue its performance as
compared to these other averages.
Miscellaneous Information
The 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
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis in order to have
a projected amount available in the future to fund a child's college education.
(Projected college cost estimates are based upon current costs published by the
College Board.) Of course, an investment in the Fund cannot guarantee that these
goals will be met.
The Fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin, one of the
oldest mutual fund organizations, has managed mutual funds for over 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 $143
billion in assets under management for more than 4.1 million U.S. based mutual
fund shareholder and other accounts. The Franklin Templeton Group of Funds
offers 115 U.S. based mutual funds to the public. The 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
$43 billion in municipal bond assets for over three-quarters of 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 800
investment advisory firms surveyed by TMS Holdings, Inc., as of March 31, 1996.
The Dalbar Surveys, Inc. broker-dealer survey has ranked Franklin number one in
service quality for five of the past eight years.
From time to time advertisements or sales material issued by the Fund may
discuss or be based upon information in a recent issue of the Special Report on
Tax Freedom Day published by the Tax Foundation, a Washington, D.C. based
nonprofit research and public education organization. The report illustrates,
among other things, the annual amount of time the average taxpayer works to
satisfy his or her tax obligations to the federal, state and local taxing
authorities.
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
Fund's Agreement and Declaration of Trust, however, contains an express
disclaimer of shareholder liability for acts or obligations of the Fund. The
Declaration of Trust also provides for indemnification and reimbursement of
expenses out of the Fund's assets if you are held personally liable for
obligations of the Fund. The Declaration of Trust provides that the Fund shall,
upon request, assume the defense of any claim made against you for any act or
obligation of the Fund and satisfy any judgment thereon. All such rights are
limited to the assets of the Fund. The Declaration of Trust further provides
that the Fund may maintain appropriate insurance (for example, fidelity bonding
and errors and omissions insurance) for the protection of the Fund, its
shareholders, trustees, officers, employees and agents to cover possible tort
and other liabilities. Furthermore, the activities of the Fund as an investment
company, as distinguished from an operating company, would not likely give rise
to liabilities in excess of the Fund's total assets. Thus, the risk of you
incurring financial loss on account of shareholder liability is limited to the
unlikely circumstances in which both inadequate insurance exists and the Fund
itself is unable to meet its obligations.
In the event of disputes involving multiple claims of ownership or authority to
control your account, the Fund has the right (but has no obligation) to: (a)
freeze the account and require the written agreement of all persons deemed by
the Fund to have a potential property interest in the account, prior to
executing instructions regarding the account; (b) interplead disputed funds or
accounts with a court of competent jurisdiction; or (c) surrender ownership of
all or a portion of the account to the IRS in response to a Notice of Levy.
Financial Statements
The audited financial statements contained in the Annual Report to Shareholders
of the Trust, for the fiscal year ended February 29, 1996, including the
auditors' report, are incorporated herein by reference.
Useful Terms and Definitions
1940 Act - Investment Company Act of 1940, as amended
Advisers - Franklin Advisers, Inc., the Fund's investment manager
Board - The Board of Trustees of the Trust
CD - Certificate of deposit
Class I and Class II - Certain funds in the Franklin Templeton Funds offer two
classes of shares, designated "Class I" and "Class II." The two classes have
proportionate interests in the same portfolio of investment securities. They
differ, however, primarily in their sales charge structures and Rule 12b-1
plans. Because the Fund's sales charge structure and Rule 12b-1 plan are similar
to those of Class I shares, shares of the Fund are considered Class I shares for
redemption, exchange and other purposes.
Code - Internal Revenue Code of 1986, as amended
Distributors - Franklin/Templeton Distributors, Inc., the 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
Franklin Templeton Group of Funds - All U.S. registered mutual funds in the
Franklin Group of Funds(R) and the Templeton Group of Funds
Investor Services - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
Letter - Letter of Intent
Net Asset Value (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
Offering Price - The public offering price is based on the net asset value per
share and includes the 2.25% sales charge.
Prospectus - The prospectus for the Fund dated July 1, 1996, as may be amended
from time to time
Resources - Franklin Resources, Inc.
SAI - Statement of Additional Information
SEC - U.S. Securities and Exchange Commission
Securities Dealer - A financial institution which, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
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
We/Our/Us - Unless a different meaning is indicated by the context, these terms
refer to the Fund and/or Investor Services, Distributors, or another
wholly-owned subsidiary of Resources.
APPENDIX
Description of Ratings
Municipal Bonds Ratings
Moody's
Aaa: Municipal bonds rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin, and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Municipal bonds rated Aa are judged to be high quality by all standards.
Together with the Aaa group, they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large, fluctuation of protective elements may be of
greater amplitude, or there may be other elements present which make the
long-term risks appear somewhat larger.
A: Municipal bonds rated A possess many favorable investment attributes and are
considered upper medium-grade obligations. Factors giving security to principal
and interest are considered adequate, but elements may be present which suggest
a susceptibility to impairment sometime in the future.
Baa: Municipal bonds 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: Municipal bonds 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: Municipal bonds rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Municipal bonds rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Con.(-): Municipal bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon the
completion of construction or the elimination of the basis of the condition.
S&P
AAA: Municipal bonds rated AAA are the highest-grade obligations. They possess
the ultimate degree of protection as to principal and interest. In the market,
they move with interest rates and, hence, provide the maximum safety on all
counts.
AA: Municipal bonds rated AA also qualify as high-grade obligations, and in the
majority of instances differ from AAA issues only in a small degree. Here, too,
prices move with the long-term money market.
A: Municipal bonds rated A are regarded as upper medium-grade. They have
considerable investment strength but are not entirely free from adverse effects
of changes in economic and trade conditions. Interest and principal are regarded
as safe. They predominantly reflect money rates in their market behavior but
also, to some extent, economic conditions.
BBB: 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.
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: Municipal bonds rated AAA are 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: Municipal bonds rated AA are considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong although not quite as strong as bonds rated AAA and not
significantly vulnerable to foreseeable future developments.
A: Municipal bonds rated A are considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB: Municipal bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an 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: Municipal bonds rated BB are considered speculative. The obligor's ability
to pay interest and repay principal may be affected over time by adverse
economic changes. However, business and financial alternatives can be identified
which could assist the obligor in satisfying its debt service requirements.
B: Municipal bonds rated B are considered highly speculative. While bonds in
this class are currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the obligor's
limited margin of safety and the need for reasonable business and economic
activity throughout the life of the issue.
CCC: Municipal bonds rated CCC have certain identifiable characteristics which,
if not remedied, may lead to default. The ability to meet obligations requires
an advantageous business and economic environment.
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 categories.
Municipal Note Ratings
Moody's
Moody's ratings for state, municipal and other short-term obligations will be
designated Moody's Investment Grade ("MIG"). This distinction is in recognition
of the differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower are uppermost in importance in
short-term borrowing; factors of the first importance in long-term borrowing
risk are of lesser importance in the short run. Symbols used will be as follows:
MIG 1: Notes are of the best quality enjoying strong protection from established
cash flows of funds for their servicing or from established and broad-based
access to the market for refinancing, or both.
MIG 2: Notes are of high quality, with margins of protection ample, although not
so large as in the preceding group.
MIG 3: Notes are of favorable quality, with all security elements accounted for,
but lacking the undeniable strength of the preceding grades. Market access for
refinancing, in particular, is likely to be less well established.
MIG 4: Notes are of adequate quality, carrying specific risk but having
protection and not distinctly or predominantly speculative.
S&P
Until June 29, 1984, S&P used the same rating symbols for notes and bonds. After
June 29, 1984, for new municipal note issues due in three years or less, the
ratings below will usually be assigned. Notes maturing beyond three years will
most likely receive a bond rating of the type recited above.
SP-1: Issues carrying this designation have a very strong or strong capacity to
pay principal and interest. Issues determined to possess overwhelming safety
characteristics will be given a "plus" (+) designation.
SP-2: Issues carrying this designation have a satisfactory capacity to pay
principal and interest.
Commercial Paper Ratings
Moody's
Moody's commercial paper ratings, which are also applicable to municipal paper
investments permitted to be made by the Fund, are opinions of the ability of
issuers to repay punctually their promissory obligations not having an original
maturity in excess of nine months. Moody's employs the following designations,
all judged to be investment grade, to indicate the relative repayment capacity
of rated issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
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.
FORM N-1A
PART C
Other Information
Item 24 Financial Statements and Exhibits
(a) Financial Statements
Financial Statements incorporated herein by reference to the
Registrant's Annual Report to Shareholders for fiscal year ended
February 29, 1996 as filed electronically with the Securities and
Exchange Commission on Form Type N-30D on May 10, 1996.
(i) Report of Independent Auditors - March 29, 1996.
(ii) Statements of Investments in Securities and Net Assets - February
29, 1996.
(iii) Statements of Assets and Liabilities - February 29, 1996.
(iv) Statement of Operations - for the year ended February 29, 1996.
(v) Statements of Changes in Net Assets - for the years ended
February 29, 1996, and February 28, 1995.
(b) Exhibits:
The following exhibits are incorporated by reference as noted, except
Exhibits 11(i), 18(i), and 27.B-1 through 27.B-49 which are attached herewith.
(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
Filing: Post-Effective Amendment No. 22 to Registration Statement
on Form N-1A
File No. 2-94222
Filing Date: March 14, 1996
(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
Filing: Post-Effective Amendment No. 22 to Registration Statement
on Form N-1A
File No. 2-94222
Filing Date: March 14, 1996
(ii) Forms of Dealer Agreements between Franklin/Templeton
Distributors, Inc., and securities dealers
Filing: Post-Effective Amendment No. 22 to Registration on Form
N-1A
File No. 2-94222
Filing Date: March 14, 1996
(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) Form of Custodian Agreements between Registrant and Citibank
Delaware
1. Citicash Management ACH Customer Agreement
2. Citibank Cash Management Services Master Agreement
3. Short Form Bank Agreement - Deposits and Disbursements of
Funds:
Registrant: Franklin Premier Return Fund
Filing: Post-Effective Amendment No. 55 to Registration 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
Filing: Post-Effective Amendment No. 22 to Registration Statement
on Form N-1A
File No. 2-94222
Filing Date: March 14, 1996
(v) Terminal Link Agreement between Registrant and Bank of New York
dated February 16, 1996
Filing: Post-Effective Amendment No. 22 to Registration Statement
on Form N-1A
File No. 2-94222
Filing Date: March 14, 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 dated June 19, 1996.
(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 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
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 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
Filing: Post-Effective Amendment No. 22 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: March 14, 1996
(16) schedule for computation of each performance quotation provided in the
registration statement in response to Item 22 (which need not be
audited)
(i) Schedule for computation of performance quotation
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
18. Copies of any plan entered into by Registrant pursuant to Rule 18f-3
under the 1940 Act.
(i) Form of Multiple Class Plan
(27) Financial Data Schedule Computations
1. Financial Data Schedule for Franklin Insured Tax-Free Income Fund
Class I
2. Financial Data Schedule for Franklin Insured Tax-Free Income Fund
Class II
3. Financial Data Schedule for Franklin Massachusetts Insured Tax-Free
Income Fund Class I
4. Financial Data Schedule for Franklin Massachusetts Insured
Tax-Free Income Fund Class II
5. Financial Data Schedule for Franklin Michigan Insured Tax-Free
Income Fund Class I
6. Financial Data Schedule for Franklin Michigan Insured Tax-Free
Income Fund Class II
7. Financial Data Schedule for Franklin Minnesota Insured Tax-Free
Income Fund Class I
8. Financial Data Schedule for Franklin Minnesota Insured Tax-Free
Income Fund Class II
9. Financial Data Schedule for Franklin Ohio Insured Tax-Free Income
Fund Class I
10. Financial Data Schedule for Franklin Ohio Insured Tax-Free Income
Fund Class II
11. Financial Data Schedule for Franklin Puerto Rico Tax-Free Income
Fund Class I
12. Financial Data Schedule for Franklin Puerto Rico Tax-Free Income
Fund Class II
13. Financial Data Schedule for Franklin High Yield Tax-Free Income
Fund Class I
14. Financial Data Schedule for Franklin High Yield Tax-Free Income
Fund Class II
15. Financial Data Schedule for Franklin Pennsylvania Tax-Free Income
Fund Class I
16. Financial Data Schedule for Franklin Pennsylvania Tax-Free Income
Fund Class II
17. Financial Data Schedule for Franklin Colorado Tax-Free Income Fund
Class I
18. Financial Data Schedule for Franklin Colorado Tax-Free Income Fund
Class II
19. Financial Data Schedule for Franklin Georgia Tax-Free Income Fund
Class I
20. Financial Data Schedule for Franklin Georgia Tax-Free Income Fund
Class II
21. Financial Data Schedule for Franklin Missouri Tax-Free Income Fund
Class I
22. Financial Data Schedule for Franklin Missouri Tax-Free Income Fund
Class II
23. Financial Data Schedule for Franklin Oregon Tax-Free Income Fund
Class I
24. Financial Data Schedule for Franklin Oregon Tax-Free Income Fund
Class II
25. Financial Data Schedule for Franklin Texas Tax-Free Income Fund
Class I
26. Financial Data Schedule for Franklin Texas Tax-Free Income Fund
Class II
27. Financial Data Schedule for Franklin Virginia Tax-Free Income Fund
Class I
28. Financial Data Schedule for Franklin Virginia Tax-Free Income Fund
Class II
29. Financial Data Schedule for Franklin Alabama Tax-Free Income Fund
Class I
30. Financial Data Schedule for Franklin Alabama Tax-Free Income Fund
Class II
31. Financial Data Schedule for Franklin Florida Tax-Free Income Fund
Class I
32. Financial Data Schedule for Franklin Florida Tax-Free Income Fund
Class II
33. Financial Data Schedule for Franklin Indiana Tax-Free Income Fund
34. Financial Data Schedule for Franklin Louisiana Tax-Free Income Fund
Class I
35. Financial Data Schedule for Franklin Louisiana Tax-Free Income Fund
Class II
36. Financial Data Schedule for Franklin North Carolina Tax-Free Income
Fund Class I
37. Financial Data Schedule for Franklin North Carolina Tax-Free Income
Fund Class II
38. Financial Data Schedule for Franklin Arizona Tax-Free Income Fund
Class I
39. Financial Data Schedule for Franklin Arizona Tax-Free Income Fund
Class II
40. Financial Data Schedule for Franklin New Jersey Tax-Fee Income Fund
Class I
41. Financial Data Schedule for Franklin New Jersey Tax-Free Income
Fund Class II
42. Financial Data Schedule for Franklin Connecticut Tax-Free Income
Fund Class I
43. Financial Data Schedule for Franklin Connecticut Tax-Free Income
Fund Class II
44. Financial Data Schedule for Franklin Maryland Tax-Free Income Fund
Class I
45. Financial Data Schedule for Franklin Maryland Tax-Free Income Fund
Class II
46. Financial Data Schedule for Franklin Kentucky Tax-Free Income Fund
47. Financial Data Schedule for Franklin Federal Intermediate Term
Tax-Free Income Fund
48. Financial Data Schedule for Franklin Arizona Insured Tax-Free
Income Fund
49. Financial Data Schedule for Franklin Florida Insured Tax-Free
Income Fund
Item 25 Persons Controlled by or under Common Control with
Registrant
None
Item 26 Number of Holders of Securities
As of April 30, 1996 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 3,701 52
Arizona Insured Fund 735 N/A
Arizona Fund 14,058 105
Colorado Fund 5,733 55
Connecticut Fund 4,109 73
Federal Intermediate Fund 2,222 N/A
Florida Insured Fund 1,380 N/A
Florida Fund 23,737 230
Georgia Fund 3,572 63
High Yield Fund 93,629 2,000
Indiana Fund 1,731 N/A
Insured Fund 35,341 301
Kentucky Fund 991 N/A
Louisiana Fund 2,500 35
Maryland Fund 4,949 75
Massachusetts Insured Fund 6,873 117
Michigan Insured Fund 28,555 305
Michigan Fund (NEW SERIES) 0 N/A
Minnesota Insured Fund 13,114 75
Missouri Fund 7,072 83
New Jersey Fund 15,950 221
North Carolina Fund 6,067 135
Ohio Insured Fund 17,538 211
Oregon Fund 9,234 104
Pennsylvania Fund 18,285 241
Puerto Rico Fund 6,519 47
Texas Fund 2,845 16
Virginia Fund 6,911 102
Item 27 Indemnification
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to trustees, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a trustee, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such trustee, officer or controlling person in
connection with securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court or appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
Item 28 Business and Other Connections of Investment Adviser
The officers and directors of the Registrant's investment advisor also
serve as officers and/or directors for (1) the advisor's corporate parent,
Franklin Resources, Inc., and/or (2) other investment companies in the
Franklin Group of Funds, or the Templeton Group of Funds. In addition,
Charles B. Johnson is a director of General Host Corporation. For
additional information please see Part B.
Item 29 Principal Underwriters
a) Franklin/Templeton Distributors, Inc., ("Distributors") also acts as
principal underwriter of shares of:
AGE High Income Fund, Inc.
Franklin California Tax-Free Income Fund, Inc.
Franklin California Tax-Free Trust
Franklin Custodian Funds, Inc.
Franklin Equity Fund
Franklin Federal Money Fund
Franklin Federal Tax-Free Income Fund
Franklin Gold Fund
Franklin Investors Securities Trust
Franklin Managed Trust
Franklin Money Fund
Franklin Municipal Securities Trust
Franklin New York Tax-Free Income Fund, Inc.
Franklin New York Tax-Free Trust
Franklin Premier Return Fund
Franklin Real Estate Securities Trust
Franklin Strategic Series
Franklin Tax-Advantaged High Yield Securities Fund
Franklin Tax-Advantaged International Bond Fund
Franklin Tax-Advantaged U.S. Government Securities Fund
Franklin Tax-Exempt Money Fund
Franklin Templeton Global Trust
Franklin Templeton International Trust
Franklin Templeton Money Fund Trust
Franklin Value Investors Trust
Institutional Fiduciary 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.
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 certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment to its
Registration Statement pursuant to Rule 485(b) under the Securities Act of
1933 and has duly caused this Post-Effective Amendment to the Registrant's
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized in the City of San Mateo and the State of
California, on the 25th day of June, 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: June 25, 1996
Martin L. Flanagan* Principal Financial
Martin L. Flanagan Officer
Dated: June 25, 1996
Diomedes Loo-Tam* Principal Accounting
Diomedes Loo-Tam Officer
Dated: June 25, 1996
Frank H. Abbott, III* Trustee
Frank H. Abbott, III Dated: June 25, 1996
Harris J. Ashton* Trustee
Harris J. Ashton Dated: June 25, 1996
S. Joseph Fortunato* Trustee
S. Joseph Fortunato Dated: June 25, 1996
David W. Garbellano* Trustee
David W. Garbellano Dated: June 25, 1996
Charles B. Johnson* Trustee
Charles B. Johnson Dated: June 25, 1996
Frank W. T. LaHaye* Trustee
Frank W. T. LaHaye Dated: June 25, 1996
Gordon S. Macklin* Trustee
Gordon S. Macklin Dated: June 25, 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 ot By-Laws *
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 Agreement *
between Franklin Tax-Free Trust and
Franklin Advisers, Inc., dated
August 1, 1995
EX-99.B6(i) Amended and Restated Distribution *
Agreement between the Registrant and
Franklin/Templeton Distributors,
Inc., dated March 29. 1995
EX-99.B6(ii) Forms of Dealer Agreement 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 Agreement between *
Registrant and Citibank Delaware
EX-99.B8(iv) Master Custodian Agreement between *
Registrant and Bank of New York
dated February 16, 1996
EX-99.B8(v) Terminal Link Agreement 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 of Counsel dated *
April 21, 1995
EX-99.B11(i) Consent of Independent Auditors Attached
dated June 19, 1996
EX-99.B13(i) Letter of Understanding dated *
September 21, 1992
EX-99.B13(ii) Letter of Understanding dated April *
12, 1994
EX-99.B15(i) Class I Shares Distribution Plans *
pursuant to Rule 12b-1 dated July 1,
1993, and May 4, 1994
EX-99.B15(ii) Class II shares Distribution Plan *
pursuant to Rule 12b-1 on behalf of
the following funds 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
EX-99.B18(i) Form of Multiple Class Plan Attached
EX-27.B-1 Financial Data Schedule for Franklin Attached
Insured Tax-Free Income Fund Class I
EX-27.B-2 Financial Data Schedule for Franklin Attached
Insured Tax-Free Income Fund Class II
EX-27.B-3 Financial Data Schedule for Attached
Massachusetts Insured Tax-Free
Income Fund Class I
EX-27.B-4 Financial Data Schedule for Attached
Massachusetts Insured Tax-Free
Income Fund Class II
EX-27.B-5 Financial Data Schedule for Franklin Attached
Michigan Insured Tax-Free Income
Fund Class I
EX-27.B-6 Financial Data Schedule for Franklin Attached
Michigan Insured Tax-Free Income
Fund Class II
EX-27.B-7 Financial Data Schedule for Franklin Attached
Minnesota Insured Tax-Free Income
Fund Class I
EX-27.B-8 Financial Data Schedule for Franklin Attached
Minnesota Insured Tax-Free Income
Fund Class II
EX-27.B-9 Financial Data Schedule for Franklin Attached
Ohio Insured Tax-Free Income Fund
Class I
EX-27.B-10 Financial Data Schedule for Franklin Attached
Ohio Insured Tax-Free Income Fund
Class II
EX-27.B-11 Financial Data Schedule for Franklin Attached
Puerto Rico Tax-Free Income Fund
Class I
EX-27.B-12 Financial Data Schedule for Franklin Attached
Puerto Rico Tax-Free Income Fund
Class II
EX-27.B-13 Financial Data Schedule for Franklin Attached
High Yield Tax-Free Income Fund
Class I
EX-27.B-14 Financial Data Schedule for Franklin Attached
High Yield Tax-Free Income Fund
Class II
EX-27.B-15 Financial Data Schedule for Franklin Attached
Pennsylvania Tax-Free Income Fund
Class I
EX-27.B-16 Financial Data Schedule for Franklin Attached
Pennsylvania Tax-Free Income Fund
Class II
EX-27.B-17 Financial Data Schedule for Franklin Attached
Colorado Tax-Free Income Fund Class I
EX-27.B-18 Financial Data Schedule for Franklin Attached
Colorado Tax-Free Income Fund Class
II
EX-27.B-19 Financial Data Schedule for Franklin Attached
Georgia Tax-Free Income Fund Class I
EX-27.B-20 Financial Data Schedule for Franklin Attached
Georgia Tax-Free Income Fund Class II
EX-27.B-21 Financial Data Schedule for Franklin Attached
Missouri Tax-Free Income Fund Class I
EX-27.B-22 Financial Data Schedule for Franklin Attached
Missouri Tax-Free Income Fund Class
II
EX-27.B-23 Financial Data Schedule for Franklin Attached
Oregon Tax-Free Income Fund Class I
EX-27.B-24 Financial Data Schedule for Franklin Attached
Oregon Tax-Free Income Fund Class II
EX-27.B-25 Financial Data Schedule for Franklin Attached
Texas Tax-Free Income Fund Class I
EX-27.B-26 Financial Data Schedule for Texas Attached
Tax-Free Income Fund Class II
EX-27.B-27 Financial Data Schedule for Franklin Attached
Virginia Tax-Free Income Fund Class I
EX-27.B-28 Financial Data Schedule for Franklin Attached
Virginia Tax-Free Income Fund Class
II
EX-27.B-29 Financial Data Schedule for Franklin Attached
Alabama Tax-Free Income Fund Class I
EX-27.B-30 Financial Data Schedule for Franklin Attached
Alabama Tax-Free Income Fund Class II
EX-27.B-31 Financial Data Schedule for Franklin Attached
Florida Tax-Free Income Fund Class I
EX-27.B-32 Financial Data Schedule for Franklin Attached
Florida Tax-Free Income Fund Class II
EX-27.B-33 Financial Data Schedule for Franklin Attached
Indiana Tax-Free Income Fund
EX-27.B-34 Financial Data Schedule for Franklin Attached
Louisiana Tax-Free Income Fund Class
I
EX-27.B-35 Financial Data Schedule for Franklin Attached
Louisiana Tax-Free Income Fund Class
II
EX-27.B-36 Financial Data Schedule for Franklin Attached
North Carolina Tax-Free Income Fund
Class I
EX-27.B-37 Financial Data Schedule for Franklin Attached
North Carolina Tax-Free Income Fund
Class II
EX-27.B-38 Financial Data Schedule for Franklin Attached
Arizona Tax-Free Income Fund Class I
EX-27.B-39 Financial Data Schedule for Franklin Attached
Arizona Tax-Free Income Fund Class II
EX-27.B-40 Financial Data Schedule for Franklin Attached
New Jersey Tax-Free Income Fund
Class I
EX-27.B-41 Financial Data Schedule for Franklin Attached
New Jersey Tax-Free Income Fund
Class II
EX-27.B-42 Financial Data Schedule for Franklin Attached
Connecticut Tax-Free Income Fund
Class I
EX-27.B-43 Financial Data Schedule for Franklin Attached
Connecticut Tax-Free Income Fund
Class II
EX-27.B-44 Financial Data Schedule for Franklin Attached
Maryland Tax-Free Income Fund Class I
EX-27.B-45 Financial Data Schedule for Franklin Attached
Maryland Tax-Free Income Fund Class
II
EX-27.B-46 Financial Data Schedule for Franklin Attached
Kentucky Tax-Free Income Fund
EX-27.B-47 Financial Data Schedule for Franklin Attached
Federal Intermediate Term Tax-Free
Income Fund
EX-27.B-48 Financial Data Schedule for Franklin Attached
Arizona Insured Tax-Fee Income Fund
EX-27.B-49 Financial Data Schedule for Franklin Attached
Florida Insured Tax-Fee Income Fund
*Incorporated by Reference
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Post-Effective Amendment No.
23 to the Registration Statement of Franklin Tax-Free Trust on Form N-1A File
Nos. 2-94222 and 811-4149 of our report dated March 29, 1996 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 29, 1996, which is incorporated by reference in the
Registration Statement.
/s/ COOPERS & LYBRAND L.L.P.
San Francisco, California
June 19, 1996
FRANKLIN________________________ FUND
MULTIPLE CLASS PLAN
This Multiple Class Plan (the "Plan") has been adopted by a
majority of the Board of [Directors/Trustees of the Franklin __________________
Fund (the "Trust"), on behalf of its series,_____________________ (the "Fund").
The Board has determined that the Plan is in the best interests of each class
and the Fund as a whole. The Plan sets forth the provisions relating to the
establishment of multiple classes of shares for the Fund.
1. The Fund shall offer two classes of shares, to be known as
Franklin _________________ Fund - Class I and Franklin _________________ Fund
- - Class II.
2. Class I shares shall carry a front-end sales charge ranging
from [_____% -_____%, and Class II shares shall carry a front-end sales charge
of 1.00%.
3. Class I shares shall not be subject to a contingent
deferred sales charge ("CDSC") except in the following limited circumstances. On
investments of $1 million or more, a contingent deferred sales charge of 1.00%
of the lesser of the then-current net asset value or the original net asset
value at the time of purchase applies to redemptions of those investments within
the contingency period of 12 months from the calendar month following their
purchase. The CDSC is waived in certain circumstances, as described in the
Fund's prospectus.
4. Class II shares redeemed within 18 months of their purchase
shall be assessed a CDSC of 1.00% on the lesser of the then-current net asset
value or the original net asset value at the time of purchase. The CDSC is
waived in certain circumstances as described in the Fund's prospectus.
5. The Rule 12b-1 Plan associated with Class I shares may be
used to reimburse Franklin/Templeton Distributors, Inc. (the "Distributor") or
others for expenses incurred in the promotion and distribution of the shares of
Class I. Such expenses 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 the Distributor's
overhead expenses attributable to the distribution of Class shares, as well as
any distribution or service fees paid to securities dealers or their firms or
others who have executed a servicing agreement with the Fund for the Class, the
Distributor or its affiliates.
The Rule 12b-1 Plan associated with Class II shares has two
components. The first component is a shareholder servicing fee, to be paid to
broker-dealers, banks, trust companies and others who will provide personal
assistance to shareholders in servicing their accounts. The second component is
an asset-based sales charge to be retained by the Distributor during the first
year after sale of shares, and, in subsequent years, to be paid to dealers or
retained by the Distributor to be used in the promotion and distribution of
Class II shares, in a manner similar to that described above for (Class I
shares.
The Plans shall operate in accordance with the Rules of Fair
Practice of the National Association of Securities Dealers, Inc., Article III,
section 26(d).
6. The only difference in expenses as between Class I and
Class II shares shall relate to differences in the Rule 12b-1 plan expenses of
each class, as described in each class' Rule 12b-1 Plan.
7. There shall be no conversion features associated with the
Class I and Class II shares.
8. Shares of either Class may be exchanged for shares of
another investment company within the Franklin Templeton Group of Funds
according to the terms and conditions stated in each fund's prospectus, as it
may be amended from time to time, to the extent permitted by the Investment
Company Act of 1940 and the rules and regulations adopted thereunder.
9. Each Class will vote separately with respect to the Rule
12b-1 Plan related to that Class.
10. On an ongoing basis, the [directors/trustees]pursuant to
their fiduciary responsibilities under the 1940 Act and otherwise, will monitor
the Fund for the existence of any material conflicts between the interests of
the two classes of shares. The [directors/trustees], including a majority of the
independent [directors/trustees], shall take such action as is reasonably
necessary to eliminate any such conflict that may develop. Franklin Advisers,
Inc. and Franklin/Templeton Distributors, Inc. shall be responsible for alerting
the Board to any material conflicts that arise.
11. All material amendments to this Plan must be approved by a
majority of the [directors/trustees] of the Fund, including a majority of the
[directors/trustees] who are not interested persons of the Fund.
I, Deborah R. Gatzek, Secretary of the Franklin Funds, do
hereby certify that this Multiple Class Plan was adopted by [Name of
Trust/Fund], on behalf of its series [_________________], by a majority of the
[Directors/Trustees] of the [Trust/Fund] on [Date].
-----------------
Deborah R. Gatzek
Secretary
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 29, 1996 ANNUAL REPORT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 011
<NAME> FRANKLIN INSURED TAX-FREE INCOME FUND - CLASS I
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-END> FEB-29-1996
<INVESTMENTS-AT-COST> 1,608,853,169
<INVESTMENTS-AT-VALUE> 1,721,402,985
<RECEIVABLES> 29,437,841
<ASSETS-OTHER> 107,647
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,750,948,473
<PAYABLE-FOR-SECURITIES> 32,410,461
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 5,347,322
<TOTAL-LIABILITIES> 37,757,783
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,599,748,559
<SHARES-COMMON-STOCK> 139,005,800
<SHARES-COMMON-PRIOR> 140,649,184
<ACCUMULATED-NII-CURRENT> 1,118,209
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (225,894)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 112,549,816
<NET-ASSETS> 1,713,190,690
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 108,697,017
<OTHER-INCOME> 0
<EXPENSES-NET> (10,254,775)
<NET-INVESTMENT-INCOME> 98,442,242
<REALIZED-GAINS-CURRENT> 12,703,972
<APPREC-INCREASE-CURRENT> 29,657,448
<NET-CHANGE-FROM-OPS> 140,803,662
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (98,929,211)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 18,183,582
<NUMBER-OF-SHARES-REDEEMED> (23,198,817)
<SHARES-REINVESTED> 3,371,851
<NET-CHANGE-IN-ASSETS> 29,956,526
<ACCUMULATED-NII-PRIOR> 1,735,732
<ACCUMULATED-GAINS-PRIOR> (12,929,866)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 7,882,310
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 10,254,775
<AVERAGE-NET-ASSETS> 1,695,107,990
<PER-SHARE-NAV-BEGIN> 11.970
<PER-SHARE-NII> .710
<PER-SHARE-GAIN-APPREC> .302
<PER-SHARE-DIVIDEND> (.712)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 12.270
<EXPENSE-RATIO> .600
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 29, 1996 ANNUAL REPORT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 012
<NAME> FRANKLIN INSURED TAX-FREE INCOME FUND - CLASS II
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-END> FEB-29-1996
<INVESTMENTS-AT-COST> 1,608,853,169
<INVESTMENTS-AT-VALUE> 1,721,402,985
<RECEIVABLES> 29,437,841
<ASSETS-OTHER> 107,647
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,750,948,473
<PAYABLE-FOR-SECURITIES> 32,410,461
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 5,347,322
<TOTAL-LIABILITIES> 37,757,783
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,599,748,559
<SHARES-COMMON-STOCK> 662,359
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 1,118,209
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (225,894)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 112,549,816
<NET-ASSETS> 1,713,190,690
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 108,697,017
<OTHER-INCOME> 0
<EXPENSES-NET> (10,254,775)
<NET-INVESTMENT-INCOME> 98,442,242
<REALIZED-GAINS-CURRENT> 12,703,972
<APPREC-INCREASE-CURRENT> 29,657,448
<NET-CHANGE-FROM-OPS> 140,803,662
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (130,554)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 678,420
<NUMBER-OF-SHARES-REDEEMED> (22,003)
<SHARES-REINVESTED> 5,942
<NET-CHANGE-IN-ASSETS> 29,956,526
<ACCUMULATED-NII-PRIOR> 1,735,732
<ACCUMULATED-GAINS-PRIOR> (12,929,866)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 7,882,310
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 10,254,775
<AVERAGE-NET-ASSETS> 1,695,107,990
<PER-SHARE-NAV-BEGIN> 11.980
<PER-SHARE-NII> .540
<PER-SHARE-GAIN-APPREC> .322
<PER-SHARE-DIVIDEND> (.532)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 12.310
<EXPENSE-RATIO> 1.180
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 29, 1996 ANNUAL REPORT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 021
<NAME> FRANKLIN MASSACHUSETTS INSURED TAX-FREE INCOME FUND-CLASS I
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-END> FEB-29-1996
<INVESTMENTS-AT-COST> 278,310,731
<INVESTMENTS-AT-VALUE> 301,310,080
<RECEIVABLES> 8,377,300
<ASSETS-OTHER> 166,305
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 309,853,685
<PAYABLE-FOR-SECURITIES> 4,863,883
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 702,263
<TOTAL-LIABILITIES> 5,566,146
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 284,736,513
<SHARES-COMMON-STOCK> 25,881,419
<SHARES-COMMON-PRIOR> 25,429,785
<ACCUMULATED-NII-CURRENT> 156,087
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (3,604,410)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 22,999,349
<NET-ASSETS> 304,287,539
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 18,755,293
<OTHER-INCOME> 0
<EXPENSES-NET> (2,024,578)
<NET-INVESTMENT-INCOME> 16,730,715
<REALIZED-GAINS-CURRENT> (82,430)
<APPREC-INCREASE-CURRENT> 8,199,260
<NET-CHANGE-FROM-OPS> 24,847,545
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (16,888,337)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,824,888
<NUMBER-OF-SHARES-REDEEMED> (2,990,203)
<SHARES-REINVESTED> 616,949
<NET-CHANGE-IN-ASSETS> 15,956,623
<ACCUMULATED-NII-PRIOR> 375,946
<ACCUMULATED-GAINS-PRIOR> (3,683,996)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,580,640
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,024,578
<AVERAGE-NET-ASSETS> 295,129,282
<PER-SHARE-NAV-BEGIN> 11.340
<PER-SHARE-NII> .660
<PER-SHARE-GAIN-APPREC> .313
<PER-SHARE-DIVIDEND> (.663)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.650
<EXPENSE-RATIO> .690
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 29, 1996 ANNUAL REPORT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 022
<NAME> FRANKLIN MASSACHUSETTS INSURED TAX-FREE INCOME FUND-CLASS II
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-END> FEB-29-1996
<INVESTMENTS-AT-COST> 278,310,731
<INVESTMENTS-AT-VALUE> 301,310,080
<RECEIVABLES> 8,377,300
<ASSETS-OTHER> 166,305
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 309,853,685
<PAYABLE-FOR-SECURITIES> 4,863,883
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 702,263
<TOTAL-LIABILITIES> 5,566,146
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 284,736,513
<SHARES-COMMON-STOCK> 236,038
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 156,087
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (3,604,410)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 22,999,349
<NET-ASSETS> 304,287,539
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 18,755,293
<OTHER-INCOME> 0
<EXPENSES-NET> (2,024,578)
<NET-INVESTMENT-INCOME> 16,730,715
<REALIZED-GAINS-CURRENT> (82,430)
<APPREC-INCREASE-CURRENT> 8,199,260
<NET-CHANGE-FROM-OPS> 24,847,545
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (62,237)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 231,785
<NUMBER-OF-SHARES-REDEEMED> (114)
<SHARES-REINVESTED> 4,367
<NET-CHANGE-IN-ASSETS> 15,956,623
<ACCUMULATED-NII-PRIOR> 375,946
<ACCUMULATED-GAINS-PRIOR> (3,683,996)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,580,640
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,024,578
<AVERAGE-NET-ASSETS> 295,129,282
<PER-SHARE-NAV-BEGIN> 11.360
<PER-SHARE-NII> .500
<PER-SHARE-GAIN-APPREC> .323
<PER-SHARE-DIVIDEND> (.493)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.690
<EXPENSE-RATIO> 1.260
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 29, 1996 ANNUAL REPORT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 031
<NAME> FRANKLIN MICHIGAN INSURED TAX-FREE INCOME FUND - CLASS I
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-END> FEB-29-1996
<INVESTMENTS-AT-COST> 1,058,045,657
<INVESTMENTS-AT-VALUE> 1,127,894,938
<RECEIVABLES> 20,799,278
<ASSETS-OTHER> 2,043,269
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,150,737,485
<PAYABLE-FOR-SECURITIES> 26,185,023
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,414,991
<TOTAL-LIABILITIES> 28,600,014
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,052,410,014
<SHARES-COMMON-STOCK> 92,289,436
<SHARES-COMMON-PRIOR> 88,222,756
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (111,019)
<ACCUMULATED-NET-GAINS> (10,805)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 69,849,281
<NET-ASSETS> 1,122,137,471
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 67,769,458
<OTHER-INCOME> 0
<EXPENSES-NET> (6,717,155)
<NET-INVESTMENT-INCOME> 61,052,303
<REALIZED-GAINS-CURRENT> 2,392,717
<APPREC-INCREASE-CURRENT> 27,527,016
<NET-CHANGE-FROM-OPS> 90,972,036
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (61,725,372)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (113,681)
<NUMBER-OF-SHARES-SOLD> 9,709,057
<NUMBER-OF-SHARES-REDEEMED> (8,123,578)
<SHARES-REINVESTED> 2,481,201
<NET-CHANGE-IN-ASSETS> 84,420,540
<ACCUMULATED-NII-PRIOR> 781,185
<ACCUMULATED-GAINS-PRIOR> (2,403,522)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 5,130,941
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 6,717,155
<AVERAGE-NET-ASSETS> 1,081,055,676
<PER-SHARE-NAV-BEGIN> 11.760
<PER-SHARE-NII> .680
<PER-SHARE-GAIN-APPREC> .337
<PER-SHARE-DIVIDEND> (.687)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.090
<EXPENSE-RATIO> .620
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 29, 1996 ANNUAL REPORT AND IS QUALIFIFED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMTNS.
</LEGEND>
<SERIES>
<NUMBER> 032
<NAME> FRANKLIN MICHIGAN INSURED TAX-FREE INCOME FUND - CLASS II
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-END> FEB-29-1996
<INVESTMENTS-AT-COST> 1,058,045,657
<INVESTMENTS-AT-VALUE> 1,127,894,938
<RECEIVABLES> 20,799,278
<ASSETS-OTHER> 2,043,269
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,150,737,485
<PAYABLE-FOR-SECURITIES> 26,185,023
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,414,991
<TOTAL-LIABILITIES> 28,600,014
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,052,410,014
<SHARES-COMMON-STOCK> 550,577
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (111,019)
<ACCUMULATED-NET-GAINS> (10,805)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 69,849,281
<NET-ASSETS> 1,122,137,471
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 67,769,458
<OTHER-INCOME> 0
<EXPENSES-NET> (6,717,155)
<NET-INVESTMENT-INCOME> 61,052,303
<REALIZED-GAINS-CURRENT> 2,392,717
<APPREC-INCREASE-CURRENT> 27,527,016
<NET-CHANGE-FROM-OPS> 90,972,036
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (105,454)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 562,131
<NUMBER-OF-SHARES-REDEEMED> (17,761)
<SHARES-REINVESTED> 6,207
<NET-CHANGE-IN-ASSETS> 84,420,540
<ACCUMULATED-NII-PRIOR> 781,185
<ACCUMULATED-GAINS-PRIOR> (2,403,522)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 5,130,941
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 6,717,155
<AVERAGE-NET-ASSETS> 1,081,055,676
<PER-SHARE-NAV-BEGIN> 11.770
<PER-SHARE-NII> .510
<PER-SHARE-GAIN-APPREC> .369
<PER-SHARE-DIVIDEND> (.509)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.140
<EXPENSE-RATIO> 1.200
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 29, 1996 ANNUAL REPORT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 041
<NAME> FRANKLIN MINNESOTA INSURED TAX-FREE INCOME FUND - CLASS I
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-END> FEB-29-1996
<INVESTMENTS-AT-COST> 475,869,643
<INVESTMENTS-AT-VALUE> 501,889,870
<RECEIVABLES> 12,159,551
<ASSETS-OTHER> 3,642,764
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 517,692,185
<PAYABLE-FOR-SECURITIES> 23,344,367
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,056,637
<TOTAL-LIABILITIES> 24,401,004
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 466,784,785
<SHARES-COMMON-STOCK> 40,539,811
<SHARES-COMMON-PRIOR> 40,383,702
<ACCUMULATED-NII-CURRENT> 489,930
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (3,761)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 26,020,227
<NET-ASSETS> 493,291,181
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 30,244,782
<OTHER-INCOME> 0
<EXPENSES-NET> (3,218,044)
<NET-INVESTMENT-INCOME> 27,026,738
<REALIZED-GAINS-CURRENT> 596,366
<APPREC-INCREASE-CURRENT> 9,650,802
<NET-CHANGE-FROM-OPS> 37,273,906
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (27,066,218)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,441,478
<NUMBER-OF-SHARES-REDEEMED> (4,417,279)
<SHARES-REINVESTED> 1,131,910
<NET-CHANGE-IN-ASSETS> 13,356,951
<ACCUMULATED-NII-PRIOR> 547,076
<ACCUMULATED-GAINS-PRIOR> (600,127)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,430,182
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,218,044
<AVERAGE-NET-ASSETS> 484,138,088
<PER-SHARE-NAV-BEGIN> 11.880
<PER-SHARE-NII> .670
<PER-SHARE-GAIN-APPREC> .265
<PER-SHARE-DIVIDEND> (.675)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.140
<EXPENSE-RATIO> .660
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 29, 1996 ANNUAL REPORT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 042
<NAME> FRANKLIN MINNESOTA INSURED TAX-FREE INCOME FUND - CLASS II
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-END> FEB-29-1996
<INVESTMENTS-AT-COST> 475,869,643
<INVESTMENTS-AT-VALUE> 501,889,870
<RECEIVABLES> 12,159,551
<ASSETS-OTHER> 3,642,764
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 517,692,185
<PAYABLE-FOR-SECURITIES> 23,344,367
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,056,637
<TOTAL-LIABILITIES> 24,401,004
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 466,784,785
<SHARES-COMMON-STOCK> 94,671
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 489,930
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (3,761)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 26,020,227
<NET-ASSETS> 493,291,181
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 30,244,782
<OTHER-INCOME> 0
<EXPENSES-NET> (3,218,044)
<NET-INVESTMENT-INCOME> 27,026,738
<REALIZED-GAINS-CURRENT> 596,366
<APPREC-INCREASE-CURRENT> 9,650,802
<NET-CHANGE-FROM-OPS> 37,273,906
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (17,666)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 99,039
<NUMBER-OF-SHARES-REDEEMED> (5,320)
<SHARES-REINVESTED> 952
<NET-CHANGE-IN-ASSETS> 13,356,951
<ACCUMULATED-NII-PRIOR> 547,076
<ACCUMULATED-GAINS-PRIOR> (600,127)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,430,182
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,218,044
<AVERAGE-NET-ASSETS> 484,138,088
<PER-SHARE-NAV-BEGIN> 11.890
<PER-SHARE-NII> .500
<PER-SHARE-GAIN-APPREC> .281
<PER-SHARE-DIVIDEND> (.501)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 12.170
<EXPENSE-RATIO> 1.250
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 29,1996 ANNUAL REPORT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 051
<NAME> FRANKLIN OHIO INSURED TAX-FREE INCOME FUND-CLASS I
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-END> FEB-29-1996
<INVESTMENTS-AT-COST> 650,824,476
<INVESTMENTS-AT-VALUE> 693,060,128
<RECEIVABLES> 13,830,777
<ASSETS-OTHER> 1,786,927
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 708,677,832
<PAYABLE-FOR-SECURITIES> 15,354,781
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,454,602
<TOTAL-LIABILITIES> 16,809,383
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 655,292,207
<SHARES-COMMON-STOCK> 56,120,455
<SHARES-COMMON-PRIOR> 54,836,159
<ACCUMULATED-NII-CURRENT> (53,972)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (5,605,438)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 42,235,652
<NET-ASSETS> 691,868,449
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 41,629,659
<OTHER-INCOME> 0
<EXPENSES-NET> (4,276,603)
<NET-INVESTMENT-INCOME> 37,353,056
<REALIZED-GAINS-CURRENT> 2,896,481
<APPREC-INCREASE-CURRENT> 15,182,787
<NET-CHANGE-FROM-OPS> 55,432,324
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (37,793,398)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5,527,081
<NUMBER-OF-SHARES-REDEEMED> (5,705,470)
<SHARES-REINVESTED> 1,462,685
<NET-CHANGE-IN-ASSETS> 39,323,845
<ACCUMULATED-NII-PRIOR> 481,682
<ACCUMULATED-GAINS-PRIOR> (8,501,919)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3,268,575
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 4,276,603
<AVERAGE-NET-ASSETS> 669,688,093
<PER-SHARE-NAV-BEGIN> 11.90
<PER-SHARE-NII> .680
<PER-SHARE-GAIN-APPREC> .327
<PER-SHARE-DIVIDEND> (.687)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 12.22
<EXPENSE-RATIO> .640
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 29,1996 ANNUAL REPORT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 052
<NAME> FRANKLIN OHIO INSURED TAX-FREE INCOME FUND-CLASS II
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-END> FEB-29-1996
<INVESTMENTS-AT-COST> 650,824,476
<INVESTMENTS-AT-VALUE> 693,060,128
<RECEIVABLES> 13,830,777
<ASSETS-OTHER> 1,786,927
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 708,677,832
<PAYABLE-FOR-SECURITIES> 15,354,781
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,454,602
<TOTAL-LIABILITIES> 16,809,383
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 655,292,207
<SHARES-COMMON-STOCK> 496,533
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> (53,972)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (5,605,438)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 42,235,652
<NET-ASSETS> 691,868,449
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 41,629,659
<OTHER-INCOME> 0
<EXPENSES-NET> (4,276,603)
<NET-INVESTMENT-INCOME> 37,353,056
<REALIZED-GAINS-CURRENT> 2,896,481
<APPREC-INCREASE-CURRENT> 15,182,787
<NET-CHANGE-FROM-OPS> 55,432,324
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (95,312)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 491,956
<NUMBER-OF-SHARES-REDEEMED> (490)
<SHARES-REINVESTED> 5,067
<NET-CHANGE-IN-ASSETS> 39,323,845
<ACCUMULATED-NII-PRIOR> 481,682
<ACCUMULATED-GAINS-PRIOR> (8,501,919)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3,268,575
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 4,276,603
<AVERAGE-NET-ASSETS> 669,688,093
<PER-SHARE-NAV-BEGIN> 11.90
<PER-SHARE-NII> .520
<PER-SHARE-GAIN-APPREC> .351
<PER-SHARE-DIVIDEND> (.511)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 12.26
<EXPENSE-RATIO> 1.220
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN
TAX-FREE TRUST FEBRUARY 29, 1996 ANNUAL REPORT AND IS QUALIFIED IN ITS
ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 061
<NAME> FRANKLIN PUERTO RICO TAX-FREE INCOME FUND - CLASS I
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-END> FEB-29-1996
<INVESTMENTS-AT-COST> 175,461,236
<INVESTMENTS-AT-VALUE> 185,744,529
<RECEIVABLES> 5,771,093
<ASSETS-OTHER> 33,151
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 191,548,773
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 438,868
<TOTAL-LIABILITIES> 438,868
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 180,915,156
<SHARES-COMMON-STOCK> 16,446,495
<SHARES-COMMON-PRIOR> 15,641,338
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (15,174)
<ACCUMULATED-NET-GAINS> (73,370)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 10,283,293
<NET-ASSETS> 191,109,905
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 11,951,638
<OTHER-INCOME> 0
<EXPENSES-NET> (1,369,052)
<NET-INVESTMENT-INCOME> 10,582,586
<REALIZED-GAINS-CURRENT> 874,797
<APPREC-INCREASE-CURRENT> 3,863,282
<NET-CHANGE-FROM-OPS> 15,320,665
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (10,726,805)
<DISTRIBUTIONS-OF-GAINS> (154,421)
<DISTRIBUTIONS-OTHER> (15,159)
<NUMBER-OF-SHARES-SOLD> 2,153,385
<NUMBER-OF-SHARES-REDEEMED> (1,796,798)
<SHARES-REINVESTED> 448,570
<NET-CHANGE-IN-ASSETS> 14,222,404
<ACCUMULATED-NII-PRIOR> 151,704
<ACCUMULATED-GAINS-PRIOR> (794,685)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,054,668
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,369,052
<AVERAGE-NET-ASSETS> 185,236,961
<PER-SHARE-NAV-BEGIN> 11.310
<PER-SHARE-NII> .660
<PER-SHARE-GAIN-APPREC> .299
<PER-SHARE-DIVIDEND> (.669)
<PER-SHARE-DISTRIBUTIONS> (.010)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.590
<EXPENSE-RATIO> .740
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN
TAX-FREE TRUST FEBRUARY 29, 1996 ANNUAL REPORT AND IS QUALIFIED IN ITS
ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 062
<NAME> FRANKLIN PUERTO RICO TAX-FREE INCOME FUND - CLASS II
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-END> FEB-29-1996
<INVESTMENTS-AT-COST> 175,461,236
<INVESTMENTS-AT-VALUE> 185,744,529
<RECEIVABLES> 5,771,093
<ASSETS-OTHER> 33,151
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 191,548,773
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 438,868
<TOTAL-LIABILITIES> 438,868
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 180,915,156
<SHARES-COMMON-STOCK> 45,905
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (15,174)
<ACCUMULATED-NET-GAINS> (73,370)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 10,283,293
<NET-ASSETS> 191,109,905
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 11,951,638
<OTHER-INCOME> 0
<EXPENSES-NET> (1,369,052)
<NET-INVESTMENT-INCOME> 10,582,586
<REALIZED-GAINS-CURRENT> 874,797
<APPREC-INCREASE-CURRENT> 3,863,282
<NET-CHANGE-FROM-OPS> 15,320,665
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (7,485)
<DISTRIBUTIONS-OF-GAINS> (176)
<DISTRIBUTIONS-OTHER> (15)
<NUMBER-OF-SHARES-SOLD> 46,373
<NUMBER-OF-SHARES-REDEEMED> (840)
<SHARES-REINVESTED> 372
<NET-CHANGE-IN-ASSETS> 14,222,404
<ACCUMULATED-NII-PRIOR> 151,704
<ACCUMULATED-GAINS-PRIOR> (794,685)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,054,668
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,369,052
<AVERAGE-NET-ASSETS> 185,236,961
<PER-SHARE-NAV-BEGIN> 11.320
<PER-SHARE-NII> .500
<PER-SHARE-GAIN-APPREC> .304
<PER-SHARE-DIVIDEND> (.494)
<PER-SHARE-DISTRIBUTIONS> (.010)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.620
<EXPENSE-RATIO> 1.320
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN
TAX-FREE TRUST FEBRUARY 29, 1996 ANNUAL REPORT AND IS QUALIFIED IN ITS
ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 071
<NAME> FRANKLIN HIGH YIELD TAX-FREE INCOME FUND - CLASS I
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-END> FEB-29-1996
<INVESTMENTS-AT-COST> 3,565,717,346
<INVESTMENTS-AT-VALUE> 3,805,363,971
<RECEIVABLES> 81,473,429
<ASSETS-OTHER> 3,160,747
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 3,889,998,147
<PAYABLE-FOR-SECURITIES> 45,851,296
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 8,836,902
<TOTAL-LIABILITIES> 54,688,198
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 3,638,166,816
<SHARES-COMMON-STOCK> 338,524,063
<SHARES-COMMON-PRIOR> 305,971,497
<ACCUMULATED-NII-CURRENT> 3,892,763
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (46,396,255)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 239,646,625
<NET-ASSETS> 3,835,309,949
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 257,750,687
<OTHER-INCOME> 0
<EXPENSES-NET> (21,589,359)
<NET-INVESTMENT-INCOME> 236,161,328
<REALIZED-GAINS-CURRENT> 10,004,172
<APPREC-INCREASE-CURRENT> 127,528,753
<NET-CHANGE-FROM-OPS> 373,694,253
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (233,856,809)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 62,180,938
<NUMBER-OF-SHARES-REDEEMED> (37,569,351)
<SHARES-REINVESTED> 7,940,979
<NET-CHANGE-IN-ASSETS> 548,040,313
<ACCUMULATED-NII-PRIOR> 2,525,462
<ACCUMULATED-GAINS-PRIOR> (56,400,427)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 16,252,138
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 21,589,359
<AVERAGE-NET-ASSETS> 3,535,302,559
<PER-SHARE-NAV-BEGIN> 10.740
<PER-SHARE-NII> .740
<PER-SHARE-GAIN-APPREC> .446
<PER-SHARE-DIVIDEND> (.736)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 11.190
<EXPENSE-RATIO> .610
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN
TAX-FREE TRUST FEBRUARY 29, 1996 ANNUAL REPORT AND IS QUALIFIED IN ITS
ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 072
<NAME> FRANKLIN HIGH YIELD TAX-FREE INCOME FUND - CLASS II
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-END> FEB-29-1996
<INVESTMENTS-AT-COST> 3,565,717,346
<INVESTMENTS-AT-VALUE> 3,805,363,971
<RECEIVABLES> 81,473,429
<ASSETS-OTHER> 3,160,747
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 3,889,998,147
<PAYABLE-FOR-SECURITIES> 45,851,296
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 8,836,902
<TOTAL-LIABILITIES> 54,688,198
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 3,638,166,816
<SHARES-COMMON-STOCK> 4,286,570
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 3,892,763
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (46,396,255)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 239,646,625
<NET-ASSETS> 3,835,309,949
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 257,750,687
<OTHER-INCOME> 0
<EXPENSES-NET> (21,589,359)
<NET-INVESTMENT-INCOME> 236,161,328
<REALIZED-GAINS-CURRENT> 10,004,172
<APPREC-INCREASE-CURRENT> 127,528,753
<NET-CHANGE-FROM-OPS> 373,694,253
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (937,218)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,395,108
<NUMBER-OF-SHARES-REDEEMED> (149,082)
<SHARES-REINVESTED> 40,544
<NET-CHANGE-IN-ASSETS> 548,040,313
<ACCUMULATED-NII-PRIOR> 2,525,462
<ACCUMULATED-GAINS-PRIOR> (56,400,427)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 16,252,138
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 21,589,359
<AVERAGE-NET-ASSETS> 3,535,302,559
<PER-SHARE-NAV-BEGIN> 10.810
<PER-SHARE-NII> .560
<PER-SHARE-GAIN-APPREC> .423
<PER-SHARE-DIVIDEND> (.553)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 11.240
<EXPENSE-RATIO> 1.180
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN
TAX-FREE TRUST FEBRUARY 29, 1996 ANNUAL REPORT AND IS QUALIFIED IN ITS
ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 081
<NAME> FRANKLIN PENNSYLVANIA TAX-FREE INCOME FUND - CLASS I
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-END> FEB-29-1996
<INVESTMENTS-AT-COST> 592,562,825
<INVESTMENTS-AT-VALUE> 635,358,067
<RECEIVABLES> 12,256,286
<ASSETS-OTHER> 2,263,638
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 649,877,991
<PAYABLE-FOR-SECURITIES> 5,366,440
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,555,040
<TOTAL-LIABILITIES> 6,921,480
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 602,684,112
<SHARES-COMMON-STOCK> 61,279,368
<SHARES-COMMON-PRIOR> 57,830,693
<ACCUMULATED-NII-CURRENT> 532,306
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (3,055,149)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 42,795,242
<NET-ASSETS> 642,956,511
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 40,615,531
<OTHER-INCOME> 0
<EXPENSES-NET> (3,965,431)
<NET-INVESTMENT-INCOME> 36,650,100
<REALIZED-GAINS-CURRENT> 1,771,090
<APPREC-INCREASE-CURRENT> 15,569,248
<NET-CHANGE-FROM-OPS> 53,990,438
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (37,185,584)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 8,023,170
<NUMBER-OF-SHARES-REDEEMED> (6,062,378)
<SHARES-REINVESTED> 1,487,883
<NET-CHANGE-IN-ASSETS> 55,590,517
<ACCUMULATED-NII-PRIOR> 1,121,082
<ACCUMULATED-GAINS-PRIOR> (4,826,239)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3,029,579
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,965,431
<AVERAGE-NET-ASSETS> 615,362,269
<PER-SHARE-NAV-BEGIN> 10.160
<PER-SHARE-NII> .620
<PER-SHARE-GAIN-APPREC> .287
<PER-SHARE-DIVIDEND> (.627)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.440
<EXPENSE-RATIO> .640
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN
TAX-FREE TRUST FEBRUARY 29, 1996 ANNUAL REPORT AND IS QUALIFIED IN ITS
ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 082
<NAME> FRANKLIN PENNSYLVANIA TAX-FREE INCOME FUND - CLASS II
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-END> FEB-29-1996
<INVESTMENTS-AT-COST> 592,562,825
<INVESTMENTS-AT-VALUE> 635,358,067
<RECEIVABLES> 12,256,286
<ASSETS-OTHER> 2,263,638
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 649,877,991
<PAYABLE-FOR-SECURITIES> 5,366,440
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,555,040
<TOTAL-LIABILITIES> 6,921,480
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 602,684,112
<SHARES-COMMON-STOCK> 296,975
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 532,306
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (3,055,149)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 42,795,242
<NET-ASSETS> 642,956,511
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 40,615,531
<OTHER-INCOME> 0
<EXPENSES-NET> (3,965,431)
<NET-INVESTMENT-INCOME> 36,650,100
<REALIZED-GAINS-CURRENT> 1,771,090
<APPREC-INCREASE-CURRENT> 15,569,248
<NET-CHANGE-FROM-OPS> 53,990,438
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (53,292)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 301,187
<NUMBER-OF-SHARES-REDEEMED> (7,205)
<SHARES-REINVESTED> 2,993
<NET-CHANGE-IN-ASSETS> 55,590,517
<ACCUMULATED-NII-PRIOR> 1,121,082
<ACCUMULATED-GAINS-PRIOR> (4,826,239)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3,029,579
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,965,431
<AVERAGE-NET-ASSETS> 615,362,269
<PER-SHARE-NAV-BEGIN> 10.170
<PER-SHARE-NII> .470
<PER-SHARE-GAIN-APPREC> .302
<PER-SHARE-DIVIDEND> (.472)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.470
<EXPENSE-RATIO> 1.220
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 29, 1996 ANNUAL REPORT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 091
<NAME> FRANKLIN COLORADO TAX-FREE INCOME FUND - CLASS I
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-END> FEB-29-1996
<INVESTMENTS-AT-COST> 202,414,010
<INVESTMENTS-AT-VALUE> 217,741,997
<RECEIVABLES> 4,036,311
<ASSETS-OTHER> 355,441
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 222,133,749
<PAYABLE-FOR-SECURITIES> 4,412,261
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 456,503
<TOTAL-LIABILITIES> 4,868,764
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 203,403,447
<SHARES-COMMON-STOCK> 18,210,137
<SHARES-COMMON-PRIOR> 17,095,446
<ACCUMULATED-NII-CURRENT> 419,983
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,886,432)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 15,327,987
<NET-ASSETS> 217,264,985
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 13,226,373
<OTHER-INCOME> 0
<EXPENSES-NET> (1,468,324)
<NET-INVESTMENT-INCOME> 11,758,049
<REALIZED-GAINS-CURRENT> 1,875,938
<APPREC-INCREASE-CURRENT> 6,034,367
<NET-CHANGE-FROM-OPS> 19,668,354
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (11,642,273)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,791,482
<NUMBER-OF-SHARES-REDEEMED> (2,153,219)
<SHARES-REINVESTED> 476,428
<NET-CHANGE-IN-ASSETS> 22,701,034
<ACCUMULATED-NII-PRIOR> 331,254
<ACCUMULATED-GAINS-PRIOR> (3,762,370)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,156,138
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,468,324
<AVERAGE-NET-ASSETS> 205,328,232
<PER-SHARE-NAV-BEGIN> 11.380
<PER-SHARE-NII> .670
<PER-SHARE-GAIN-APPREC> .453
<PER-SHARE-DIVIDEND> (.663)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 11.840
<EXPENSE-RATIO> .710
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 29, 1996 ANNUAL REPORT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 092
<NAME> FRANKLIN COLORADO TAX-FREE INCOME FUND - CLASS II
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-END> FEB-29-1996
<INVESTMENTS-AT-COST> 202,414,010
<INVESTMENTS-AT-VALUE> 217,741,997
<RECEIVABLES> 4,036,311
<ASSETS-OTHER> 355,441
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 222,133,749
<PAYABLE-FOR-SECURITIES> 4,412,261
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 456,503
<TOTAL-LIABILITIES> 4,868,764
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 203,403,447
<SHARES-COMMON-STOCK> 139,523
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 419,983
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,886,432)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 15,327,987
<NET-ASSETS> 217,264,985
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 13,226,373
<OTHER-INCOME> 0
<EXPENSES-NET> (1,468,324)
<NET-INVESTMENT-INCOME> 11,758,049
<REALIZED-GAINS-CURRENT> 1,875,938
<APPREC-INCREASE-CURRENT> 6,034,367
<NET-CHANGE-FROM-OPS> 19,668,354
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (27,047)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 141,464
<NUMBER-OF-SHARES-REDEEMED> (3,674)
<SHARES-REINVESTED> 1,733
<NET-CHANGE-IN-ASSETS> 22,701,034
<ACCUMULATED-NII-PRIOR> 331,254
<ACCUMULATED-GAINS-PRIOR> (3,762,370)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,156,138
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,468,324
<AVERAGE-NET-ASSETS> 205,328,232
<PER-SHARE-NAV-BEGIN> 11.400
<PER-SHARE-NII> .500
<PER-SHARE-GAIN-APPREC> .461
<PER-SHARE-DIVIDEND> (.491)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 11.870
<EXPENSE-RATIO> 1.290
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 29, 1996 ANNUAL REPORT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 101
<NAME> FRANKLIN GEORGIA TAX-FREE INCOME FUND - CLASS I
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-END> FEB-29-1996
<INVESTMENTS-AT-COST> 119,609,492
<INVESTMENTS-AT-VALUE> 127,292,860
<RECEIVABLES> 4,676,500
<ASSETS-OTHER> 266,143
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 132,235,503
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 520,223
<TOTAL-LIABILITIES> 520,223
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 124,825,226
<SHARES-COMMON-STOCK> 10,977,803
<SHARES-COMMON-PRIOR> 10,115,092
<ACCUMULATED-NII-CURRENT> 40,555
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (833,869)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 7,683,368
<NET-ASSETS> 131,715,280
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 7,829,961
<OTHER-INCOME> 0
<EXPENSES-NET> (947,830)
<NET-INVESTMENT-INCOME> 6,882,131
<REALIZED-GAINS-CURRENT> 792,584
<APPREC-INCREASE-CURRENT> 2,701,329
<NET-CHANGE-FROM-OPS> 10,376,044
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (6,924,143)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,163,963
<NUMBER-OF-SHARES-REDEEMED> (1,586,419)
<SHARES-REINVESTED> 285,166
<NET-CHANGE-IN-ASSETS> 14,943,944
<ACCUMULATED-NII-PRIOR> 98,646
<ACCUMULATED-GAINS-PRIOR> (1,626,453)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 744,453
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 947,830
<AVERAGE-NET-ASSETS> 123,351,758
<PER-SHARE-NAV-BEGIN> 11.540
<PER-SHARE-NII> .660
<PER-SHARE-GAIN-APPREC> .343
<PER-SHARE-DIVIDEND> (.663)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 11.880
<EXPENSE-RATIO> .770
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 29, 1996 ANNUAL REPORT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 102
<NAME> FRANKLIN GEORGIA TAX-FREE INCOME FUND - CLASS II
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-END> FEB-29-1996
<INVESTMENTS-AT-COST> 119,609,492
<INVESTMENTS-AT-VALUE> 127,292,860
<RECEIVABLES> 4,676,500
<ASSETS-OTHER> 266,143
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 132,235,503
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 520,223
<TOTAL-LIABILITIES> 520,223
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 124,825,226
<SHARES-COMMON-STOCK> 111,999
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 40,555
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (833,869)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 7,683,368
<NET-ASSETS> 131,715,280
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 7,829,961
<OTHER-INCOME> 0
<EXPENSES-NET> (947,830)
<NET-INVESTMENT-INCOME> 6,882,131
<REALIZED-GAINS-CURRENT> 792,584
<APPREC-INCREASE-CURRENT> 2,701,329
<NET-CHANGE-FROM-OPS> 10,376,044
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (16,079)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 115,112
<NUMBER-OF-SHARES-REDEEMED> (4,193)
<SHARES-REINVESTED> 1,080
<NET-CHANGE-IN-ASSETS> 14,943,944
<ACCUMULATED-NII-PRIOR> 98,646
<ACCUMULATED-GAINS-PRIOR> (1,626,453)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 744,453
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 947,830
<AVERAGE-NET-ASSETS> 123,351,758
<PER-SHARE-NAV-BEGIN> 11.570
<PER-SHARE-NII> .500
<PER-SHARE-GAIN-APPREC> .343
<PER-SHARE-DIVIDEND> (.493)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 11.920
<EXPENSE-RATIO> 1.340
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 29, 1996 ANNUAL REPORT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 111
<NAME> FRANKLIN MISSOURI TAX-FREE INCOME FUND - CLASS I
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-END> FEB-29-1996
<INVESTMENTS-AT-COST> 232,716,672
<INVESTMENTS-AT-VALUE> 248,149,427
<RECEIVABLES> 4,368,365
<ASSETS-OTHER> 360,584
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 252,878,376
<PAYABLE-FOR-SECURITIES> 3,528,634
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 503,026
<TOTAL-LIABILITIES> 4,031,660
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 233,016,588
<SHARES-COMMON-STOCK> 20,731,900
<SHARES-COMMON-PRIOR> 19,874,717
<ACCUMULATED-NII-CURRENT> 405,867
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (8,494)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 15,432,755
<NET-ASSETS> 248,846,716
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 14,944,470
<OTHER-INCOME> 0
<EXPENSES-NET> (1,681,821)
<NET-INVESTMENT-INCOME> 13,262,649
<REALIZED-GAINS-CURRENT> 2,429,032
<APPREC-INCREASE-CURRENT> 7,364,664
<NET-CHANGE-FROM-OPS> 23,056,345
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (13,013,408)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,530,350
<NUMBER-OF-SHARES-REDEEMED> (2,165,784)
<SHARES-REINVESTED> 492,617
<NET-CHANGE-IN-ASSETS> 21,405,210
<ACCUMULATED-NII-PRIOR> 179,382
<ACCUMULATED-GAINS-PRIOR> (2,437,526)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,318,581
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,681,821
<AVERAGE-NET-ASSETS> 237,832,678
<PER-SHARE-NAV-BEGIN> 11.440
<PER-SHARE-NII> .650
<PER-SHARE-GAIN-APPREC> .494
<PER-SHARE-DIVIDEND> (.644)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 11.940
<EXPENSE-RATIO> .710
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 29, 1996 ANNUAL REPORT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 112
<NAME> FRANKLIN MISSOURI TAX-FREE INCOME FUND - CLASS II
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-END> FEB-29-1996
<INVESTMENTS-AT-COST> 232,716,672
<INVESTMENTS-AT-VALUE> 248,149,427
<RECEIVABLES> 4,368,365
<ASSETS-OTHER> 360,584
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 252,878,376
<PAYABLE-FOR-SECURITIES> 3,528,634
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 503,026
<TOTAL-LIABILITIES> 4,031,660
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 233,016,588
<SHARES-COMMON-STOCK> 110,725
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 405,867
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (8,494)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 15,432,755
<NET-ASSETS> 248,846,716
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 14,944,470
<OTHER-INCOME> 0
<EXPENSES-NET> (1,681,821)
<NET-INVESTMENT-INCOME> 13,262,649
<REALIZED-GAINS-CURRENT> 2,429,032
<APPREC-INCREASE-CURRENT> 7,364,664
<NET-CHANGE-FROM-OPS> 23,056,345
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (22,756)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 110,467
<NUMBER-OF-SHARES-REDEEMED> (1,125)
<SHARES-REINVESTED> 1,383
<NET-CHANGE-IN-ASSETS> 21,405,210
<ACCUMULATED-NII-PRIOR> 179,382
<ACCUMULATED-GAINS-PRIOR> (2,437,526)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,318,581
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,681,821
<AVERAGE-NET-ASSETS> 237,832,678
<PER-SHARE-NAV-BEGIN> 11.470
<PER-SHARE-NII> .480
<PER-SHARE-GAIN-APPREC> .497
<PER-SHARE-DIVIDEND> (.477)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 11.970
<EXPENSE-RATIO> 1.270
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN
TAX-FREE TRUST FEBRUARY 29, 1996 ANNUAL REPORT AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 121
<NAME> FRANKLIN OREGON TAX-FREE INCOME FUND - CLASS I
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-END> FEB-29-1996
<INVESTMENTS-AT-COST> 347,554,059
<INVESTMENTS-AT-VALUE> 371,294,097
<RECEIVABLES> 6,477,829
<ASSETS-OTHER> 399,338
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 378,171,264
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 712,360
<TOTAL-LIABILITIES> 712,360
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 357,742,823
<SHARES-COMMON-STOCK> 32,356,619
<SHARES-COMMON-PRIOR> 31,142,756
<ACCUMULATED-NII-CURRENT> 1,180,384
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (5,204,341)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 23,740,038
<NET-ASSETS> 377,458,904
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 22,390,204
<OTHER-INCOME> 0
<EXPENSES-NET> (2,399,889)
<NET-INVESTMENT-INCOME> 19,990,315
<REALIZED-GAINS-CURRENT> 212,997
<APPREC-INCREASE-CURRENT> 11,590,457
<NET-CHANGE-FROM-OPS> 31,793,769
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (19,773,493)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,896,034
<NUMBER-OF-SHARES-REDEEMED> (3,636,816)
<SHARES-REINVESTED> 954,645
<NET-CHANGE-IN-ASSETS> 28,001,022
<ACCUMULATED-NII-PRIOR> 998,757
<ACCUMULATED-GAINS-PRIOR> (5,417,338)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,887,234
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,399,889
<AVERAGE-NET-ASSETS> 362,721,162
<PER-SHARE-NAV-BEGIN> 11.220
<PER-SHARE-NII> 0.630
<PER-SHARE-GAIN-APPREC> 0.377
<PER-SHARE-DIVIDEND> (0.627)
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 11.600
<EXPENSE-RATIO> 0.660
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN
TAX-FREE TRUST FEBRUARY 29, 1996 ANNUAL REPORT AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 122
<NAME> FRANKLIN OREGON TAX-FREE INCOME FUND - CLASS II
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-END> FEB-29-1996
<INVESTMENTS-AT-COST> 347,554,059
<INVESTMENTS-AT-VALUE> 371,294,097
<RECEIVABLES> 6,477,829
<ASSETS-OTHER> 399,338
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 378,171,264
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 712,360
<TOTAL-LIABILITIES> 712,360
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 357,742,823
<SHARES-COMMON-STOCK> 175,549
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 1,180,384
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (5,204,341)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 23,740,038
<NET-ASSETS> 377,458,904
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 22,390,204
<OTHER-INCOME> 0
<EXPENSES-NET> (2,399,889)
<NET-INVESTMENT-INCOME> 19,990,315
<REALIZED-GAINS-CURRENT> 212,997
<APPREC-INCREASE-CURRENT> 11,590,457
<NET-CHANGE-FROM-OPS> 31,793,769
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (35,195)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 192,124
<NUMBER-OF-SHARES-REDEEMED> (18,704)
<SHARES-REINVESTED> 2,129
<NET-CHANGE-IN-ASSETS> 28,001,022
<ACCUMULATED-NII-PRIOR> 998,757
<ACCUMULATED-GAINS-PRIOR> (5,417,338)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,887,234
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,399,889
<AVERAGE-NET-ASSETS> 362,721,162
<PER-SHARE-NAV-BEGIN> 11.230
<PER-SHARE-NII> 0.470
<PER-SHARE-GAIN-APPREC> 0.414
<PER-SHARE-DIVIDEND> (0.464)
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 11.650
<EXPENSE-RATIO> 1.240
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE FRANKLIN TAX-FREE TRUST FEBRUARY 29, 1996 ANNUAL REPORT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 131
<NAME> FRANKLIN TEXAS TAX-FREE INCOME FUND - CLASS I
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-END> FEB-29-1996
<INVESTMENTS-AT-COST> 120,386,404
<INVESTMENTS-AT-VALUE> 129,698,362
<RECEIVABLES> 5,234,630
<ASSETS-OTHER> 140,666
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 135,073,658
<PAYABLE-FOR-SECURITIES> 4,924,933
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 367,618
<TOTAL-LIABILITIES> 5,292,551
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 120,210,380
<SHARES-COMMON-STOCK> 11,196,751
<SHARES-COMMON-PRIOR> 11,617,264
<ACCUMULATED-NII-CURRENT> 247,882
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 10,887
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 9,311,958
<NET-ASSETS> 129,781,107
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 8,621,835
<OTHER-INCOME> 0
<EXPENSES-NET> (989,165)
<NET-INVESTMENT-INCOME> 7,632,670
<REALIZED-GAINS-CURRENT> 1,250,561
<APPREC-INCREASE-CURRENT> 2,598,262
<NET-CHANGE-FROM-OPS> 11,481,493
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (7,659,213)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 908,569
<NUMBER-OF-SHARES-REDEEMED> (1,588,268)
<SHARES-REINVESTED> 259,186
<NET-CHANGE-IN-ASSETS> (903,275)
<ACCUMULATED-NII-PRIOR> 275,469
<ACCUMULATED-GAINS-PRIOR> (1,239,674)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 776,321
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 989,165
<AVERAGE-NET-ASSETS> 130,297,239
<PER-SHARE-NAV-BEGIN> 11.250
<PER-SHARE-NII> .670
<PER-SHARE-GAIN-APPREC> .335
<PER-SHARE-DIVIDEND> (.675)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 11.580
<EXPENSE-RATIO> .760
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 29, 1996 ANNUAL REPORT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 132
<NAME> FRANKLIN TEXAS TAX-FREE INCOME FUND - CLASS II
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-END> FEB-29-1996
<INVESTMENTS-AT-COST> 120,386,404
<INVESTMENTS-AT-VALUE> 129,698,362
<RECEIVABLES> 5,234,630
<ASSETS-OTHER> 140,666
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 135,073,658
<PAYABLE-FOR-SECURITIES> 4,924,933
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 367,618
<TOTAL-LIABILITIES> 5,292,551
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 120,210,380
<SHARES-COMMON-STOCK> 6,731
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 247,882
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 10,887
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 9,311,958
<NET-ASSETS> 129,781,107
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 8,621,835
<OTHER-INCOME> 0
<EXPENSES-NET> (989,165)
<NET-INVESTMENT-INCOME> 7,632,670
<REALIZED-GAINS-CURRENT> 1,250,561
<APPREC-INCREASE-CURRENT> 2,598,262
<NET-CHANGE-FROM-OPS> 11,481,493
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,044)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 9,645
<NUMBER-OF-SHARES-REDEEMED> (2,975)
<SHARES-REINVESTED> 61
<NET-CHANGE-IN-ASSETS> (903,275)
<ACCUMULATED-NII-PRIOR> 275,469
<ACCUMULATED-GAINS-PRIOR> (1,239,674)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 776,321
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 989,165
<AVERAGE-NET-ASSETS> 130,297,239
<PER-SHARE-NAV-BEGIN> 11.27
<PER-SHARE-NII> .510
<PER-SHARE-GAIN-APPREC> .403
<PER-SHARE-DIVIDEND> (.503)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 11.68
<EXPENSE-RATIO> 1.330
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 29, 1996 ANNUAL REPORT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 141
<NAME> FRANKLIN VIRGINIA TAX-FREE INCOME FUND - CLASS I
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-END> FEB-29-1996
<INVESTMENTS-AT-COST> 251,381,328
<INVESTMENTS-AT-VALUE> 269,069,587
<RECEIVABLES> 4,857,875
<ASSETS-OTHER> 79,942
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 274,007,404
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 561,312
<TOTAL-LIABILITIES> 561,312
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 255,680,798
<SHARES-COMMON-STOCK> 23,164,535
<SHARES-COMMON-PRIOR> 22,584,171
<ACCUMULATED-NII-CURRENT> 591,271
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (514,236)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 17,688,259
<NET-ASSETS> 273,446,092
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 16,773,657
<OTHER-INCOME> 0
<EXPENSES-NET> (1,836,252)
<NET-INVESTMENT-INCOME> 14,937,405
<REALIZED-GAINS-CURRENT> 2,856,048
<APPREC-INCREASE-CURRENT> 5,708,436
<NET-CHANGE-FROM-OPS> 23,501,889
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (14,797,398)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,697,710
<NUMBER-OF-SHARES-REDEEMED> (2,687,517)
<SHARES-REINVESTED> 570,171
<NET-CHANGE-IN-ASSETS> 17,481,383
<ACCUMULATED-NII-PRIOR> 487,430
<ACCUMULATED-GAINS-PRIOR> (3,370,284)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,441,960
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,836,252
<AVERAGE-NET-ASSETS> 264,242,510
<PER-SHARE-NAV-BEGIN> 11.330
<PER-SHARE-NII> .660
<PER-SHARE-GAIN-APPREC> .381
<PER-SHARE-DIVIDEND> (.651)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 11.720
<EXPENSE-RATIO> .690
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 29,1996 ANNUAL REPORT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 142
<NAME> FRANKLIN VIRGINIA TAX-FREE INCOME FUND - CLASS II
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-END> FEB-29-1996
<INVESTMENTS-AT-COST> 251,381,328
<INVESTMENTS-AT-VALUE> 269,069,587
<RECEIVABLES> 4,857,875
<ASSETS-OTHER> 79,942
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 274,007,404
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 561,312
<TOTAL-LIABILITIES> 561,312
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 255,680,798
<SHARES-COMMON-STOCK> 174,185
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 591,271
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (514,236)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 17,688,259
<NET-ASSETS> 273,446,092
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 16,773,657
<OTHER-INCOME> 0
<EXPENSES-NET> (1,836,252)
<NET-INVESTMENT-INCOME> 14,937,405
<REALIZED-GAINS-CURRENT> 2,856,048
<APPREC-INCREASE-CURRENT> 5,708,436
<NET-CHANGE-FROM-OPS> 23,501,889
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (36,166)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 173,487
<NUMBER-OF-SHARES-REDEEMED> (1,232)
<SHARES-REINVESTED> 1,930
<NET-CHANGE-IN-ASSETS> 17,481,383
<ACCUMULATED-NII-PRIOR> 487,430
<ACCUMULATED-GAINS-PRIOR> (3,370,284)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,441,960
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,836,252
<AVERAGE-NET-ASSETS> 264,242,510
<PER-SHARE-NAV-BEGIN> 11.350
<PER-SHARE-NII> .490
<PER-SHARE-GAIN-APPREC> .412
<PER-SHARE-DIVIDEND> (.482)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 11.770
<EXPENSE-RATIO> 1.26
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 29, 1996 ANNUAL REPORT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 151
<NAME> FRANKLIN ALABAMA TAX-FREE INCOME FUND - CLASS I
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-END> FEB-29-1996
<INVESTMENTS-AT-COST> 173,561,500
<INVESTMENTS-AT-VALUE> 184,424,469
<RECEIVABLES> 3,926,107
<ASSETS-OTHER> 87,029
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 188,437,605
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 794,791
<TOTAL-LIABILITIES> 794,791
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 176,553,347
<SHARES-COMMON-STOCK> 15,856,631
<SHARES-COMMON-PRIOR> 15,037,977
<ACCUMULATED-NII-CURRENT> 375,254
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (148,756)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 10,862,969
<NET-ASSETS> 187,642,814
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 11,494,745
<OTHER-INCOME> 0
<EXPENSES-NET> (1,298,669)
<NET-INVESTMENT-INCOME> 10,196,076
<REALIZED-GAINS-CURRENT> 1,639,699
<APPREC-INCREASE-CURRENT> 4,747,672
<NET-CHANGE-FROM-OPS> 16,583,447
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (10,122,459)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,001,806
<NUMBER-OF-SHARES-REDEEMED> (1,525,925)
<SHARES-REINVESTED> 342,773
<NET-CHANGE-IN-ASSETS> 17,591,945
<ACCUMULATED-NII-PRIOR> 326,607
<ACCUMULATED-GAINS-PRIOR> (1,788,455)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,025,448
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,298,669
<AVERAGE-NET-ASSETS> 179,320,923
<PER-SHARE-NAV-BEGIN> 11.310
<PER-SHARE-NII> .660
<PER-SHARE-GAIN-APPREC> .416
<PER-SHARE-DIVIDEND> (.656)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 11.730
<EXPENSE-RATIO> .720
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 29, 1996 ANNUAL REPORT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 152
<NAME> FRANKLIN ALABAMA TAX-FREE INCOME FUND - CLASS II
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-END> FEB-29-1996
<INVESTMENTS-AT-COST> 173,561,500
<INVESTMENTS-AT-VALUE> 184,424,469
<RECEIVABLES> 3,926,107
<ASSETS-OTHER> 87,029
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 188,437,605
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 794,791
<TOTAL-LIABILITIES> 794,791
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 176,553,347
<SHARES-COMMON-STOCK> 141,273
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 375,254
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (148,756)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 10,862,969
<NET-ASSETS> 187,642,814
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 11,494,745
<OTHER-INCOME> 0
<EXPENSES-NET> (1,298,669)
<NET-INVESTMENT-INCOME> 10,196,076
<REALIZED-GAINS-CURRENT> 1,639,699
<APPREC-INCREASE-CURRENT> 4,747,672
<NET-CHANGE-FROM-OPS> 16,583,447
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (24,970)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 140,587
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 686
<NET-CHANGE-IN-ASSETS> 17,591,945
<ACCUMULATED-NII-PRIOR> 326,607
<ACCUMULATED-GAINS-PRIOR> (1,788,455)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,025,448
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,298,669
<AVERAGE-NET-ASSETS> 179,320,923
<PER-SHARE-NAV-BEGIN> 11.360
<PER-SHARE-NII> .490
<PER-SHARE-GAIN-APPREC> .405
<PER-SHARE-DIVIDEND> (.485)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 11.770
<EXPENSE-RATIO> 1.290
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 29, 1996 ANNUAL REPORT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 161
<NAME> FRANKLIN FLORIDA TAX-FREE INCOME FUND - CLASS I
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-END> FEB-29-1996
<INVESTMENTS-AT-COST> 1,255,621,202
<INVESTMENTS-AT-VALUE> 1,345,547,676
<RECEIVABLES> 34,130,328
<ASSETS-OTHER> 563,692
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,380,241,696
<PAYABLE-FOR-SECURITIES> 15,857,833
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,199,536
<TOTAL-LIABILITIES> 19,057,369
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,270,073,150
<SHARES-COMMON-STOCK> 115,813,580
<SHARES-COMMON-PRIOR> 111,493,189
<ACCUMULATED-NII-CURRENT> 3,602,270
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (2,417,567)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 89,926,474
<NET-ASSETS> 1,361,184,327
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 85,848,573
<OTHER-INCOME> 0
<EXPENSES-NET> 7,935,554
<NET-INVESTMENT-INCOME> 77,913,019
<REALIZED-GAINS-CURRENT> 5,260,309
<APPREC-INCREASE-CURRENT> 33,040,146
<NET-CHANGE-FROM-OPS> 116,213,474
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 77,720,760
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 18,302,298
<NUMBER-OF-SHARES-REDEEMED> (15,697,038)
<SHARES-REINVESTED> 1,715,131
<NET-CHANGE-IN-ASSETS> 96,165,892
<ACCUMULATED-NII-PRIOR> 3,546,965
<ACCUMULATED-GAINS-PRIOR> (7,677,876)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 6,180,348
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 7,935,554
<AVERAGE-NET-ASSETS> 1,313,829,660
<PER-SHARE-NAV-BEGIN> 11.350
<PER-SHARE-NII> .690
<PER-SHARE-GAIN-APPREC> .338
<PER-SHARE-DIVIDEND> (.688)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 11.690
<EXPENSE-RATIO> .600
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 29, 1996 ANNUAL REPORT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 162
<NAME> FRANKLIN FLORIDA TAX-FREE INCOME FUND - CLASS II
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-END> FEB-29-1996
<INVESTMENTS-AT-COST> 1,255,621,202
<INVESTMENTS-AT-VALUE> 1,345,547,676
<RECEIVABLES> 34,130,328
<ASSETS-OTHER> 563,692
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,380,241,696
<PAYABLE-FOR-SECURITIES> 15,857,833
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,199,536
<TOTAL-LIABILITIES> 19,057,369
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,270,073,150
<SHARES-COMMON-STOCK> 650,212
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 3,602,270
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (2,417,567)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 89,926,474
<NET-ASSETS> 1,361,184,327
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 85,848,573
<OTHER-INCOME> 0
<EXPENSES-NET> 7,935,554
<NET-INVESTMENT-INCOME> 77,913,019
<REALIZED-GAINS-CURRENT> 5,260,309
<APPREC-INCREASE-CURRENT> 33,040,146
<NET-CHANGE-FROM-OPS> 116,213,474
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 136,954
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 686,966
<NUMBER-OF-SHARES-REDEEMED> (43,258)
<SHARES-REINVESTED> 6,504
<NET-CHANGE-IN-ASSETS> 96,165,892
<ACCUMULATED-NII-PRIOR> 3,546,965
<ACCUMULATED-GAINS-PRIOR> (7,677,876)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 6,180,348
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 7,935,554
<AVERAGE-NET-ASSETS> 1,313,829,660
<PER-SHARE-NAV-BEGIN> 11.370
<PER-SHARE-NII> .520
<PER-SHARE-GAIN-APPREC> .382
<PER-SHARE-DIVIDEND> (.512)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 11.760
<EXPENSE-RATIO> 1.180
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN
TAX-FREE TRUST FEBRUARY 29, 1996 ANNUAL REPORT AND IS QUALIFIED IN ITS
ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 171
<NAME> FRANKLIN INDIANA TAX-FREE INCOME FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-END> FEB-29-1996
<INVESTMENTS-AT-COST> 45,072,281
<INVESTMENTS-AT-VALUE> 48,375,303
<RECEIVABLES> 1,363,411
<ASSETS-OTHER> 61,434
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 49,800,148
<PAYABLE-FOR-SECURITIES> 754,454
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 96,418
<TOTAL-LIABILITIES> 850,872
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 46,412,927
<SHARES-COMMON-STOCK> 4,164,111
<SHARES-COMMON-PRIOR> 4,087,558
<ACCUMULATED-NII-CURRENT> 105,591
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (872,264)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 3,303,022
<NET-ASSETS> 48,949,276
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,142,928
<OTHER-INCOME> 0
<EXPENSES-NET> (379,465)
<NET-INVESTMENT-INCOME> 2,763,463
<REALIZED-GAINS-CURRENT> 354,703
<APPREC-INCREASE-CURRENT> 1,058,994
<NET-CHANGE-FROM-OPS> 4,177,160
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,714,978)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 479,381
<NUMBER-OF-SHARES-REDEEMED> (529,309)
<SHARES-REINVESTED> 126,481
<NET-CHANGE-IN-ASSETS> 2,365,819
<ACCUMULATED-NII-PRIOR> 57,106
<ACCUMULATED-GAINS-PRIOR> (1,226,967)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 298,107
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 379,465
<AVERAGE-NET-ASSETS> 47,626,785
<PER-SHARE-NAV-BEGIN> 11.400
<PER-SHARE-NII> .670
<PER-SHARE-GAIN-APPREC> .350
<PER-SHARE-DIVIDEND> (.660)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.760
<EXPENSE-RATIO> .800
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 29, 1996 ANNUAL REPORT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 181
<NAME> FRANKLIN LOUISIANA TAX-FREE INCOME FUND - CLASS I
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-END> FEB-29-1996
<INVESTMENTS-AT-COST> 100,823,587
<INVESTMENTS-AT-VALUE> 108,117,502
<RECEIVABLES> 1,947,463
<ASSETS-OTHER> 59,149
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 110,124,114
<PAYABLE-FOR-SECURITIES> 870,915
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 354,035
<TOTAL-LIABILITIES> 1,224,950
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 104,238,054
<SHARES-COMMON-STOCK> 9,492,783
<SHARES-COMMON-PRIOR> 9,517,644
<ACCUMULATED-NII-CURRENT> 305,059
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (2,937,864)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 7,293,915
<NET-ASSETS> 108,899,164
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 7,053,971
<OTHER-INCOME> 0
<EXPENSES-NET> (823,787)
<NET-INVESTMENT-INCOME> 6,230,184
<REALIZED-GAINS-CURRENT> 315,845
<APPREC-INCREASE-CURRENT> 2,327,110
<NET-CHANGE-FROM-OPS> 8,873,139
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (6,126,121)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 901,479
<NUMBER-OF-SHARES-REDEEMED> (1,148,001)
<SHARES-REINVESTED> 221,661
<NET-CHANGE-IN-ASSETS> 3,919,373
<ACCUMULATED-NII-PRIOR> 214,417
<ACCUMULATED-GAINS-PRIOR> (3,253,709)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 655,033
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 823,787
<AVERAGE-NET-ASSETS> 105,927,756
<PER-SHARE-NAV-BEGIN> 11.030
<PER-SHARE-NII> .660
<PER-SHARE-GAIN-APPREC> .281
<PER-SHARE-DIVIDEND> (.651)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 11.320
<EXPENSE-RATIO> .780
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 29, 1996 ANNUAL REPORT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 182
<NAME> FRANKLIN LOUISIANA TAX-FREE INCOME FUND - CLASS II
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-END> FEB-29-1996
<INVESTMENTS-AT-COST> 100,823,587
<INVESTMENTS-AT-VALUE> 108,117,502
<RECEIVABLES> 1,947,463
<ASSETS-OTHER> 59,149
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 110,124,114
<PAYABLE-FOR-SECURITIES> 870,915
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 354,035
<TOTAL-LIABILITIES> 1,224,950
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 104,238,054
<SHARES-COMMON-STOCK> 126,471
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 305,059
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (2,937,864)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 7,293,915
<NET-ASSETS> 108,899,164
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 7,053,971
<OTHER-INCOME> 0
<EXPENSES-NET> (823,787)
<NET-INVESTMENT-INCOME> 6,230,184
<REALIZED-GAINS-CURRENT> 315,845
<APPREC-INCREASE-CURRENT> 2,327,110
<NET-CHANGE-FROM-OPS> 8,873,139
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (13,421)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 126,335
<NUMBER-OF-SHARES-REDEEMED> (27)
<SHARES-REINVESTED> 163
<NET-CHANGE-IN-ASSETS> 3,919,373
<ACCUMULATED-NII-PRIOR> 214,417
<ACCUMULATED-GAINS-PRIOR> (3,253,709)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 655,033
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 823,787
<AVERAGE-NET-ASSETS> 105,927,756
<PER-SHARE-NAV-BEGIN> 11.010
<PER-SHARE-NII> .490
<PER-SHARE-GAIN-APPREC> .351
<PER-SHARE-DIVIDEND> (.481)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 11.370
<EXPENSE-RATIO> 1.350
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 29, 1996 ANNUAL REPORT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 191
<NAME> FRANKLIN NORTH CAROLINA TAX-FREE INCOME FUND - CLASS I
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-END> FEB-29-1996
<INVESTMENTS-AT-COST> 232,457,383
<INVESTMENTS-AT-VALUE> 245,460,015
<RECEIVABLES> 4,636,287
<ASSETS-OTHER> 106,903
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 250,203,205
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 741,431
<TOTAL-LIABILITIES> 741,431
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 239,419,263
<SHARES-COMMON-STOCK> 21,030,672
<SHARES-COMMON-PRIOR> 19,023,013
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (30,217)
<ACCUMULATED-NET-GAINS> (2,929,904)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 13,002,632
<NET-ASSETS> 249,461,774
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 14,453,217
<OTHER-INCOME> 0
<EXPENSES-NET> (1,647,683)
<NET-INVESTMENT-INCOME> 12,805,534
<REALIZED-GAINS-CURRENT> 55,992
<APPREC-INCREASE-CURRENT> 7,436,156
<NET-CHANGE-FROM-OPS> 20,297,682
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (12,897,164)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (30,868)
<NUMBER-OF-SHARES-SOLD> 3,644,032
<NUMBER-OF-SHARES-REDEEMED> (2,170,445)
<SHARES-REINVESTED> 534,072
<NET-CHANGE-IN-ASSETS> 33,198,278
<ACCUMULATED-NII-PRIOR> 125,919
<ACCUMULATED-GAINS-PRIOR> (2,985,896)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,292,366
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,647,683
<AVERAGE-NET-ASSETS> 232,146,215
<PER-SHARE-NAV-BEGIN> 11.370
<PER-SHARE-NII> .640
<PER-SHARE-GAIN-APPREC> .391
<PER-SHARE-DIVIDEND> (.651)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 11.750
<EXPENSE-RATIO> .710
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 29, 1996 ANNUAL REPORT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 192
<NAME> FRANKLIN NORTH CAROLINA TAX-FREE INCOME FUND - CLASS II
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-END> FEB-29-1996
<INVESTMENTS-AT-COST> 232,457,383
<INVESTMENTS-AT-VALUE> 245,460,015
<RECEIVABLES> 4,636,287
<ASSETS-OTHER> 106,903
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 250,203,205
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 741,431
<TOTAL-LIABILITIES> 741,431
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 239,419,263
<SHARES-COMMON-STOCK> 205,964
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (30,217)
<ACCUMULATED-NET-GAINS> (2,929,904)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 13,002,632
<NET-ASSETS> 249,461,774
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 14,453,217
<OTHER-INCOME> 0
<EXPENSES-NET> (1,647,683)
<NET-INVESTMENT-INCOME> 12,805,534
<REALIZED-GAINS-CURRENT> 55,992
<APPREC-INCREASE-CURRENT> 7,436,156
<NET-CHANGE-FROM-OPS> 20,297,682
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (33,638)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 204,503
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 1,461
<NET-CHANGE-IN-ASSETS> 33,198,278
<ACCUMULATED-NII-PRIOR> 125,919
<ACCUMULATED-GAINS-PRIOR> (2,985,896)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,292,366
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,647,683
<AVERAGE-NET-ASSETS> 232,146,215
<PER-SHARE-NAV-BEGIN> 11.410
<PER-SHARE-NII> .490
<PER-SHARE-GAIN-APPREC> .384
<PER-SHARE-DIVIDEND> (.484)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 11.800
<EXPENSE-RATIO> 1.280
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 29, 1996 ANNUAL REPORT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 201
<NAME> FRANKLIN ARIZONA TAX-FREE INCOME FUND - CLASS I
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-END> FEB-29-1996
<INVESTMENTS-AT-COST> 700,991,283
<INVESTMENTS-AT-VALUE> 747,273,045
<RECEIVABLES> 9,850,343
<ASSETS-OTHER> 39,965
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 757,163,353
<PAYABLE-FOR-SECURITIES> 2,846,536
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,627,117
<TOTAL-LIABILITIES> 4,473,653
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 703,793,269
<SHARES-COMMON-STOCK> 66,223,810
<SHARES-COMMON-PRIOR> 64,885,691
<ACCUMULATED-NII-CURRENT> 892,152
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,722,517
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 46,281,762
<NET-ASSETS> 752,689,700
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 46,462,498
<OTHER-INCOME> 0
<EXPENSES-NET> (4,569,897)
<NET-INVESTMENT-INCOME> 41,892,601
<REALIZED-GAINS-CURRENT> 11,019,710
<APPREC-INCREASE-CURRENT> 12,069,384
<NET-CHANGE-FROM-OPS> 64,981,695
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (42,358,865)
<DISTRIBUTIONS-OF-GAINS> (7,829,470)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 7,740,101
<NUMBER-OF-SHARES-REDEEMED> (8,159,585)
<SHARES-REINVESTED> 1,757,603
<NET-CHANGE-IN-ASSETS> 31,888,631
<ACCUMULATED-NII-PRIOR> 1,398,060
<ACCUMULATED-GAINS-PRIOR> (1,450,555)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3,578,992
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 4,569,897
<AVERAGE-NET-ASSETS> 738,321,096
<PER-SHARE-NAV-BEGIN> 11.110
<PER-SHARE-NII> .640
<PER-SHARE-GAIN-APPREC> .362
<PER-SHARE-DIVIDEND> (.651)
<PER-SHARE-DISTRIBUTIONS> (.121)
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 11.340
<EXPENSE-RATIO> .620
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 29, 1996 ANNUAL REPORT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 202
<NAME> FRANKLIN ARIZONA TAX-FREE INCOME FUND - CLASS II
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-END> FEB-29-1996
<INVESTMENTS-AT-COST> 700,991,283
<INVESTMENTS-AT-VALUE> 747,273,045
<RECEIVABLES> 9,850,343
<ASSETS-OTHER> 39,965
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 757,163,353
<PAYABLE-FOR-SECURITIES> 2,846,536
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,627,117
<TOTAL-LIABILITIES> 4,473,653
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 703,793,269
<SHARES-COMMON-STOCK> 166,263
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 892,152
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,722,517
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 46,281,762
<NET-ASSETS> 752,689,700
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 46,462,498
<OTHER-INCOME> 0
<EXPENSES-NET> (4,569,897)
<NET-INVESTMENT-INCOME> 41,892,601
<REALIZED-GAINS-CURRENT> 11,019,710
<APPREC-INCREASE-CURRENT> 12,069,384
<NET-CHANGE-FROM-OPS> 64,981,695
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (39,644)
<DISTRIBUTIONS-OF-GAINS> (17,168)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 177,823
<NUMBER-OF-SHARES-REDEEMED> (14,220)
<SHARES-REINVESTED> 2,660
<NET-CHANGE-IN-ASSETS> 31,888,631
<ACCUMULATED-NII-PRIOR> 1,398,060
<ACCUMULATED-GAINS-PRIOR> (1,450,555)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3,578,992
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 4,569,897
<AVERAGE-NET-ASSETS> 738,321,096
<PER-SHARE-NAV-BEGIN> 11.150
<PER-SHARE-NII> .490
<PER-SHARE-GAIN-APPREC> .344
<PER-SHARE-DIVIDEND> (.483)
<PER-SHARE-DISTRIBUTIONS> (.121)
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 11.380
<EXPENSE-RATIO> 1.200
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN
TAX-FREE TRUST FEBRUARY 29, 1996 ANNUAL REPORT AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 211
<NAME> FRANKLIN NEW JERSEY TAX-FREE INCOME FUND - CLASS I
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-END> FEB-29-1996
<INVESTMENTS-AT-COST> 528,254,849
<INVESTMENTS-AT-VALUE> 563,481,415
<RECEIVABLES> 9,484,334
<ASSETS-OTHER> 199,878
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 573,165,627
<PAYABLE-FOR-SECURITIES> 2,682,580
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,077,650
<TOTAL-LIABILITIES> 3,760,230
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 538,657,324
<SHARES-COMMON-STOCK> 48,364,863
<SHARES-COMMON-PRIOR> 47,326,824
<ACCUMULATED-NII-CURRENT> 1,200,415
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (5,678,908)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 35,226,566
<NET-ASSETS> 569,405,397
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 34,947,459
<OTHER-INCOME> 0
<EXPENSES-NET> (3,590,096)
<NET-INVESTMENT-INCOME> 31,357,363
<REALIZED-GAINS-CURRENT> 4,841,385
<APPREC-INCREASE-CURRENT> 13,508,714
<NET-CHANGE-FROM-OPS> 49,707,462
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (30,636,840)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 6,190,382
<NUMBER-OF-SHARES-REDEEMED> (6,497,336)
<SHARES-REINVESTED> 1,344,993
<NET-CHANGE-IN-ASSETS> 35,468,569
<ACCUMULATED-NII-PRIOR> 544,751
<ACCUMULATED-GAINS-PRIOR> (10,520,293)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,755,151
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,590,096
<AVERAGE-NET-ASSETS> 554,936,876
<PER-SHARE-NAV-BEGIN> 11.280
<PER-SHARE-NII> .650
<PER-SHARE-GAIN-APPREC> .389
<PER-SHARE-DIVIDEND> (.639)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.680
<EXPENSE-RATIO> .650
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN
TAX-FREE TRUST FEBRUARY 29, 1996 ANNUAL REPORT AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 212
<NAME> FRANKLIN NEW JERSEY TAX-FREE INCOME FUND - CLASS II
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-END> FEB-29-1996
<INVESTMENTS-AT-COST> 528,254,849
<INVESTMENTS-AT-VALUE> 563,481,415
<RECEIVABLES> 9,484,334
<ASSETS-OTHER> 199,878
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 573,165,627
<PAYABLE-FOR-SECURITIES> 2,682,580
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,077,650
<TOTAL-LIABILITIES> 3,760,230
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 538,657,324
<SHARES-COMMON-STOCK> 387,446
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 1,200,415
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (5,678,908)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 35,226,566
<NET-ASSETS> 569,405,397
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 34,947,459
<OTHER-INCOME> 0
<EXPENSES-NET> (3,590,096)
<NET-INVESTMENT-INCOME> 31,357,363
<REALIZED-GAINS-CURRENT> 4,841,385
<APPREC-INCREASE-CURRENT> 13,508,714
<NET-CHANGE-FROM-OPS> 49,707,462
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (64,859)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 404,242
<NUMBER-OF-SHARES-REDEEMED> 20,625
<SHARES-REINVESTED> 3,829
<NET-CHANGE-IN-ASSETS> 35,468,569
<ACCUMULATED-NII-PRIOR> 544,751
<ACCUMULATED-GAINS-PRIOR> (10,520,293)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,755,151
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,590,096
<AVERAGE-NET-ASSETS> 554,936,876
<PER-SHARE-NAV-BEGIN> 11.300
<PER-SHARE-NII> .490
<PER-SHARE-GAIN-APPREC> .403
<PER-SHARE-DIVIDEND> (.473)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.720
<EXPENSE-RATIO> 1.230
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN
TAX-FREE TRUST FEBRUARY 29, 1996 ANNUAL REPORT AND IS QUALIFIED IN ITS
ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 221
<NAME> FRANKLIN CONNECTICUT TAX-FREE INCOME FUND - CLASS I
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-END> FEB-29-1996
<INVESTMENTS-AT-COST> 153,637,992
<INVESTMENTS-AT-VALUE> 165,083,180
<RECEIVABLES> 2,993,884
<ASSETS-OTHER> 1,002,084
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 169,079,148
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 378,371
<TOTAL-LIABILITIES> 378,371
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 163,173,315
<SHARES-COMMON-STOCK> 15,247,577
<SHARES-COMMON-PRIOR> 14,621,232
<ACCUMULATED-NII-CURRENT> 234,517
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (6,152,243)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 11,445,188
<NET-ASSETS> 168,700,777
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 10,452,715
<OTHER-INCOME> 0
<EXPENSES-NET> (1,182,715)
<NET-INVESTMENT-INCOME> 9,270,000
<REALIZED-GAINS-CURRENT> (46,957)
<APPREC-INCREASE-CURRENT> 4,696,045
<NET-CHANGE-FROM-OPS> 13,919,088
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (9,244,580)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,410,965
<NUMBER-OF-SHARES-REDEEMED> (2,173,137)
<SHARES-REINVESTED> 388,517
<NET-CHANGE-IN-ASSETS> 13,077,338
<ACCUMULATED-NII-PRIOR> 234,709
<ACCUMULATED-GAINS-PRIOR> (6,105,286)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 941,489
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,182,715
<AVERAGE-NET-ASSETS> 162,708,405
<PER-SHARE-NAV-BEGIN> 10.640
<PER-SHARE-NII> .620
<PER-SHARE-GAIN-APPREC> .319
<PER-SHARE-DIVIDEND> (.619)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.960
<EXPENSE-RATIO> .730
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN
TAX-FREE TRUST FEBRUARY 29, 1996 ANNUAL REPORT AND IS QUALIFIED IN ITS
ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 222
<NAME> FRANKLIN CONNECTICUT TAX-FREE INCOME FUND - CLASS II
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-END> FEB-29-1996
<INVESTMENTS-AT-COST> 153,637,992
<INVESTMENTS-AT-VALUE> 165,083,180
<RECEIVABLES> 2,993,884
<ASSETS-OTHER> 1,002,084
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 169,079,148
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 378,371
<TOTAL-LIABILITIES> 378,371
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 163,173,315
<SHARES-COMMON-STOCK> 150,925
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 234,517
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (6,152,243)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 11,445,188
<NET-ASSETS> 168,700,777
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 10,452,714
<OTHER-INCOME> 0
<EXPENSES-NET> (1,182,715)
<NET-INVESTMENT-INCOME> 9,270,000
<REALIZED-GAINS-CURRENT> (46,957)
<APPREC-INCREASE-CURRENT> 4,696,045
<NET-CHANGE-FROM-OPS> 13,918,088
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (25,612)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 152,190
<NUMBER-OF-SHARES-REDEEMED> (2,849)
<SHARES-REINVESTED> 1,584
<NET-CHANGE-IN-ASSETS> 13,077,338
<ACCUMULATED-NII-PRIOR> 234,709
<ACCUMULATED-GAINS-PRIOR> (6,105,286)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 941,489
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,182,715
<AVERAGE-NET-ASSETS> 162,708,405
<PER-SHARE-NAV-BEGIN> 10.650
<PER-SHARE-NII> .470
<PER-SHARE-GAIN-APPREC> .312
<PER-SHARE-DIVIDEND> (.462)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.970
<EXPENSE-RATIO> 1.300
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 29, 1996 ANNUAL REPORT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 231
<NAME> FRANKLIN MARYLAND TAX-FREE INCOME FUND - CLASS I
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-END> FEB-29-1996
<INVESTMENTS-AT-COST> 162,180,457
<INVESTMENTS-AT-VALUE> 172,551,983
<RECEIVABLES> 3,556,945
<ASSETS-OTHER> 237,109
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 176,346,037
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 354,799
<TOTAL-LIABILITIES> 354,799
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 166,628,272
<SHARES-COMMON-STOCK> 15,386,759
<SHARES-COMMON-PRIOR> 14,026,485
<ACCUMULATED-NII-CURRENT> 271,585
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,280,145)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 10,371,526
<NET-ASSETS> 175,991,238
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 10,386,920
<OTHER-INCOME> 0
<EXPENSES-NET> (1,222,280)
<NET-INVESTMENT-INCOME> 9,164,640
<REALIZED-GAINS-CURRENT> (339,820)
<APPREC-INCREASE-CURRENT> 6,976,565
<NET-CHANGE-FROM-OPS> 15,801,385
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (9,178,594)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,688,694
<NUMBER-OF-SHARES-REDEEMED> (1,734,342)
<SHARES-REINVESTED> 405,922
<NET-CHANGE-IN-ASSETS> 22,846,661
<ACCUMULATED-NII-PRIOR> 300,019
<ACCUMULATED-GAINS-PRIOR> (940,325)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 954,307
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,222,280
<AVERAGE-NET-ASSETS> 164,878,378
<PER-SHARE-NAV-BEGIN> 10.920
<PER-SHARE-NII> .620
<PER-SHARE-GAIN-APPREC> .467
<PER-SHARE-DIVIDEND> (.627)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 11.380
<EXPENSE-RATIO> .740
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 29, 1996 ANNUAL REPORT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 232
<NAME> FRANKLIN MARYLAND TAX-FREE INCOME FUND - CLASS II
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-END> FEB-29-1996
<INVESTMENTS-AT-COST> 162,180,457
<INVESTMENTS-AT-VALUE> 172,551,983
<RECEIVABLES> 3,556,945
<ASSETS-OTHER> 237,109
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 176,346,037
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 354,799
<TOTAL-LIABILITIES> 354,799
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 166,628,272
<SHARES-COMMON-STOCK> 79,853
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 271,585
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,280,145)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 10,371,526
<NET-ASSETS> 175,991,238
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 10,386,920
<OTHER-INCOME> 0
<EXPENSES-NET> (1,222,280)
<NET-INVESTMENT-INCOME> 9,164,640
<REALIZED-GAINS-CURRENT> (339,820)
<APPREC-INCREASE-CURRENT> 6,976,565
<NET-CHANGE-FROM-OPS> 15,801,385
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (14,480)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 83,626
<NUMBER-OF-SHARES-REDEEMED> (4,532)
<SHARES-REINVESTED> 759
<NET-CHANGE-IN-ASSETS> 22,846,661
<ACCUMULATED-NII-PRIOR> 300,019
<ACCUMULATED-GAINS-PRIOR> (940,325)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 954,307
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,222,280
<AVERAGE-NET-ASSETS> 164,878,378
<PER-SHARE-NAV-BEGIN> 10.930
<PER-SHARE-NII> .470
<PER-SHARE-GAIN-APPREC> .506
<PER-SHARE-DIVIDEND> (.466)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 11.440
<EXPENSE-RATIO> 1.310
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 29, 1996 ANNUAL REPORT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 241
<NAME> FRANKLIN KENTUCKY TAX-FREE INCOME FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-END> FEB-29-1996
<INVESTMENTS-AT-COST> 36,763,183
<INVESTMENTS-AT-VALUE> 38,229,483
<RECEIVABLES> 765,832
<ASSETS-OTHER> 74,687
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 39,070,002
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 78,878
<TOTAL-LIABILITIES> 78,878
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 38,379,248
<SHARES-COMMON-STOCK> 3,532,880
<SHARES-COMMON-PRIOR> 3,113,643
<ACCUMULATED-NII-CURRENT> 24,543
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (878,967)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,466,300
<NET-ASSETS> 38,991,124
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2,127,826
<OTHER-INCOME> 0
<EXPENSES-NET> (117,517)
<NET-INVESTMENT-INCOME> 2,010,309
<REALIZED-GAINS-CURRENT> (93,203)
<APPREC-INCREASE-CURRENT> 1,657,762
<NET-CHANGE-FROM-OPS> 3,574,868
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,006,847)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 601,004
<NUMBER-OF-SHARES-REDEEMED> (268,807)
<SHARES-REINVESTED> 87,040
<NET-CHANGE-IN-ASSETS> 6,159,820
<ACCUMULATED-NII-PRIOR> 21,081
<ACCUMULATED-GAINS-PRIOR> (785,764)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 223,931
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 292,253
<AVERAGE-NET-ASSETS> 35,599,239
<PER-SHARE-NAV-BEGIN> 10.540
<PER-SHARE-NII> .620
<PER-SHARE-GAIN-APPREC> .495
<PER-SHARE-DIVIDEND> (.615)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 11.040
<EXPENSE-RATIO> .330
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TAX-FREE TRUST FEBRUARY 29, 1996 ANNUAL REPORT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 25
<NAME> FRANKLIN FED. INTERMED. TERM TAX-FREE INCOME FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-END> FEB-29-1996
<INVESTMENTS-AT-COST> 84,650,515
<INVESTMENTS-AT-VALUE> 87,411,324
<RECEIVABLES> 1,426,419
<ASSETS-OTHER> 178,850
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 89,016,593
<PAYABLE-FOR-SECURITIES> 2,752,737
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 296,371
<TOTAL-LIABILITIES> 3,049,108
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 84,073,396
<SHARES-COMMON-STOCK> 7,848,594
<SHARES-COMMON-PRIOR> 7,060,177
<ACCUMULATED-NII-CURRENT> 199,901
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,066,621)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,760,809
<NET-ASSETS> 85,967,485
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 4,515,730
<OTHER-INCOME> 0
<EXPENSES-NET> (506,246)
<NET-INVESTMENT-INCOME> 4,009,484
<REALIZED-GAINS-CURRENT> 28,851
<APPREC-INCREASE-CURRENT> 3,289,690
<NET-CHANGE-FROM-OPS> 7,328,025
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (3,973,970)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,586,067
<NUMBER-OF-SHARES-REDEEMED> (2,002,142)
<SHARES-REINVESTED> 204,492
<NET-CHANGE-IN-ASSETS> 11,990,193
<ACCUMULATED-NII-PRIOR> 164,387
<ACCUMULATED-GAINS-PRIOR> (1,095,472)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 491,681
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 662,110
<AVERAGE-NET-ASSETS> 78,302,191
<PER-SHARE-NAV-BEGIN> 10.480
<PER-SHARE-NII> 0.550
<PER-SHARE-GAIN-APPREC> 0.468
<PER-SHARE-DIVIDEND> (0.548)
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 10.950
<EXPENSE-RATIO> 0.650
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE FRANKLIN TAX-FREE TRUST FEBRUARY 29, 1996 ANNUAL REPORT
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 26
<NAME> FRANKLIN ARIZONA INSURED TAX-FREE INCOME FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-END> FEB-29-1996
<INVESTMENTS-AT-COST> 36,971,970
<INVESTMENTS-AT-VALUE> 38,392,837
<RECEIVABLES> 618,170
<ASSETS-OTHER> 134,603
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 39,145,610
<PAYABLE-FOR-SECURITIES> 875,174
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 71,640
<TOTAL-LIABILITIES> 946,814
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 37,129,523
<SHARES-COMMON-STOCK> 3,688,139
<SHARES-COMMON-PRIOR> 2,122,922
<ACCUMULATED-NII-CURRENT> 75,946
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (427,540)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,420,867
<NET-ASSETS> 38,198,796
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,683,040
<OTHER-INCOME> 0
<EXPENSES-NET> (47,790)
<NET-INVESTMENT-INCOME> 1,635,250
<REALIZED-GAINS-CURRENT> 8,518
<APPREC-INCREASE-CURRENT> 1,489,428
<NET-CHANGE-FROM-OPS> 3,133,196
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,604,164)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,838,731
<NUMBER-OF-SHARES-REDEEMED> (344,498)
<SHARES-REINVESTED> 70,984
<NET-CHANGE-IN-ASSETS> 17,404,337
<ACCUMULATED-NII-PRIOR> 44,860
<ACCUMULATED-GAINS-PRIOR> (436,058)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 190,058
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 256,568
<AVERAGE-NET-ASSETS> 29,669,474
<PER-SHARE-NAV-BEGIN> 9.800
<PER-SHARE-NII> .550
<PER-SHARE-GAIN-APPREC> .565
<PER-SHARE-DIVIDEND> (.555)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 10.360
<EXPENSE-RATIO> .160
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE FRANKLIN TAX-FREE TRUST FEBRUARY 29, 1996
ANNUAL REPORT AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 27
<NAME> FRANKLIN FLORIDA INSURED TAX-FREE INCOME FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-END> FEB-29-1996
<INVESTMENTS-AT-COST> 68,377,035
<INVESTMENTS-AT-VALUE> 70,450,024
<RECEIVABLES> 1,539,470
<ASSETS-OTHER> 178,330
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 72,167,824
<PAYABLE-FOR-SECURITIES> 2,431,854
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 152,617
<TOTAL-LIABILITIES> 2,584,471
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 68,767,900
<SHARES-COMMON-STOCK> 6,942,043
<SHARES-COMMON-PRIOR> 4,914,966
<ACCUMULATED-NII-CURRENT> 32,739
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,290,275)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,072,989
<NET-ASSETS> 69,583,353
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,270,050
<OTHER-INCOME> 0
<EXPENSES-NET> (198,478)
<NET-INVESTMENT-INCOME> 3,071,572
<REALIZED-GAINS-CURRENT> 29,740
<APPREC-INCREASE-CURRENT> 2,612,156
<NET-CHANGE-FROM-OPS> 5,713,468
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (3,052,806)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,201,678
<NUMBER-OF-SHARES-REDEEMED> (1,278,505)
<SHARES-REINVESTED> 103,904
<NET-CHANGE-IN-ASSETS> 22,736,849
<ACCUMULATED-NII-PRIOR> 13,973
<ACCUMULATED-GAINS-PRIOR> (1,320,015)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 362,566
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 468,347
<AVERAGE-NET-ASSETS> 57,148,509
<PER-SHARE-NAV-BEGIN> 9.530
<PER-SHARE-NII> .530
<PER-SHARE-GAIN-APPREC> .491
<PER-SHARE-DIVIDEND> (.531)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 10.020
<EXPENSE-RATIO> .350
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
